UK Green Day: key takeaways on net zero

The UK government’s “Green Day” or “Energy Security Day” finally landed on 30 March 2023, with a raft of key announcements on green finance, net zero and energy security (see press release).

This includes a very large package of documents, consultations and announcements, including:

• Green Finance Strategy, which provides an update to the government's 2019 Green Finance Strategy;
• Consultation on the regulation of ESG ratings providers;
• Powering Up Britain, which sets out how the government aims to enhance the UK's energy security, seize the economic opportunities of the low carbon transition, and deliver the government's net zero commitments;
• Net Zero Growth Plan, which sets out the government’s revised Net Zero Strategy and its response to Chris Skidmore’s net zero review;
• Energy Security Plan, which sets out the government’s steps to ensure that the UK is more energy independent, secure and resilient;
• Consultation on options for dealing with carbon leakage, including proposals for a UK carbon border adjustment mechanism (CBAM).

In this blog post, we focus on the key net zero aspects.

Key takeaways on net zero

By way of background – following a challenge brought by ClientEarth and other NGOs last year, the High Court ruled that the government had failed to take into account material considerations when formulating the climate policies in its 2021 Net Zero Strategy and ordered the government to submit a revised analysis before the end of March 2023 (see our previous blog post).

In addition, the previous government had asked former Energy Minister Chris Skidmore to carry out an independent review of how best to meet the UK’s legally-binding climate target of net zero by 2050 in a way that grows the economy and does not place undue burdens on businesses or consumers. The Chris Skidmore net zero review, which was published in January 2023, included a long list of recommendations. In particular, the review concluded that net zero is “the growth opportunity of the 21st century” but warned that reaping the benefits would not be possible without a “step change” in the government’s approach to delivering net zero.

The Net Zero Growth Plan sets out the government’s revised net zero strategy and its response to the Chris Skidmore review.

Although touted in advance as a “Green Day”, the emphasis on the day was very much on energy security: “Energy security and net zero are two sides of the same coin.”

The Net Zero Growth Plan – a hefty 126-page tome - sets out in detail what progress the government has made since it first published the Net Zero Strategy in late 2021 and what further steps it plans to take in relation to a number of sectors, including power, fuel supply and hydrogen, industry, buildings, and transport  - including the following:

• The Net Zero Growth Plan concludes that “the path to net zero outlined in the [2021] Net Zero Strategy is still the right one” and so the emphasis remains firmly on renewables (mainly offshore wind), carbon capture, usage and storage (CCUS), nuclear and hydrogen, along with EV uptake and infrastructure.
• This includes a commitment to invest £20bn in CCUS, £160m for port infrastructure to help expand offshore wind, £380m to improve the number of electric vehicle charge points, more details on the existing plans to establish Great British Nuclear, confirmation of £240m funding for green hydrogen projects, and an extra £10bn capacity for UK Export Finance to increase exports from green industries. For more information on key energy announcements made on Green Day, see our blog post. 
• With regard to the continued role of oil & gas in the UK’s energy transition, the government has said: “As we transition to net zero, fossil fuels will retain a crucial role in the energy system, until there are credible clean energy alternatives that can replicate their role. As recognised by the CCC [Committee on Climate Change], natural gas will play a role for years to come, particularly in the hardest to decarbonise sectors….Electrification is the primary means to decarbonise the oil and gas sector between 2027 and 2040.”
• The government is still aiming to double Britain’s electricity generation capacity by the late 2030s and fully decarbonise the power sector by 2035. It has said it will launch a call for evidence on Industrial Electrification in 2023.
• The government has confirmed that it is partly or fully acting upon 23 of the 25 recommendations in the Skidmore review for 2025. This includes expediting the setup of Great British Nuclear, announcing a new taskforce to deliver on our ambitions for solar power, and setting out long-term commitments to CCUS. The full response to the Skidmore recommendations are set out in a separate annex. It is worth noting that the Skidmore review made 129 recommendations in total.
• The government agrees with the Skidmore review that the net zero energy transition will provide the “economic opportunity of the 21st century” and it says that it is committed to ensuring the UK takes advantage of its early mover status.
• One of the key recommendations in the Skidmore review was that the government should set up a new Office for Net Zero Delivery. Instead, the government has created a new Department for Energy Security and Net Zero (DESNZ) and a Domestic and Economic Affairs (Energy, Climate and Net Zero) Cabinet committee, which together it says should ensure a coordinated approach to delivering net zero across government.
• The government says it is responding to feedback from investors on the need for government to provide clarity on how it is making new net zero technologies and sectors investable. It has said that will develop and publish, throughout 2023, a series of net zero investment roadmaps which will “articulate investment needs by sector and summarise the relevant government policy and opportunities to support investment decisions”. It has published a roadmap on offshore wind, and will shortly publish a roadmap on heat pumps, as well as updated roadmaps on CCUS, and hydrogen. It will also publish a roadmap to “guide nature positive investment in key sectors by 2024”. The government is also establishing a new partnership to work with key leaders across business and finance to support the delivery of the UK’s net zero target through a new Net Zero Business & Investment Group.

