Centre for Energy Policy Understanding who pays and who gains in the transition to Net Zero

Prof Karen Turner – Director, Centre for Energy Policy, University of Strathclyde

This article was first published in the NECCUS newsletter January 2021

In December 2020, the HM Treasury (HMT), the UK Governments economic and finance ministry, published the interim findings of their much anticipated Net Zero Review.

The review was initiated after the Climate Change Committee (CCC) recommended in 2019, that HMT undertake a review to understand how the costs of achieving net zero emissions are distributed and the benefits returned, the fiscal impacts, risks of competitiveness effects and the impacts of decarbonisation across the whole economy. Alongside this, the CCC recommended that the review explore the full range of policy levers, including carbon pricing, taxes, financial incentives, public spending, regulation and information provision.

With the final review to be published later in 2021, the interim review presents 6 key findings: 

  1. The combined effect of UK and global climate action on UK economic growth is likely to be relatively small. The scale, distribution and balance of new growth opportunities and challenges will depend on how the economy and policy respond to the changes required.
  2. The costs of the transition to net zero are uncertain and depend on policy choices
  3. Government needs to use a mix of policy levers to address multiple market failures and support decarbonisation
  4. Well-designed policy can reduce costs and risk for investors, support innovation and the deployment of new technologies.
  5. The risk of carbon leakage will increase with efforts to reduce emissions.
  6. Households are exposed to the transition through their consumption, labour market participation and asset holdings. Government needs to consider these patterns of exposure in designing policies for the transition. 

The interim review opens with the statement that ‘reaching net zero is essential for long term prosperity’. This key recognition frames an important context in a debate that, for understandable reasons, has recently focussed on the challenge of short-term costs and economic consequences, while the central focus of net zero planning and action must be what we want and need from our economy going forward.

The interim review notes that the net zero transition will require substantial investment and significant changes to people’s lives. However, it also recognises that opportunities will be created for the UK economy, through the emergence of new industrial activity and jobs, as existing sectors decarbonise and new low carbon equivalents emerge. The HMT identify in the review that the Government’s Ten Point Plan starts the process of setting out how such opportunities may be exploited. 

The interim review describes the opportunity associated with moving decisively in areas where the UK has or can develop comparative advantage, to generate export opportunities and establish the UK as a leader in low carbon initiatives. This could be an important mechanism used to offset a range of sector specific and wider economy costs. For example, at CEP we have an ongoing research programme (supported by the Bellona Foundation with funding from the Children’s Investment Fund Foundation) which focusses on assessing the wider economy impacts of industrial decarbonisation. Findings to date suggest that UK activity in delivering CO2 transport and storage services to UK and overseas emitters, has the potential to deliver net gains to the UK economy in ways that may help smooth the evolution of the current oil and gas sector over the coming decades.

As noted under key finding 3, the interim review also tackles the challenge of carbon leakage, which is highlighted as at risk of increase if the UK continues to show leadership in being a first mover in decarbonising industry. If decarbonisation cannot be delivered in a competitive manner, there is risk of emissions and production activity relocating overseas. Given the risk of such investment leakage, job losses and associated GDP contraction for the UK economy, supporting industry through the transition thus presents a crucial policy, industry and societal challenge. As recognised in the interim review, the length and nature of this transition and therefore the support needed, will depend crucially on the evolution of the competitiveness challenge, which may ultimately be overcome through the emergence of markets for ‘green’ products. However, this may be particularly challenging for the process industries that dominate much of the emissions-intensive landscape in the UK.

Perhaps the most notable takeaway message from the review is that the net impact on growth to 2050 in the UK economy is likely to be relatively small, and depending on how the UK capitalises on emerging opportunities, could be slightly positive or negative. While this is a challenging finding, the review concurs with our own research at CEP in concluding that the transition to net zero will cause structural changes, naturally involve a combination of losses and gains, and, thus, will have some distributional implications across the economy. This undoubtedly pose important socio-economic risks to some labour markets, consumers and sectors.

The review confirms our perspective that getting to net zero is a societal and public policy challenge. We believe effective planning and holistic policymaking, that considers the true consequences of actions – as demonstrated in our Net Zero Principles Framework - will be needed to ensure those at risk are protected and that a ‘Just Transition’ can be delivered effectively within a wider sustainable economy.