Net Zero Strategy: Build Back Greener
The Government has finally launched its Net Zero Strategy, which was published on 19 October 2021. This provides much needed clarity on how the Government intends to reduce greenhouse gas emissions and achieve the target of net zero by 2050, while ensuring economic growth.
The Net Zero Strategy is a significant document which provides the blueprint for the Government's policies to achieve net zero over the next 30 years. But there is recognition that the strategy cannot be prescriptive, and the Government needs to take a 'systems' approach to address the complexity and interconnections. That includes a dynamic approach to policy making, which allows the Government to update its assumptions on an ongoing basis – considering innovations, public reactions to policy, cross-sector impacts and consideration of the net costs and benefits across the different parts of the economy.
The strategy notes that there are a range of ways in which net zero could be achieved – depending on the availability of key technologies, market growth and the extent to which individuals and businesses adopt green choices. So the strategy isn’t fixed at this stage, and includes potential scenarios and indicative pathways showing how the UK could deliver on its carbon budgets while navigating that uncertainty.
Addressing the cost of transition
The strategy builds on the Prime Minister's earlier Ten Point Plan for a Green Industrial Revolution, and recognises the importance of creating the necessary conditions for private sector investment in achieving the net zero target. There is also acknowledgement of the costs involved in making the transition, and the strategy includes four key principles to protect consumers:
- Work with the grain of consumer choice (ensuring that no-one will be required to rip out existing boilers or scrap their current car);
- Ensure that the biggest polluters pay the most for the transition (through fair carbon pricing);
- Protect the most vulnerable through Government support (including energy bill discounts and energy efficiency upgrades);
- Work with businesses to deliver cost reductions in low carbon technology (supporting technology that brings down the costs for consumers).
The strategy outlines policies for reducing emissions across the wider economy, covering key sectors including Power, Fuel Supply and Hydrogen, Industry, Heat and Buildings, Transport, Natural Resources and Waste and Greenhouse Gas Removal.
The key commitment is to fully decarbonise the UK's power system by 2035 (subject to security of supply). The strategy notes that the shift away from oil and gas will increase demands on the power network. Even with improved energy efficiency and increased flexibility, this could represent a potential doubling of demand, with a requirement for a four-fold increase in low carbon electricity generation (with significant expansion of the networks needed to transport it to where it is needed).
That will require more renewables, with a commitment to deliver 40GW of offshore wind by 2030 (including 1GW of innovative floating offshore wind) plus more onshore wind, solar and other renewable energy installations. To ensure the system is reliable, intermittent renewable energy generation needs to be backed by nuclear, CCUS-enabled generation, and flexible technologies including interconnectors, electricity storage and demand-side response. On nuclear power, the strategy includes a commitment to secure a final investment decision on a large-scale nuclear plant by the end of the current Parliament plus the launch of a new £120m Future Nuclear Enabling Fund for future nuclear technologies (including Small Modular Reactors).
There is also a commitment to deliver on the actions set out in the Smart Systems and Flexibility Plan (published in July 2021). That includes facilitating flexibility from consumers and removing barriers to flexibility on the grid (both for small-scale and large-scale long-duration electricity storage) and increasing interconnector capacity (which connect the UK grid to other countries).
All this requires significant investment, and the strategy estimates that a total of £280 - £400bn of public and private investment is needed in generation and flexible assets. This also creates significant business and employment opportunities. But the strategy is clear on the need to protect consumers throughout the transition – with consumers paying a fair, affordable price for their electricity, and engaging with a retail energy market that allows them to make choices to support net zero. It is likely that reforms to the retail energy market will be needed to support that commitment.
The strategy for decarbonising the power network will be of interest to funders and renewable energy developers – particularly the planned investment in wind and solar. Flexibility also plays a significant role, including demand side reduction and energy storage (and the potential for associated commercial models).
Fuel supply and hydrogen
While widespread electrification of the UK economy is a key part of the strategy, there is recognition that many sectors require low-carbon energy where electrification is not viable or cost effective. To meet that requirement, the strategy covers the reduction in emissions from traditional oil and gas fuel supplies, while scaling up the production of low-carbon alternatives (including hydrogen and biofuels).
