What the UK Budget means for green growth

Welcome back. This is the final official day of negotiations at the UN COP16 biodiversity summit here in Cali, Colombia. But with national delegates struggling to reach consensus, it looks possible that talks will run late into the night or into the weekend.

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

As at recent UN climate summits, serious tensions have emerged between wealthy and developing nations over finance. Rich countries are resisting pressure to stump up more cash for conservation, and to make multinational companies pay a share of the money they make using genetic data from nature.

We’ll have an update on the outcome in your inbox on Monday. In today’s newsletter, Lee unpacks 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 UK Budget that counts ‘the benefits of investment’

Governments all over the world are grappling with how to galvanise 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 the field. Here’s what it means for green growth in Britain.

A significant rule change

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

Climate change groups are hopeful that this adjustment will jump-start green investment, and help the government’s looming target to make the electricity system carbon-neutral by 2030. That’s because the change will give Reeves space to borrow up to £50bn ($65bn) a year to invest in big projects such as roads and railways, even while debt falls as a proportion of GDP. 

On Thursday, bond markets appeared unnerved by the increase in borrowing. Reeves, however, said that the fiscal rule tweak would “count the benefits of investment, not just the costs”, in a recognition “that government investment delivers returns for taxpayers”.

“This for the first time acknowledges 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.

The change is in line with moves by the Biden administration, which has expanded access to climate finance through government loans from agencies including the Department of Energy and Small Business Administration. Reeves has cited US Treasury secretary Janet Yellen as an inspiration for her economic philosophy, and the White House has similarly underscored 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, a climate analyst at think-tank E3G. Overall, the chancellor promised an additional £100bn 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 electrical transmission towers, in the investment rule change.

“If Reeves believes that public investment delivers returns, why only count financial assets?” asked Chris Hayes, chief economist at the Common Wealth think-tank. Hayes argued that debt issued to pay for investments by Great British Energy, a new state-owned energy investment vehicle, for example, should be booked as neutral in terms of net financial liabilities. 

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.

How exactly to book the cost of wind turbines and transmission lines built with state support will matter, as the government races to reduce the supply of electricity that still comes from fossil fuels, even as electric vehicles and data centres raise power demand.

Odds and ends 

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 extra bandwidth could move proposals into action more quickly. Details remain scant, but an ability to negotiate local opposition will be key to delivering on the government’s clean energy buildout ambitions.

The government’s warm homes plan for energy efficiency would receive £3.4bn over the next three years, Reeves said, to upgrade 350,000 homes, including a quarter of a million low-income and social homes.

Altogether, she said, the government plans to invest an additional £100bn over the next five years in capital spending. That falls short of Labour’s pledge, while in opposition, to commit £28bn per year to green investment alone, which was scrapped earlier this year.

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

Reeves opted not to raise a fuel duty on British motorists that has been frozen for 13 years, citing cost-of-living concerns. That decision came as a surprise to campaigners such as Matthew, who told me that higher fuel costs would be good for the climate — but acknowledged that they remained deeply politically unpopular.

Labour also announced that the carbon border adjustment mechanism, a tax on carbon-intensive imports, would go into effect in 2027, reflecting a similar move by the EU. Alexander, of UKSIF, praised that news. Plus, he said: “I wouldn’t be surprised if the government is saving a few announcements” for the UN climate conference in Azerbaijan, beginning this month.

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