With apologies to the football obsessed and the acres of newsprint generated by the now-you-see-it-now-you-don’t breakaway European Super League, far bigger news, which should have been generating at least as much heat, one which will profoundly affect us all, footie fans included, was Boris’s soviet-sounding Sixth Carbon Budget ahead of the UK-hosted COP26 in November.

 

Adopting the recommendations of the Climate Change Committee (CCC) from last December, but timed politically to pressure President Biden and others at Biden’s own climate summit this week, Boris intends to pass in to law yet another binding reduction in UK carbon emissions, this time by 78% from 1990 levels, by 2035. This replaces the December 2020 commitment, made only four months ago sitting alongside Sir David Attenborough, to reduce CO2 emissions by 68% by 2030 compared with 1990, which itself replaced the previous 2030 target of 57%. To be clear, the end-game of carbon net-zero (see below) by 2050 has not changed, merely the timetable and the means by which we get there. But in this accelerating, politically motivated reverse auction of CO2 emissions, that the target is a moving feast is an understatement.

Current state of progress: a quiet energy revolution

What progress has been made so far? According to the Office for National Statistics (ONS), in 1990 the UK generated 793.8 million tonnes (mt) of greenhouse gases, of which 595.7mt (75%) was CO2, the rest being defined as methane, nitrous oxide and the four specific fluorinated gases of the types used in aerosols, air conditioning units, heat exchangers etc. By 2019, net UK CO2 emissions (where ‘net’ is defined as gross emissions less capture in ‘carbon sinks’, including change of land usage by afforestation) had fallen by 244.2mt, or 41%. Even more impressively, on a per capita basis, annual emissions had nearly halved from 10.4tph to 5.3tph.

 

Interestingly, over 30 years our total energy consumption per annum has declined by 12% despite significant economic growth and that period encompassing the entire digital revolution. The decline reflects the significant loss of heavy industry and the erosion of manufacturing, and the technological leaps made in improving the efficiency of energy consuming processes and mechanisms including domestic and industrial lighting and not least the internal combustion engine (a 1980 Mk1 1.5L Golf had an average fuel consumption of 24mpg; the latest equivalent Golf Mk 8 averages 60mpg; even the current 2.7 tonne 3 litre Discovery can do 36mpg on a long run, downhill with the wind behind it).

 

But despite the efficiencies, that energy decline exposes the extent to which no country is an island in this great competition to be environmentally holier-than-thou. Two examples highlight the issues: according to industry body UK Steel, in 1990 the UK produced 17mt of steel and consumed 14mt, we were a net exporter of 3mt; by 2018, UK production was 7.3mt and consumption was 12mt, we had reversed the trend and were a net importer of 4.7mt; leaving aside the economic loss of a significant heavy industry fortuitously contributing to a reduction in domestic energy consumption and CO2 emissions, in moving from a net export to a net import position, we have ‘offshored’ the carbon footprint liability, made it somebody else’s problem. Secondly, in considering the significant growth in energy consumption arising from the digitisation of the economy and the colossal growth of social media (which did not even exist in 1990), even if the data generator or the consumer is based in the UK, the servers processing and storing that data (i.e. where much the most energy in the chain is consumed) could be anywhere in the world. Again, you have simply shifted the emissions problem to someone else’s CO2 ledger.

Where from here?

But if it has taken three decades to cut UK emissions by 244mtpa, Boris’s commitment says we now have 15 years, half that time, to remove a further 220mt to reach 131.0mtpa by 2035, to give his 78% total reduction from 1990. Arguably, the easy bit has been done through the virtual annihilation of coal derived power generation, replaced by renewables and less dirty, more efficient natural gas. The results are impressive: 1990, 203mtpa of CO2 emitted from power stations; 2019, 57.4mt, a reduction of 145.6mtpa, or 60% of the UK total from that one sector alone; the aim is to be carbon zero by 2035. ‘Business’ and industrial processes have contributed the bulk of the rest of the total reduction. Of the 351.5mtpa still being pumped out, substantially the biggest contributors now are transport (119.6mtpa, 34%), business (64.7mtpa, 18.4%) and residential accommodation (65.2mtpa, 18.5%). We know the vehicular and transport revolution is on its way, D-Day being 2030 beyond which no new internal combustion vehicle sales are permitted, but the new target simply means that if we are to achieve it, the massive investment in refuelling infrastructure required to maintain the standard of freedom and mobility we have come to expect in our petrol-and-diesel-powered world has to be significantly accelerated. We say ‘refuelling’ dependant upon whether electric or hydrogen power becomes the best or right way forward. Because Boris now rightly includes aviation and shipping in the target figure, to the extent we have any, pressure is put on ship builders, aircraft manufacturers and those who supply propulsion systems rapidly to deliver technological developments in those sectors too.

The housing minefield

Houses present a major problem (not least because voters inhabit them, potentially a political elephant trap when many householders are in for some very hefty bills). In England alone, the ONS calculates there are 24.4m dwellings, 20.16m of which are private. New builds are not a problem: the design rules can easily be amended to ensure ‘green’ compliance with new energy efficiency requirements. But retrofitting the millions of homes currently deemed inefficient, whether because of lack of insulation, reliance on dirty energy sources etc will be a major programme, and immensely costly. In densely populated areas, there is likely to be a fundamental shift towards communal district power-and-heating systems.

 

Then there are potential systemic risks, particularly the risks to the stability of the housing market if recommended mitigations prove to be wrong; or assuming a more-stick-than-carrot approach by central government and local authorities, the ramifications of non-compliance because the mandatory fit-out programme is over-ambitious and unachievable by the designated completion date.