Key commitments include delivering on the UK Hydrogen Strategy (published in August 2021), with the ambition to deliver 5GW of low-carbon hydrogen production capacity by 2030. The strategy also notes that blending hydrogen into the gas grid could also support the initial steps to decarbonise heating. Work has already been carried out to set up the Industrial Decarbonisation and Hydrogen Revenue Support (IDHRS) scheme to fund new hydrogen and industrial carbon capture business models. There is a commitment to provide up to £140m to establish the IDHRS scheme (including £100m to award contracts of up to 250MW of hydrogen production capacity in 2023 with a further allocation in 2024). The strategy also commits to implement the £240m Net Zero Hydrogen Fund (which will be launched in early 2022) and to establish a Low Carbon Hydrogen Standard.
The strategy talks about the potential for the UK to be a leader in low-carbon fuel production. Further strategies are due in 2022, including a new Biomass Strategy (which will consider how sustainable biomass could help achieve net zero, including the production of low carbon fuels). The Government has also committed to develop a low-carbon fuel strategy for transport (as announced in the recent Transport Decarbonisation Plan), which will look to maximise emissions savings from low carbon fuels across different transport modes in the period to 2050.
There is already significant talk about the potential for hydrogen across a variety of sectors. The strategy acknowledges that hydrogen can play a part in decarbonising the gas grid in the short term. but there is the potential for a much wider low-carbon hydrogen economy, with fuel switching for industry and transport, including rail and shipping.
The UK's manufacturing and refining sector makes an important contribution to the overall economy, but is also a major source of emissions (responsible for 15% of the UK's current CO2 emissions). To achieve net zero, industrial emissions will need to fall significantly, with residual emissions being compensated for by Greenhouse Gas Removal methods.
The Industrial Decarbonisation Strategy (published in March 2021) already sets out the policy foundations for achieving net zero in the industrial sector. The strategy covers a combination of fuel switching (most likely to low-carbon hydrogen), carbon capture, utilisation and storage (CCUS), measures to improve resource and energy efficiency and with carbon pricing to incentivise action.
The strategy includes the ambition to increase the capture and storage of industrial emissions to 6 MtCO2 by 2030, and 9 MtCO2 by 2035. As noted above, this includes the commitment to set up the Industrial Decarbonisation and Hydrogen Revenue Support (IDHRS) scheme to fund new hydrogen and industrial carbon capture business models. The deployment of CCUS will also be supported through the £1bn CCS Infrastructure Fund. The strategy also makes a commitment to deploy CCUS in a minimum of two industrial clusters by the mid-2020s and four by 2030 at the latest.
Developing industrial clusters around CCUS and low-carbon hydrogen production has the potential for changing the industrial landscape in the UK. That will be of interest to existing manufacturing and associated supply chains. Electrification, fuel-switching and energy efficiency measures are likely to require capital investment, but businesses are likely to be incentivised by the impact of carbon pricing and other fiscal measures.
Heat and buildings
Heating for homes and workspaces makes up almost a third of all UK carbon emissions. The Government has pledged to improve the energy efficiency of housing and non-domestic properties across the UK, ensuring they require less energy to heat, making them cheaper to run and more comfortable and live and work in.
Key commitments include phasing out the installation of new and replacement gas boilers in homes and buildings by 2035 (in favour of low-carbon alternatives), a new £450m Boiler Upgrade Scheme to provide grants for the installation of low-carbon heating systems, a further £1.75bn for the Social Housing Decarbonisation Fund and Home Upgrade Grants to tackle the upgrades required to social housing stock and those on low incomes, and additional funding of £1.435bn for Public Sector Decarbonisation. Alongside, the Government are committed to deliver cheaper electricity by rebalancing of policy costs from electricity bills to gas bills during the course of this decade.
The Heat and Buildings Strategy is a key policy document. It provides clarity on the trajectory of change - covering the requirements for improved efficiency of building fabric, changes to how we heat and cool buildings, and clarity on the financial support that will be necessary to make the transition affordable. It will be of particular interest to developers and landlords, but presents wider opportunities for contractors, service providers and funded models. For further detail see our separate summary here.
Domestic transport currently has the largest share of UK greenhouse gas emissions of any sector of the UK economy, with a 23% share in 2019. The Government's Transport Decarbonisation Plan (published in July 2021) already sets out a pathway to reaching net zero in all areas of transport. But it isn’t just about switching to electric vehicles. The strategy also highlights the need to increase the share of trips taken by public transport, cycling and walking (with associated benefits in public health and wellbeing).
