Long-term regulatory and policy changes needed to avoid stalls to business decarbonisation

In light of the financial pressures faced by businesses from rising inflation and interest rates, tight supply chains and labour markets, alongside high energy bills, there is a high chance corporate investment in decarbonisation could be in trouble. In Cornwall Insight’s latest Insight paper “Business net zero: Making progress in a challenging economy” we set out a range of regulation and policy changes the government could examine if it wants to avoid a slowdown or stalling of business investment in decarbonisation. .

The paper echoes Tony Danker, director-general of the CBI, who cautioned that without a green strategy, the UK could lose the green race for growth.

It is important for the UK’s competitive economic position that it sustains strong levels of investment in businesses’ net zero strategies and in pursuit of their environmental, social and governance (ESG) commitments. As other parts of the world, like the US, introduce investment-friendly policies targeted at green growth, UK policy Ideas from Cornwall Insight including fiscal measures to incentivise electrification and addressing the grid constraints of getting renewables onto the network will help the UK keep pace and not miss out on economic growth.

Our research confirms that net-zero targets remain a priority for many businesses, with many wishing to progress decarbonisation plans, even more so if they are viewed as being beneficial ethically and financially to businesses in the long run. But realising plans will not be easy.

Our research finds that businesses are currently facing significant pressures as challenging economic conditions, including continuing high energy bills, hit their finances. The recently announced Energy Bill Discount Scheme (EBDS), coming in from April, will not ease this pressure, as businesses see their support levels drop from the more generous scheme it replaces, whilst energy costs remain elevated to previous norms. As a result, there is a rising risk that corporate capital investment in decarbonisation could be overshadowed by falling business earnings and squeezed cash flows.

To address this, Cornwall Insight suggests that long-term regulatory and policy changes could be implemented which will help protect businesses, encourage investment in decarbonisation and prevent net zero plans from being put on the back burner whilst businesses face unusually difficult circumstances. These include:

  • A boost to energy efficiency and electrification – energy efficiency awareness campaigns can provide quick wins and immediate savings.
  • Longer-term fiscal measures for decarbonisation progress – including levelling policy costs to incentivise process electrification. Coupled with deterrents for carbon-intensive practices, these could be used as part of a ‘carrot and stick’ approach.
  • Devising a market design fit for net zero – with many Energy Intensive Industries (Ells) reliant on mass electrification for decarbonisation, there is a clear need to reform the existing market design to maximise the efficient distribution of cheaper renewables sources of power.
  • Reducing energy costs – with power prices in the UK elevated compared to other global markets due to the additional levies on energy bills, the competitiveness of UK businesses is hindered. Harmonisation of levies applied to gas and electricity could help close the cost gap.
  • Addressing grid constraints – there is a need to bring generation and storage assets onto the network as quickly and cost-effectively as possible, alongside ensuring that industries switching to electrification are able to access sufficient grid capacity to make this transition.
  • Tackling labour shortages and accelerating digitalisation – there is a severe labour shortage in the UK currently, particularly in net zero skills. Programmes designed at upskilling workforces as well as policies to enable efficient digitalisation of business operations could both help businesses in reducing costs and accelerating their net zero journeys.
  • Encouraging direct investment – promoting the growth of businesses and supply chains that support net zero within the UK can help increase security and reduce dependence on external markets.

The report has also outlined a range of options available to businesses to progress decarbonisation plans themselves, from understanding and then reducing their energy consumption and implementing energy efficiency measures to investing in on-site generation or setting up corporate power purchase agreements (CPPAs), which both aid decarbonisation and help businesses manage their volatile energy costs. But in reality, small and medium sized businesses may not be able to access all of the benefits of many of these strategies by virtue of their scale. As a result, a partnership with government emerges as a credible way to ensure viable businesses of all shapes and sizes are able to continue to cut emissions.

While the will for decarbonisation remains very strong, unfortunately, investment capability may be compromised without action by policymakers. Economic realities are taking their toll, and high energy bills and reduced government support are starting to hit some businesses’ financial standing. The picture varies by sector and business size. But where investment plans start to be reviewed under the shadow of challenging trading environments, we must wonder whether the decarbonisation of UK business will be one of the first victims as near term, and more existential pressures take precedence.

As the director-general of the CBI said , a green strategy is not about outspending to keep investment from leaving the country, but about outsmarting. The success or failure of the business and industry green agenda in the UK rests largely on the shoulders of companies and their shareholders. Of course, some businesses and sectors will be able to navigate this period, and continue progress, but certain sectors and business types are more susceptible to risk. While the government and businesses recognise the challenges of continuing direct bill subsidies, policymakers may want to counterbalance the loss of bill support with other green investment incentives. Whether the policy changes come through tax incentives, energy market design, informing behaviour changes, reducing energy bills or a mix of all of these, businesses clearly would benefit from knowing that the government has a clear road map for supporting their role in delivering our net zero ambitions.

There is a widespread feeling that the current policy landscape does not provide businesses in general with enough clarity to make long-term business and investment decisions. If we are to avoid the period after the pandemic representing a lost era of business progress on decarbonisation, regulatory and policy clarity will be essential. Indeed, this is a prerequisite to allow businesses to address the challenges brought about by the energy crisis, and to seize the opportunity unleashed by the net-zero transition.

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