It’s almost exactly ten years since then-Prime Minister David Cameron, was reported to have asked aides to ‘cut the green crap’.1 While much has changed since then, there was nonetheless a clear echo of Cameron’s frustration in the current Prime Minister’s recent speech in which he promised to roll-back targets aimed at accelerating the transition to a net zero carbon (NZC) economy2. As Mark Twain famously put it, ‘history does not repeat itself, but it does rhyme’.
Mr Sunak’s policy flip-flopping is likely a result of a short-term political calculus aimed at creating points of differentiation with a potential Labour administration. It is also clearly aimed at currying favour with the right wing of the Conservative party. A move that David Cameron would no doubt recognise.
But in other respects, the world has changed dramatically since 2013. Much more of the parliamentary Conservative Party has defended commitments to tackle climate change than was the case in 2013.3 There is even stronger evidence that the Conservative voting public support strong NZC measures.4
Perhaps the biggest change since 2013 is the position of the business and financial communities. Make UK, the trade body representing manufacturers, described Sunak’s speech as ‘a huge set-back’.5 The Green Building Council, representing the view across the construction and real-estate industry, claimed the action would increase costs.6 The Corporate Leaders Group, supported by 400 businesses including Amazon, E.ON, Laing O’Rourke and Nestlé, described the move as ‘a body blow for net zero policies’.7 Investors too have been highly critical. A joint letter from the PRI, the Institutional Investors Group on Climate Change (IIGCC) and UKSIF along with 32 individual institutional investors including WHEB, argued that the weakened commitments would harm investor confidence in the UK.8
A broader backlash and a cost of living crisis
Investor and business support is not of course unanimous. NZC targets in Europe and the US have been under pressure, often at the behest of business. The German car industry, for example, has been successful in securing exemptions for the use of synthetic e-fuels in combustion engines. Often these roll-backs are more like the one step back after the two steps forward. Sunak for example did also include some extra support for low and zero carbon technology. Germany and Italy have also both recently moderated their support for heat pumps. In Italy’s case this was clearly needed as the initial scheme provided subsidies equal to 110% of the cost of heat pump and energy efficiency renovations.
Tempering of ambitions for NZC technologies are often proposed to help people cope with a higher cost of living. But here is the rub. Many of these technologies have advanced to a point where they are actually saving people money – certainly over the total lifecycle of the product and in some cases even on the initial capital cost.
Renewable electricity – notably onshore wind and solar power – is already the cheapest form of new power generation. Cameron’s decision to outlaw onshore wind in the UK ended up costing the British public £2.5bn in higher energy bills.9 Reduced support for insulating homes has cost British homeowners even more.10
Even in the case of battery electric vehicles (BEV) which are often seen as more expensive than internal combustion engine vehicles (ICE), the picture is changing very quickly. In most cases, the total cost of ownership of a BEV over the lifetime of the vehicle is already cheaper than an ICE vehicle due to the much lower cost of running the vehicle.11 The initial price may still be higher for a BEV compared to an ICE vehicle, but with the price of batteries tumbling more than 30% so far in 2023, some forecasts suggest that even the initial capital cost of a BEV may be cheaper than an ICE today.12, 13
Politics needs to catch-up with economics
The NZC transition will still clearly need a lot of investment. BEVs still need public charging infrastructure. Intermittent renewables need storage technologies. There are also plenty of new NZC technologies that are uncommercial without generous public subsidy. But the fact remains that the more mature NZC technologies are already cheaper – and will be even cheaper in the future. Deploying these technologies today would reduce costs for hard-working families.14 The political narrative that greener is inevitably more expensive is clearly wrong, but nonetheless a hard one to shake.
No time to go slower – but time to adapt
And at the same time there is no flexibility to delay or slow the transition. In fact, climate science clearly argues for an even faster transition. Recent data has confirmed that September 2023 was the hottest September ever, with the average global temperature +1.75°C warmer than the pre-industrial period and putting the world on course for the hottest year on record.15 Rather than rowing back on NZC commitments, we urgently need to accelerate them.
As investors, we need to be pragmatic. We do still expect the NZC transition to speed up as the economics move ever more firmly in favour of NZC technologies. But we also expect that this will not be enough to limit warming to 1.5°C. It is for this reason that we have introduced a new segment to our investment universe, climate adaptation. A significant amount of climate change is now inevitable. Communities around the world need to adapt to this change. For every year we delay action to reduce emissions, the more the world will have to pay to adapt to the higher level of climate change we will then experience.
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3 For example, more than 120 Conservative MPs have specifically committed to net zero carbon policies through their member of the Conservative Environment Network.
4 For example, https://www.politico.eu/article/uk-tory-voters-tell-pm-rishi-sunak-stick-with-net-zero-target/ and https://twitter.com/LukeTryl/status/1654426732865175552?s=20
11 https://nickelinstitute.org/en/about-nickel-and-its-applications/nickel-in-batteries/total-cost-of-ownership-tco-for-electric-vehicles-ev-vs-internal-combustion-engine-vehicles-ice/ and https://www.osti.gov/biblio/1780970
14 For example the IEA’s latest net zero roadmap shows that the energy transition is cheaper than business as usual (see https://www.iea.org/reports/net-zero-roadmap-a-global-pathway-to-keep-the-15-0c-goal-in-reach?utm_source=substack&utm_medium=email)