The strategy confirms the commitment to end the sale of new petrol and diesel cars and vans by 2030, and by 2035 all new cars and vans will need to be fully zero emissions. To provide market certainty, the strategy also introduces a zero-emissions vehicle mandate, setting targets requiring a percentage of manufacturer's new cars and van sales to be zero emissions from 2024. The strategy also confirms the Government's commitment to an additional £620m of funding to support the transition to electric vehicles, with an EV Infrastructure Strategy to be published later this year. Alongside the infrastructure, the Government has allocated a further £350m through the Automotive Transformation Fund to support the electrification of UK vehicles and their supply chains.
For freight and logistics, the strategy confirms the intention (subject to consultation) to end the sale of new and non-zero emission HGVs by 2035 (for vehicles under 26 tonnes) and by 2040 (for vehicles over 26 tonnes). There is also a commitment to support and encourage modal shift of freight from road to more sustainable alternatives, such as rail, bike and waterways.
Other commitments include electrification of railway lines to deliver a net zero rail network by 2050, with the ambition to remove all diesel-only trains (both passenger and freight) by 2040, and to plot a net zero course for the UK domestic maritime sector. There is also a commitment to invest £3bn in the National Bus Strategy to create integrated networks and more frequent bus services, and supporting the delivery of 4,000 new zero emission buses. In the aviation sector, there is reference to the recent consultation on the Jet Zero Strategy (which closed in September 2021), with support for the commercialisation of sustainable aviation fuel (with the ambition to enable delivery of 10% sustainable aviation fuel by 2030).
The transport strategy will be of particular interest to business and the logistics sector, particularly the move to zero emissions HGVs. The ban on the sale of new petrol and diesel vans by 2030 shouldn’t come as a surprise, but landlords are likely to be interested in the EV Infrastructure Strategy when it comes out later this year. The importance of public transport, cycling and walking is likely to be reflected in local transport policies and place-based approaches. Landlords and developers will need to consider these requirements in their own developments to help create more sustainable places.
Natural resources, waste and F- gases
The strategy covers a range of natural resources, including agriculture, forestry and other land use (AFOLU) (including peatlands and soil), plus resources, waste, wastewater and fluorinated gases. That might sound a strange mix, but together these sectors (referred to as Natural Resources, Waste and F-Gases (NRWF)) contributed to 20% of the UK's net greenhouse gas emissions in 2019.
To achieve net zero by 2050, there is recognition that a "systemic transformation" is required across the UK economy, including the NRWF sectors. While emissions can be reduced in some sectors, residual emissions will remain from agriculture, waste and F-Gases – which will need to be compensated for by nature-based and engineered greenhouse gas removals.
For the agricultural sector the strategy highlights support to for farmers to take up low-carbon practices and technology. The Farming Investment Fund will provide grants to enable farmers to invest in equipment, technology and infrastructure to improve profitability and benefit the environment. The strategy also flags increased investment into research and development, with the Farming Innovation Programme open for applications in October 2021, with further competitions planned for 2022. In moving away from the EU Common Agricultural Policy, the Government will introduce three environmental land management schemes - the Sustainable Farming Incentive, Local Nature Recovery and Landscape Recovery. Net zero will be a key priority across the delivery of these environmental land management schemes.
The strategy contains specific policies aimed at peatland, with the England Peat Action Plan (EPAP) providing a long-term vision for managing, protecting and restoring peatlands. There is a commitment to restoring at least 35,000ha of peatlands in England by 2025 through the Nature for Climate Fund, with the aim to restore approximately 280,000ha of peatlands in England by 2050, using a range of policies to mobilise private investment.
There is a significant push in woodland creation, with the aim to treble woodland creation rates by the end of the current Parliament. This will contribute to meeting the UK's target of increasing planting rates to 30,000ha per year by end of this Parliament, and maintaining at least this level from 2025 onwards. The strategy also refers to the potential for a long-term statutory tree target in England, with a commitment to spend over £500m of the Nature for Climate Fund on funding woodland creation and management to 2025, beyond which the new environmental land management schemes will provide the main source of public funding. The Government is also mobilising private investment in tree planting and management, through the Woodland Carbon Code with the support of the Government's Woodland Carbon Guarantee.
