What the UK budget means for green growth

Glad to see you again. It’s the last official day of negotiations for the COP16 UN biodiversity summit here in Cali, Colombia. But as national delegates struggle to reach consensus, it appears possible that talks could continue late into the night or into the weekend.

“We have never seen so much bitterness” in this area of ​​negotiations, said Oscar Soria, director of the think tank The Common Initiative. “It’s like people negotiating a divorce.”

As at recent UN climate summits, serious tensions have emerged between rich and developing countries over financing. Rich countries are resisting pressure to mobilize more money for conservation and to force multinational corporations to pay a share of the money they make from nature’s genetic data.

We’ll have an update on the outcome in your inbox on Monday. In today’s newsletter, Lee reveals what this week’s high-impact UK Budget tells us about the prospects for green investment in Britain and beyond. -Simon Mundy

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Green investment

A British budget which takes into account “the benefits of investment”

Governments around the world are grappling with how to galvanize investment in the energy transition. Less than four months after taking office, Prime Minister Keir Starmer’s new UK government has published its first budget, which highlights major challenges and opportunities in this area. Here’s what this means for green growth in Britain.

An important rule change

For starters: an adjustment to UK fiscal rules that facilitates a new, broader measure of net public debt would be hugely important. It allows the government to include financial assets such as student loans in its calculations of its net debt – an approach that will make that number look healthier.

Climate change groups hope the adjustment will boost green investment and contribute to the government’s looming goal of making the electricity system carbon neutral by 2030. Indeed, the change will give Reeves the opportunity to borrow up to £50 billion ($65 billion). a year to invest in major projects such as roads and railways, even if debt falls as a proportion of GDP.

On Thursday, bond markets seemed disturbed by the increase in borrowing. Reeves said, however, that adjusting fiscal rules would “consider the benefits of investment, not just the costs,” recognizing “that government investment generates returns on investment for taxpayers.”

“This recognizes for the first time that there are different types of debt, including debt that can have a positive impact,” James Alexander, of the UK Sustainable Investment and Finance Association, told me.

This change is consistent with actions taken by the Biden administration, which has expanded access to climate finance through government loans provided by agencies such as the Department of Energy and the Small Business Administration. Reeves has cited U.S. Treasury Secretary Janet Yellen as inspiration for his economic philosophy, and the White House has also highlighted green investment as a source of revenue for the national budget.

The new investment rule will be “vital” to unlocking more capital investment in the green energy transition, according to Ed Matthew, climate analyst at think tank E3G. In total, the Chancellor has promised an extra £100 billion in capital spending over the next five years.

But others argued that – by Reeves’ own logic – the government should have gone further and included non-financial infrastructure, such as electricity transmission pylons, in the change to investment rules.

“If Reeves believes that public investments generate returns, why only count financial assets? asked Chris Hayes, chief economist at the think tank Common Wealth. Hayes argued that debt issued to finance investments by Great British Energy, a new public investment vehicle in the energy sector, for example, should be counted as net financial liability neutral.

HM Treasury did not respond to a request for comment on why the government did not include non-financial assets in the rule change, or how it would classify assets as financial.

Exactly how to account for the cost of wind turbines and transmission lines built with state support will be important as the government works to reduce the supply of electricity that still comes from fossil fuels, even as Electric vehicles and data centers are increasing the demand for electricity.

Tips

The slow permitting and approval process for green investment projects has long clogged the pipeline. Reeves’ plan to hire “hundreds of new planning officers” to provide additional bandwidth could help bring proposals to fruition more quickly. Details remain scarce, but the ability to negotiate with local opposition will be key to realizing the government’s clean energy development ambitions.

The Government’s Warm Homes for Energy Efficiency plan would receive £3.4 billion over the next three years, Reeves said, to upgrade 350,000 homes, including a quarter of a million low-income and social homes.

In total, she said, the government plans to invest a further £100 billion over the next five years in capital spending. This does not match Labour’s pledge, while in opposition, to spend £28 billion a year on green investment alone, a pledge which was abandoned earlier this year.

The package “falls short of the promised green transformation,” said Andy Garraway, head of climate policy at Risilience, an analytics platform. He said Labor was too reliant on unproven technologies at scale, such as carbon capture and storage and green hydrogen.

Reeves opted not to increase fuel taxes on British motorists, frozen for 13 years, citing concerns over the cost of living. The move came as a surprise to activists like Matthew, who told me that higher fuel prices would be good for the climate – but acknowledged that they remained deeply unpopular politically.

Labor also announced that the Carbon Border Adjustment Mechanism, a tax on carbon-intensive imports, would come into force in 2027, mirroring a similar EU decision. UKSIF’s Alexander welcomed the news. Additionally, he said, “I wouldn’t be surprised if the government reserves some announcements” for the United Nations climate conference in Azerbaijan, which begins this month.

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