Policy Exchange - The Clean Growth Strategy: worth the wait?

17 Oct 2017 09:29 AM

The Clean Growth Strategy, published last week after long being delayed, signifies a step change in Government thinking and is ambitious in its scope.

It is now clear that economic growth and the transition to a low carbon economy are no longer seen by the Government as mutually exclusive. Decarbonisation will have a large role as part of an active industrial policy in the UK regions. However, whether this will be successful enough to justify the increased expenditure of the plans remains to be seen.

There are a number of key takeaway messages in the strategy document, the most important of which we judge to be:

• Fracking is conspicuous by its absence. Under the previous Chancellor (George Osborne), fracking was widely considered as a transitional solution to a low carbon economy. However, there is not a single mention of fracking in the Clean Growth Strategy. The continually low wholesale price of gas no longer makes the economics compelling and public opinion is against further exploration. Fracking has obviously fallen off the Government’s priority list for the time being.
• The door for onshore wind has been left ajar. The Clean Growth Strategy states that “it is our current intention that wind projects on the remote islands of Scotland that directly benefit local communities will be eligible for the next Pot 2 auction, subject to obtaining State Aid approval.” This is to be welcomed for what is now almost certainly the cheapest form of renewable energy.
• Nuclear generation is part of the future energy mix, perhaps more so then carbon capture, utilisation and storage (CCUS) despite wide recognition that CCUS is crucial in the transition to a low carbon economy. £460 million has been pledged to support work in areas including future nuclear fuels, new nuclear manufacturing techniques, recycling and reprocessing, and advanced reactor design. This figure dwarfs the £100 million pledged to CCUS.
• The hydrogen economy has been given a boost. It features heavily in the Clean Growth Strategy (“hydrogen” is mentioned 49 times), as a means of decarbonising heat and transport as well as for use in conjunction with CCUS. The Government has indicated they will fund a £25 million project on using hydrogen as an alternative to natural gas and a further £4.8 million will be made available through the Hydrogen for Transport Advancement Programme.
• Ambitious in rhetoric but light on detail when it comes to energy efficiency. 25% of emissions come from the business and industry which is the largest of any sector. Our recent research into business energy efficiency, Clean Growth, put forward the idea for a new Industrial Energy Efficiency scheme to help large companies install measures to cut their energy use and bills and it looks like the Government intends to do this, but what will the scheme look like?
• Land use policy receives more emphasis than one would have imagined – in particular, increasing tree coverage as a mechanism for greenhouse gas removal, something Policy Exchanged recommended in our recent report Farming Tomorrow. The Clean Growth Strategy wishes to “establish a new network of forests in England including new woodland on farmland and fund larger-scale woodland and forest creation”. Leaving the Common Agricultural Policy presents an opportunity to develop an integrated land management framework as to date the competence for agricultural policy is at the EU level, whereas competence for forestry policy remains at Member State level.

Finally, regarding overall emissions reduction, the Clean Growth Strategy reiterates the Government’s commitment to the ambitious decarbonisation plans set out in both the Climate Change Act and the Paris Agreement, but there is no commitment to stay in the EU Emissions Trading Scheme (EU ETS). Europe’s flagship scheme has largely been a failure due to a surplus of permits leading to a suppressed carbon price.

Policy Exchange is currently conducting research into whether an independent carbon tax with border carbon adjustments (BCA) would be implementable and desirable after we leave the EU. BCAs are a necessary feature of independent carbon taxes as they would help prevent ‘carbon leakage’, the offshoring of emissions.

The Government claims that UK carbon emissions are down by 42% since 1990, but this is not the whole story. This reduction has largely been due to the offshoring of manufacturing during this period. Using carbon consumption – in which emissions produced in making imported goods are allocated to the importing country, rather than the exporting one – instead of carbon production methodology, the UK’s emissions have barely reduced at all since 1990.

If we are to leave the EU ETS, the obvious time to make the transition to a new scheme would be 2021 when Phase 3 of the EU ETS is completed, but decisions will need to be made much sooner. Policy Exchange will publish a new report in the coming months in which we will make recommendations on the future of carbon pricing in the UK.