The UK entered COP21 negotiations on the back of an ambitious commitment to close all coal power stations by 2025, even if it was somewhat tainted by domestic policy confusion. Energy Secretary Amber Rudd, who led the UK delegation in Paris, has spent the last eight months repositioning the national debate away from decarbonisation to one of energy security and consumer value for money.
While she has consistently maintained that the UK is a global leader in championing the low-carbon economy and renewable energy, she has simultaneously cut a raft of low-carbon subsidies and energy efficiency schemes at the cost of dwindling investor confidence. In this sense the Paris deal, which calls on just under 200 countries to keep global temperature increase “well below” 2C and to pursue efforts to limit it to 1.5C, does not change the reality that investing in UK energy infrastructure is a risky undertaking. Perhaps the greatest illustration of this came in the 24 hours before the final agreement was published, when National Grid announced subsidy payments of £294 million will be made to polluting diesel generators and aging coal power stations from 2019.
As unsettling as this sounds, the UK’s adoption of the Climate Change Act in 2008 has committed successive governments to cutting national carbon emissions by 80% of 1990 levels by 2050, which is an obligation 33% more demanding than the pledge put forward at COP21 by the whole of the EU bloc. The announcement in November of the Fifth Carbon Budget reminds us that the Department for Energy & Climate Change is under pressure to ensure emissions are cut by 60% of 1990 levels by 2032, and will have to enshrine this in law no later than June 2016. The question is what the 1.5C element of the Paris deal will have on UK carbon targets, something the Government’s advisory body, the Committee on Climate Change, has already been tasked with investigating. The likelihood is that Chancellor George Osborne will no longer be able roll back low-carbon projects on the premise they place the UK at an economic disadvantage.
Whether true in practice, the UK already operates one of the strictest emissions frameworks in the world. Binding EU targets, such as the obligation to generate at least 15% of energy from renewable sources by 2020, place further pressure on the Government to pursue ever greater commercial decarbonisation through low-carbon building standards, energy efficiency measures, and more robust renewable heat networks and transport fuels. Each of these areas will require significant private sector investment going forward.
However, the Government has also shown itself willing to make concessions to business in the name of competition with a tax relief and compensation package to help shield energy intensive industries, such as heavy manufacturing, from environmental levies. This will be achieved by offsetting the indirect costs of the carbon price floor, currently £18.08 per tonne of CO2, and the EU Emissions Trading Scheme (ETS). In his Paris speech, Prime Minister David Cameron sent a conciliatory message to investors by suggesting that the UK hasn’t “even really begun to generate the private finance that is possible to help in tackling climate change”. His words will likely be borne out through a series of Government schemes, such as the recent commitment to spend £500 million on innovation over the next five years to ensure that clean-tech and R&D remain viable business spaces.
Looking to 2016, the March Budget will be the first chance for the Government to make financial decisions deemed necessary in the light of the Paris agreement and investor unrest. These could include a post-2020 renewable energy subsidy framework and therefore new opportunities for investors, or, indeed, a decision on the future of long-term financial support for fossil fuels. Furthermore, if a referendum on the UK’s EU membership is to take place in the summer or autumn, even a so-called ‘Brexit’ would be no justification for the Government to renege on its existing emissions commitments.
Therefore, while COP21 may not have in the first instance placed any significant new demands on the UK Government, ministers will face heightened pressure to steady the ship for investors while also developing a coherent energy strategy that promotes decarbonisation and welcomes business with open arms.