 

Three live examples highlight the potential problems when broadened and multiplied to encompass the entire UK housing stock: first, the Grenfell Tower tragedy has exposed not only the catastrophe of failing to understand the materials and their application, but now leaseholders of any property in a similar block clad with the same material find themselves with either an unsellable home (i.e. essentially worthless) or shouldering enormous rectification bills through no fault of their own; second, last week, it was revealed that properties using the ‘wrong’ sort of cavity wall insulation are ineligible for mortgage finance, again those properties are essentially worthless until remedial works have been done; finally, in Scotland (so almost sure to make its way to England), rental properties with an EPC rating below a certain level are not allowed to be let thus also rendering them worthless until remedial actions are taken. One assumes regulators including the Prudential Regulation Authority which oversees the banking and lending sectors are taking a keen interest, playing the game of unintended consequences.

The changing landscape

Agriculture too will see a revolution, as if that promulgated by Brexit is not enough. The CCC recommends that nearly a million acres (an area equivalent to that of Suffolk) of mixed woodlands are planted but controversially that half a million acres (an area the size of West Yorkshire) of arable and grassland is withdrawn from food production and set aside for the growth of energy crops (e.g. oil seed rape and maize), which unless grown as break crops are currently explicitly prohibited to protect food source security. Consumers will be expected to eat less meat and dairy.

But what IS Net-Zero?

A daft question you would think after 25 international climate summits, much verbal hot air generated, millions of delegate air miles flown and forests of paper sacrificed on the subject. But as most of the world bends over backwards, leveraging itself to the hilt to meet green targets and the carbon nihilists demand more despite the trillions of dollars, euros, pounds, yen and so many more denominations of taxpayers’ money being spent (many yuan are being spent too but the application is decidedly khaki rather than green, and not nearly enough rupees, together a major problem with China and India being two of the world’s three biggest polluters), it seems that there is a large hole in the understanding of what the definition of net-zero actually is. To the extent that it was revealed last week that arriving at a firm definition is to be one of the priorities at COP26.

 

Epitomising the confusion are two clear examples. First, amid accusations of pandering to national interests and accusations of greenwashing, EU talks defining the ‘taxonomy of sustainable finance’ (which defines the emissions classification of industries and processes comprising 40% of the EU economy) this week broke up in acrimony over whether nuclear and natural gas are ‘green’ technologies or not. Second involves no less a figure than Mark Carney, former Governor of the Bank of England and now the UN’s climate change ambassador. He and his investment fund, Brookfield, not unreasonably claimed to have achieved a net-zero position with their $600bn portfolio; where it has nasty brown and black assets in oil and coal, it has offset them with green investments in wind and solar. A leading and respected arbiter and quasi auditor of green measures, the Science Based Targets (SBT) institute, publicly accused Brookfield of greenwashing (that term again, increasingly bandied about, in environmental language the accusation is tantamount to money laundering in finance), of making false environmental statements, forcing the asset manager to retract its claims.

 

This opens a veritable morass, not only because of the lack of clear understanding of the terms by a leading global climate change player, but because the inference is that SBT itself is questioning the entire principle of carbon offsets and the carbon credit market, both significant contributors to and mitigants of business costs, and drivers of corporate behaviours. Is offsetting ‘bad’ investments with ‘good’ as an asset manager any worse or different from a business producing emissions and offsetting them by buying others’ credits, or planting trees? Are we all guilty of ‘greenwashing’? Nobody seems very sure, but there is a whole global industry built around it. As the runaway train accelerates inexorably towards achieving “net-zero” it would be useful to know what net-zero actually is!

The Project is mandatory. The costs are……? Pick a number

Truly, as William Hague said, this is a revolution by coercion. Given it affects all of us it is surprising (or cynically, perhaps not) that the UK government has been less than honest with the public about the costs likely to be incurred between now and 2050, the year the Paris Climate Accord targets global carbon net-zero. The CCC estimated that the UK’s annual net cost by 2050 would be £50 billion a year. After a two-year battle under a Freedom of Information request from the Global Warming Policy Forum, documents finally released by order reveal that when Philip Hammond was Chancellor, the Treasury challenged the CCC assumptions and said that £70bn a year by 2050 was much more likely, bringing the total cumulative spend over the next 30 years discounted to today’s prices to £1.3 trillion. In context, the current national debt is £1.9 trillion and the total size of the economy is not much greater. It seems No 10 at the time took fright at the Treasury’s high number so expunged it and went with the much lower CCC estimate. Even the Treasury estimate might be low (history says when it comes to forecasting the cost of government capital projects compared with the sums actually incurred, cost overruns are usually tens of percentage points, if not multiples adrift): the Energy Technologies Institute estimates that retrofitting the UK housing stock alone (i.e. ignoring all other infrastructure expenditure) will cost £2 trillion to be emissions compliant.

 

While of course such programmes present significant investment opportunities as well as risks, Boris’s politically moving the goal posts has arguably just increased the broader economic risk, not least that peremptory political policy on the hoof, as already experienced by the automotive sector, makes long-term business planning, and the prospective financing of such projects, much more difficult.

 

Arguably there is a case for first-mover advantage. However, given virtually every country is committed to the Paris Climate Accord, over time it is far less likely that from an investment standpoint the perceived environmental winners will be accorded premium ratings, much more likely that the losers and the non-compliant will be dealt a heavy discount, or will be literally unsustainable as businesses.

 

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