On the UK Emissions Trading Scheme (UK ETS):

• The government has said it will explore expanding the scheme to more sectors of the economy, including high emitting sectors. It will shortly publish a government response to the consultation on initial expansion of the UK ETS’s scope to cover energy from waste/waste incineration and domestic maritime emissions. However, it does not propose expanding the UK ETS to agriculture at this time.
• The government intends to legislate to continue the UK ETS beyond 2030 until at least 2050.
• The government will explore the potential role of emissions trading markets in gas/electricity price rebalancing, as it considers options for rebalancing policy costs away from electricity and onto fossil energy use when the current high gas prices fall.
• The government is currently reviewing its approach to free allocation of ETS allowances, looking at ways to better target free allocations for those most at risk of carbon leakage to ensure they are fairly distributed. It is also considering other potential mitigation approaches in the carbon leakage consultation (see below).

The carbon leakage consultation, which was published on 30 March and closes on 22 June, explores options for dealing with carbon leakage, including proposals for a UK carbon border adjustment mechanism (CBAM):

• “Carbon leakage” is when industry (and associated greenhouse gas emissions) move from one country to another to take advantage of lower levels of carbon pricing and climate regulation.
• Currently, the main domestic carbon leakage policy measure in the UK is free allocation of allowances under the UK ETS.
• In June 2022, the government indicated that it would consult on proposals for implementing a domestic CBAM and product standards to address carbon leakage. The EU is also planning to introduce a CBAM (see our previous blog post).
• The carbon leakage consultation published on 30 March explores potential policies, namely: a CBAM; mandatory product standards; other demand-side measures to help grow the market for low carbon products; and embodied emissions reporting. The consultation seeks views on whether the proposed measures should be deployed individually or in combination for different sectors.
• The sectors considered are cement, chemicals, glass, iron and steel, non-ferrous metals, non-metallic minerals, paper and pulp, refining, fertiliser and power generation. The government may consider expanding the measures to further sectors (such as agriculture or timber) on a case-by-case basis.
• A CBAM would introduce a carbon price on imported products, to reflect the carbon emitted in their production and any gap between the carbon price applied in the country of origin and the carbon price that would have been incurred had the imported products been produced in the UK. The government envisages that a CBAM may be best suited to sectors that are already subject to the UK ETS. See Chapter 2 in the consultation document for more detail.
• Mandatory product standards (MPS) would set an upper limit on the embodied emissions for individual products placed on the UK market or produced in the UK. “Embodied emissions” are the GHG emissions relating to the manufacture of a product (which could include emissions relating to the extraction and processing of raw materials and fuels, combustion of fuels, process emissions and end-of-life emissions). Products that are more emissions intensive than a defined limit would be prohibited. “Emissions intensity” is the measure of GHG emissions emitted by an economic activity or product per unit of output, revenue or GDP. The prohibition could apply to both domestically produced and imported products. The government envisages that MPS could operate either as a standalone measure or in addition to a CBAM. MPS would be introduced through product regulations and could apply to sectors that are currently outside the UK ETS, as well as UK ETS sectors. See Chapter 3 in the consultation document for more detail.
• The consultation includes an illustrative timeline for how a framework of carbon leakage could be introduced (see Figure 3 at the end of Chapter 1). This envisages introducing embodied emissions reporting in 2025, an initial implementation of a CBAM in 2026 (alongside reforms to the UK ETS allocation of free allowances) and product standards in the late 2020s.

