BLOG | Hannah Corbett | June 2024
Net zero: Who pays, when and how, and why that matters
Promises, promises. Clean energy by 2030. Deliver new nuclear. Establish Great British Energy. Rebuild the steel industry. Rewire Britain. Treble offshore wind capacity. Double onshore wind. Build a new gigawatt power plant. Support carbon capture and storage. Scrap green levies. Invest in skills and training. Expand energy storage. Produce green hydrogen. The list goes on. All of the political parties’ manifestos contain energy and net zero commitments, with indications to varying degrees of where the money will come from. Yet, as our research consistently highlights, there is more to it than simply stumping up the cash. How things are paid for, by whom and when, matters to the wider economy, households and businesses, and should be of key concern to the incoming UK Government.
Decisions on how net zero is funded will have implications for the wider economy
Net zero will require multiple sources of funding. In their manifestos, political parties have talked with varying degrees of detail on funding for these commitments. There have been mentions of windfall taxes, carbon taxes and billions of new investments (and re-stating billions of existing investments). Yet who pays (e.g., Government, taxpayer, industry, etc.), how and when, for different net zero actions, matters. In terms of what happens to the wider economy, including jobs and GDP, and how households and businesses are affected, with real implications for fairness and competitiveness.
The potential employment impacts of different funding approaches to industrial decarbonisation
For example, our analysis of investments in establishing a UK CO2 Transport and Storage (T&S) industry (linked to the wider deployment of Carbon Capture Utilisation and Storage – CCUS - deployment aligned to current UK Government plans) demonstrates why the question of ‘who pays’ is an important one.
Depending on who pays – Government, households, or polluting industries – the impact on net employment across sectors varies, with the most positive outcomes arising from Government funding through increased public budget deficit, and the least from industry paying. If industry pays, they will likely try to pass on the costs to consumers (in the UK and abroad), and that could drive up the cost of living and doing business. In order to avoid higher costs, consumers and businesses could decide to deploy their purchasing power and shift demand, leading to firms losing competitiveness and triggering GDP and employment losses. This could potentially undermine UK Government efforts to address regional inequalities in the same areas in which T&S is being deployed and further exacerbate those challenges.
The electric vehicle rollout – emerging questions around who pays and who benefits
The electric vehicle (EV) rollout offers another interesting example of the consequences of funding decisions and the implications for economic and distributional outcomes. Our research looking at the wider economic impacts of upgrading the electricity network to enable the EV rollout shows that there could be positive associated GDP and jobs gains. Yet not all households will benefit from these gains, for example, in relation to increases to real wage incomes. However, all will face the impact of rising electricity and consumer prices. Furthermore, although the network upgrade costs are likely to be borne across all households through energy bills, it is unlikely that all households will benefit through ownership/access to EVs. Thus, raising real issues around fairness.
A question of timing – sequencing net zero projects and managing costs
The ‘when’ aspect of funding decisions is also critical. Multiple net zero actions need to take place in similar or the same timeframes. All in the face of persistent worker and skills shortages, which without action will pose a barrier to net zero project delivery by driving up competition for labour and, in turn, wage costs, as well as limiting the economic gains that could be generated from investment in net zero actions. A new UK Government will have a key role to play in coordinating and incentivising the timing of these actions, alongside encouraging labour market participation and upskilling and training for net zero, in order to avoid unnecessarily inflating the costs.
What can a new UK Government do to manage questions around who pays, how and when for net zero?
In addition to enabling the effective timing and coordination of projects, the UK Government can also take action in a number of other key areas. First, working with the Climate Change Committee (CCC) to ensure its advice to Government on Carbon Budgets is informed by modelling of potential scenarios around how the costs of the transition are to be met. This is currently absent from the CCC’s approach to this analysis. Second, ensuring more generally that net zero policy making is shaped by an understanding of the wider economic costs and benefits (and their distribution) of different approaches to funding. This can help mitigate any negative unintended consequences, which could potentially undermine public support and the consensus around net zero. Third, and finally, ensuring careful consideration around the setting, reviewing, and updating of net zero targets. Postponements and delays to targets can disincentivise investment and other decisions, having negative implications for the wider economy in terms of driving up costs and prices, as well as the environment and health and wellbeing of the nation.
By recognising and acting on ‘who pays, how and when’ questions in relation to net zero, a new UK Government can set itself more squarely on a trajectory to a transition that delivers sustainable and more equitable prosperity.
Image credit: HM Treasury on Flickr