Building a net zero emissions economy: Next steps for government and business

Report and Policy Recommendations
Aldersgate Group | October 2020

Following extensive cross-industry and civil society engagement, our partners at the Aldersgate Group published a new report, setting out some of the key policy decisions that need to be taken in this parliamentary term to put the UK on a credible pathway to building a competitive, net zero emissions economy.

The report, Building a net zero emissions economy [1], provides an in-depth overview of the near-term policy interventions required across a range of economic sectors to reach the net zero emissions target. Building on growing business [2] and public calls [3] to align the UK’s economic recovery strategy with the net zero target, the report argues that policy decisions in the early 2020s will be essential to grow private sector investment in low carbon technologies and services, strengthen the UK’s economic recovery and support efforts to tackle regional and social inequalities. Having a comprehensive net zero delivery plan in place will also strengthen the UK’s influence as host of the G7 and COP26 summits in 2021.

Based on recent government announcements but also the recognition that the UK is currently off track for meeting its interim targets under the fourth and fifth carbon budgets, the Aldersgate Group calls for an overarching strategy to align policy interventions in the buildings, transport, power, heavy industry, agricultural, land management and finance sectorsand calls on the government to put in place a trade and diplomatic policy that is consistent with its net zero target.

Key recommendations include:

1. Pressing ahead with policy and regulatory measures to cut emissions in buildings, surface transport, power and waste. These are ‘low regret’ areas where the required technological solutions and business models to cut emissions are well known. Building on recent consultations and economic stimulus announcements, government should introduce binding energy efficiency standards for new and existing buildings, continue to support energy efficiency retrofits through the Green Homes Grant and fiscal incentives such as stamp duty rebates and make a decision to phase out the sale of petrol and diesel vehicles by 2030.

Other key recommendations include setting a clear carbon price trajectory for the 2020s that is aligned with the net zero target and ensuring that final decisions on the regulatory framework for the 2021-2026 ‘RIIO-2’ price control period supports the necessary investments that will be required to modernise and complete the decarbonisation of the power sector.

2. Focusing innovation efforts to support large scale trials of technologies and business models that will be essential to cut emissions in ‘hard to treat’ sectors such as heavy industry, agriculture and aviation. These include at scale trials of Carbon Capture and Storage, hydrogen production and use, battery technology and more resource efficient business models. The report highlights that consolidating recent funding for these technologies will be key in supporting an efficient innovation programme and that trials should work hand in hand with developing new market mechanisms, such as low carbon product standards for industrial goods and CO2 storage incentives. These are essential to grow market demand for low carbon goods and services, provide a level playing field and strengthen the competitiveness of UK businesses.

3. Growing the potential for negative emissions by creating a market for nature-based solutions and supporting scalable trials of potentially promising negative emissions technologies (NETs). The use of nature-based solutions should be supported through a robust carbon price to adequately reflect their contribution to carbon removal and their co-benefits. This will attract more consistent investment from companies looking to offset emissions and deliver against environmental improvement objectives. Nature-based solutions illustrate the importance of ensuring that the net zero delivery agenda works hand in hand with the finalisation of the Environment Bill and the Agriculture Bill.

The Government should use its upcoming £100m competition for greenhouse gas removal technologies as the first step to trial the potential of technologies such as Bioenergy with Carbon Capture and Storage (BECCS) and Direct Air Capture and Carbon Storage (DACCS) [4] and identify some of the market mechanisms that would be needed to support their future deployment.

Given the high cost of NETs and the limited space available for nature-based solutions, the use of negative emission solutions should not undermine the imperative of reducing emissions across all sectors.

4. Strengthening the Government’s Green Finance Strategy by creating a well-capitalised National Investment Bank, with a clear mandate to support investment in complex low carbon projects and direct low carbon investment towards regions in need of economic regeneration.

Other key priorities should include making TCFD-aligned climate risk disclosures mandatory ahead of COP26, continuing to support the British Standards Institute in the development of new green finance management standards, acting on the lessons from the Bank of England’s upcoming climate stress testing of the UK’s largest banks and insurers, and improve the risk profile for green investment through the introduction of a ‘brown penalising factor’ as part of a reform of capital weighting requirements.

5. Tackling the ‘levelling up’ challenge, by managing a just transition towards a durable recovery and a net zero emissions economy. This should include government working closely with businesses, local bodies and educational institutions to help direct low carbon investment and skills funding towards areas of the country worst affected by the pandemic and likely to be impacted by the net zero transition.  Adequate funding and training for Local Authorities and Local Enterprise Partnerships will be essential to ensure that the recovery drives local regeneration and maximises the opportunities afforded by the low carbon transition for businesses and SMEs right across the country. In addition, a new national skills strategy will be essential to help embed sustainability training at all levels of the educational system and through lifelong learning.

6. Putting in place a diplomatic and trade policy that is fully consistent with the UK’s net zero and Environment Bill targets. As argued in a recent Aldersgate Group briefing [6], it is essential that future trade agreements promote high standards on the environment and climate change, reduce barriers for trade in low carbon goods and services and protect the UK’s future right to regulate on environmental and climate change policy issues.

Through its network of climate diplomats and attachés and its position as host of the G7 and COP26 summits in 2021, the UK has a unique opportunity to engineer a global increase in climate ambition. Negotiation priorities for COP26 should include putting forward a strong business case for major emitters to align their economic recovery plans with the need to achieve net zero emissions, agreeing on a mechanism to support developing countries already vulnerable to adverse climate impacts, and finalising a rule book for the market and cooperation mechanisms under Article 6 of the Paris Agreement.