Without consensus across the main political parties, the risks to the private sector go up considerably. Net zero requires a transformation of electricity generation, transmission and distribution, a transformation of businesses and households, a transformation of agriculture, and a radical overhaul of industry. When a government commits to a path to net zero in electricity at breakneck speed within just five years, brands those who might stand in the way as nimbies, and sets out a rhetoric of confrontation, there is bound to be a reaction. When a government proclaims that bills and industrial costs will come down and they don’t, its credibility slips away.
As the impacts are felt, and losers are berated, there will inevitably be a reaction, and, consequently, it is inevitable that the sharpening of the political knives will lead to voters seeking redress through the ballot box. It is a short step to those concerns being incorporated into the programmes of political parties.
That, indeed, is what has happened across the EU and the US, and it now finds its reflections in the stances of the leading candidates for the UK’s Conservative Party after its election defeat. The government’s response in the UK differs from that in the EU. Instead of trying to engage and understand this public opposition and to face up to the higher costs that the transformations are going to give rise to, the government is doubling down and creating ever-sharper political divides.
In doing so, the government underestimates the opposition to parts of the policies and the breakneck-speed timetable. Recall that the Labour Party won the General Election with 34% of the vote – the lowest ever in forming not only a majority, but a massive super-majority. In the election, 16% voted for Reform and 25% for the Conservatives. Reform’s position on net zero echoes those of the leading political parties in Europe now – notably those in all the main founder members of the original European Economic Community (EEC). The “far” right recently won elections in France, Italy, Germany, the Netherlands, Hungary, Slovakia and now Austria.
Perhaps of much more importance are the shifts in the position of the UK’s Conservative Party. The recent Party conference saw the main leadership candidates push back hard against the 2030 net zero target and cast doubt on its own previous target for 2035.
Nor is the fracturing of the net zero consensus confined to the political right. It is important to the left too. In the UK the unions are looking at the closure of primary steel production at Port Talbot and the switching of Grangemouth to being an import terminal, and asking perfectly sensible questions about how these de-industrialisation steps reduce the threat of climate change when the products will now be imported from high coal-based energy systems in China and elsewhere. Similar questions are being asked about switching from North Sea oil and gas production to more imports, and, in the case of gas, to the much more polluting LNG (liquefied natural gas).
There are several ways of responding to these challenges. One is that of the activists and the metropolitan left. They want to double down on the net zero 2030 target, and confront those whom they abuse with terms like “luddites”. They want to “just stop oil” and overthrow capitalism. Another approach is that of the government. They double down on the rhetoric of the previous Conservative government, promising that energy prices are going to fall, and fall much more than they would have on a slower transition. They trot out the nonsense about getting away from “high and volatile gas fossil-fuel prices” and make silly statements like the claim that renewables are “ten times cheaper”. They ignore the fact that it is carbon consumption that determines the UK’s contribution to climate change, and it is not world leadership to close UK energy-intensive industry and import the stuff instead.
The trouble with this approach is that the government risks being found out, and importantly that the electorate notices. The government may get lucky: low and stable gas prices may bring the electricity price down, and it is possible that the electorate just looks at their household energy bills and notices that they are lower. But the luck will be no protection against the lack of competitiveness of the UK’s energy prices compared to those in the US and China, and also to prices in the EU. Having some of the most expensive electricity in the industrialised world will have its effects, as has the closure of almost all energy-intensive industry in the UK.
As reality seeps through, and as the government remains in the aggressive attack mode against any who dare challenge any of its plans – from pylons to onshore wind to the associated infrastructures, and to the impacts on industry more generally – the tragedy (and the irony) is that the very desire to make a serious contribution to mitigating global warming may be lost. Climate change matters and, given there are limited resources to throw at this great challenge of our times, instead of engaging with those of a more sceptical persuasion about its policies and timetables (not scepticism about climate change itself) to sustain the precious consensus, the government’s rhetoric and actions splinter it further. Sadly that splintering is already taking place.
Splintering may well change the rhetoric of the opposition parties, who could quite plausibly be in power in 2029 (or earlier). 34% is a low base to defend from (much lower than Corbyn achieved in 2019 or Brown in 2010). All the stars aligned in tactical voting in 2024. There is no reason why Labour will get so extraordinarily lucky again. Just assuming the Conservatives will implode and that Labour has at least ten years in power is a dangerous path to follow in the context of something as important as climate change.
This matters not just in 2029, but right now. Why? Because investors notice too. Almost all the debt and equity the government wishes to garner from foreigners will rely on funding from customers after 2029. The UK has no net savings after capital depreciation, and this is about to get worse because the government is looking to tax savings in its October 30th Budget (having ruled out taxing consumption and income). More domestic taxes on savings just makes the reliance on foreigners ever greater.
Investors must now ask themselves the following question: what happens if and when the 2030 target is watered down – probably first by the government, and then after the election possibly by the Conservatives/Reform? It might not of course, but any investor looks at downside risk, and much of the investment is in core infrastructures, which might just get temporarily or permanently stranded.
Investors can look, too, to the debacle at Thames Water. Though there are lots of faults with Thames itself, investors will see that regulators are mindful of the politics too, and especially in relation to bills. Investors will want to know that, post-2030, they are going to be allowed to fully price their costs of debt and now especially equity, get guaranteed returns via the regulatory asset bases (RABs), and that contracts for differences (CfDs) and other subsidy mechanisms are fully supported too. Investors are not stupid: they know that when the politics changes, so does the risk to their investments.
All of this adds to the cost of capital, and almost all of the net zero programme is capital-intensive. It is the number that matters most. The real interest rate in the UK is already nearly 3% and the gap in gilt prices between the UK and Germany is almost 2%. Any investor knows that when a government sets a target on the basis that it will be achieved whatever it costs, it is departing from the other way of thinking about the net zero transition – i.e. whatever the customers, taxpayers and voters can afford.
These considerations suggest a number of “rethinks” for the government. First, dialling down the rhetoric and hostility to those who disagree would be a good start. Creating and blackening enemies of its policies is very bad politics in anything but the very short term. Second, engaging with the widest range of views, analysis and interests is a sensible way of continuing to bolster the consensus. Third, given that almost no one (including the government itself) believes that the 2030 target will actually be met, it is time to reset the expectations. Fourth, in reconsidering and engaging, prioritisation is going to be important. The UK cannot do everything; it is not a world leader in mitigating global warming, and it could focus on the main things that would make a global difference, including carbon capture and storage (CCS) and offshore wind, for which it has some of the best locations in the world.
Sadly, none of this is likely to happen, and investors should and will take note. There is time to rescue the situation, there is time to rebuild the consensus that is now fracturing, but that means recognising that climate change is above party politics. It is a medium- and long-term great challenge and we all need to be in it together, not a select few. The government should seriously consider whether it is akin to the “activists” or a serious party of government and grounded energy policies.