The strategy notes that timber has the lowest embodied carbon of any mainstream building materials, and refers to opportunities for the safe growth of timer use. The Government intends to promote the use of timber in construction through various measures, including financial support through the Forestry Innovation Fund, working with key construction stakeholders to develop a policy roadmap, and research into the barriers to uptake of timber.
The strategy refers to a Biomass Strategy being published in 2022, which will provide clarity on how sustainable biomass available in the UK can be used across the economy to help achieve net zero. This will also set out the role which Bioenergy with Carbon Capture and Storage (BECCS) can play in reducing emissions.
On waste, the Government's Resources and Waste Strategy already sets out the trajectory of travel for the waste sector. That includes a commitment to increase municipal recycling rates to 65%, and ensure that no more than 10% of municipal waste is landfilled by 2035. To support the elimination of biodegradable municipal waste in landfill by 2028, the strategy commits to bring forward £295m of capital funding which will allow local authorities in England to implement separate food waste collections for all households from 2025. There are also policies aimed at encouraging greater use of recycled plastic in plastic packaging, and moving to a more circular economy.
The strategy notes that the F-gas Regulation is currently under review, and the Government will assess whether the measures can go further than the current requirements and international commitments to help the UK meet net zero by 2050.
This strategy dealing with agriculture, forestry and land use/environmental land management will be of interest to landowners, farmers and land managers. Of particular interest is the promotion of the safe use of timber in construction, which is likely to be of interest to developers, contractors and those involved in designing and delivering modern methods of construction (MMC).
Greenhouse gas removal
The strategy acknowledges that for some sectors (including industry, agriculture and aviation) it will be difficult to decarbonise completely by 2050. Achieving net zero is therefore reliant on greenhouse gas removal (GGR) of residual emissions.
The strategy makes a commitment to deploying at least 5 MtCO2/year of engineered greenhouse gas removal by 2030, with £100m innovation funding for Direct Air Carbon Capture and Storage (DACCS) and other GGRs. The strategy also talks about establishing a market for carbon removals, where polluters have a policy or financial incentive to invest in GGR's to compensate for their remaining emissions.
The Government has flagged that there will be a call for evidence in the coming months to explore the use of the UK ETS as a potential long-term market for GGR. In the short term, the strategy notes the potential need for Government to provide bespoke support for initial projects to de-risk investment decisions and provide revenue certainty. The strategy also notes the need to develop suitable regulatory oversight with robust monitoring, reporting and verification.
The opportunity created through the development of a market-based framework for GGR will be of interest to a wide range of commercial operators, funders and developers. It will also be relevant for sectors that are unable to fully decarbonise, and will need to meet their obligations through the procurement of negative emissions alongside other reduction measures.
Supporting the transition
The strategy sets out how the Government intends to support the transition through cross-cutting action (including support for innovation, encouraging private investment, increasing training and skills and working with local government to ensure local areas have the capability and capacity to deliver).
Innovation is flagged as being central to the Government's approach to delivering net zero. The strategy talks about publishing the UK's first Net Zero Research & Innovation Framework to identify the critical net zero challenges that require development over the next 5-10 years. The strategy also commits the Government to funding at least £1.5bn during the next spending review on net zero innovation programmes on power, buildings, industry, transport and natural resources, waste and F-gases. Government investment in research and development is to increase to 2.4% of GDP by 2027.
Harnessing both public and private finance will be essential to deliver net zero. Green Investment is a cornerstone of this plan with the Government stating its desired aim to lead the world in green finance. The strategy recognises that the bulk of investment in relation to net zero will come from the private sector and that as such the government needs to work closely with them to deliver "a world-leading net zero financial system." The Government aims to work with the private sector to deliver a world-leading net zero financial system – with climate-related financial risk embedded into regulatory frameworks to guide capital flows to green investments.
Key initiatives proposed in respect of green investment include using the UK Infrastructure Bank (UKIB) to crowd in private finance and kick-start new sectors, introducing new Sustainability Disclosures Requirements (including making climate related financial disclosures mandatory across the UK economy and developing a UK Green Taxonomy) continuing to issue green guilts and getting NS&I to issue a Green Retail Savings Product. The strategy also commits the Government to publish an update to the Green Finance Strategy in 2022, which will include a net zero transition pathway for the UK financial sector. For further detail of the initiatives focused on green investment, see our separate summary here.
The Net Zero Strategy runs to 368 pages (including a useful annex explaining the climate science). The full publication is available here.