The Green Finance Strategy provides more detail on how the government plans to deliver on its ambition to be the world’s first net zero-aligned financial centre and mobilise private investment in the net zero transition - including the following announcements:

• The government will publish in 2023 a series of net zero investment roadmaps and a nature investment roadmap, and work with UK financial institutions to start a series of government-convened roundtables to discuss deforestation-linked finance, as well as host a Global Investment Summit 2023 in Q3.
• It published a consultation on 30 March on the regulation of ESG ratings providers, which closes on 30 June (see our client briefing for more information).
• The government will consult by autumn 2023 on a UK green taxonomy. The government had already indicated earlier this month that it intends to include nuclear power in the UK green taxonomy (subject to consultation). Once the taxonomy is finalised, the government will expect companies to report on a voluntary basis for two reporting years, after which it will consider requiring mandatory disclosures.
• It will consult in Q4 on the introduction of requirements for the UK’s largest companies to disclose their transition plan (if they have them). This will take place once the Transition Plan Taskforce (TPT) has published the final version of its guidance in autumn/winter 2023  (see our previous blog post for more on the TPT). The government wants to ensure parity between listed and private companies.
• The government will launch a call for evidence in Q3 on Scope 3 emissions reporting to better understand the costs and benefits of producing and using this information, and will update the Environmental Reporting Guidelines including for Streamlined Energy and Carbon Reporting (SECR).
• It will provide clarification in Q4 on the fiduciary duty for pension fund trustees in relation to the net zero transition.
• The government will review the first two ISSB sustainability standards as soon as they have been published (expected in June 2023) to assess whether they are appropriate for UK companies. The government is aiming for the endorsement decisions to be made within 12 months of publication of the ISSB standards (or sooner if possible) (see our previous blog post for more on the ISSB standards).
• It will explore in Q4 how best the final Taskforce on Nature-related Financial Disclosures (TNFD) framework (expected in September 2023) should be incorporated in the UK (see our previous blog post for more on the TNFD).
• The government will consult in 2023 on the specific steps and interventions needed to support the growth of high integrity voluntary carbon markets to protect against greenwashing. The government published a Nature Markets Framework on 30 March setting out its approach to accelerating high-integrity markets to enable farmers and land managers to attract investment in natural capital, as well as plans to develop a comprehensive suite of nature investment standards.
• For more detail on the Green Finance Strategy, see our client briefing. 

Industry and market response to the government’s Green Day has been mixed:

• By the government’s own admission, the calculations in the revised net zero strategy shows the government would only deliver 92% of the emission reductions needed to meet the UK’s 2030 goal, rising to 97% in 2037, which is a key milestone on the path to net zero by 2050. Some feel the government has rushed its net zero plans in order to meet the deadline set by the High Court.
• Some critics also questioned the focus on technologies that are yet to be deployed at commercial scale such as CCUS and the lack of interest in existing solutions that could be rolled out more quickly such as insulating homes and building more onshore wind (see FT coverage and BBC coverage).
• The Chancellor Jeremy Hunt has said that the UK would not go “toe-to-toe...in some distortive global subsidy race” with the US and EU green subsidy measures. The government said it would invest £30bn in kick-starting industries, including up to £20bn for CCUS, and that it would leverage billions more in private capital. Whether the action plan set out in the new Green Finance Strategy will be enough to accomplish that remains to be seen, not least because many of the sectoral net zero roadmaps that the private sector has been clamouring for have not yet been published.
• The head of policy at Friends of the Earth, one of the parties that brought the legal challenge against the government in the High Court last year, said that the group was scrutinising the documents closely and was ready to take legal action again if necessary.
• However, not everyone has been critical of the government’s efforts, with some commenting that the revised net zero strategy provides the transparency that the High Court demanded from the government and others saying that it’s impressive how policy teams across various departments have brought so much together. And the consultation on ESG ratings providers will no doubt be welcomed by many in the private sector.