UK Budget: climate agenda clear but businesses need policy detail

Michael Watson of Pinsent Masons was commenting after UK chancellor Rachel Reeves outlined a range of climate- and ‘net zero’-related tax and spending commitments in her maiden Budget on Wednesday.

Watson said that while the Budget contained welcome measures centred on enabling the energy transition and investment in cleantech, there is still a lack of detail on important areas of policy that are needed to catalyse business action and investment towards the UK’s climate and ‘net zero’ objectives. He said that the economic cost of delayed action in this regard was laid bare recently.

“In her speech, the chancellor made much of the importance of complying with the Office of Budget Responsibility’s (OBR’s) advice and recommendations, but in relation to the climate and net zero agenda she could perhaps have gone further,” Watson said.

“In its ‘fiscal risks and sustainability’ report from September 2024, the OBR highlighted the risks of climate change, and in particular the impact that a delayed transition towards net zero has on real GDP in the long term – real GDP is predicted to be 5% lower in a scenario where global temperatures rise by more than three degrees, compared to pre-industrial levels, by the end of this century,” he said. “This illustrates the challenge and opportunity presented by climate transition.”

“The challenge is in elevating the urgency of the transition in the priorities of policymakers and CEOs when there may be shorter term urgent priorities,” he said.

Many of the measures that were announced in Reeves’ Budget were centred on the energy transition, in line with the government’s stated desire for Britain to become less reliant on fossil fuel production and imports and meet more of its future energy needs from cleaner energy sources, generated domestically.

In this regard, the Budget included an increase in the rate of the energy profits levy, which applies to oil and gas producers – as well as changes to the allowances that the producers can take advantage of to reduce what they pay under the levy.

In tandem with this, the government confirmed that it plans to legislate in the Finance Bill 2024-25 to provide for tax relief for payments oil and gas companies make into decommissioning funds in relation to assets sold for use in CCUS – technology that enables greenhouse gases to be removed from the atmosphere. The government recently announced that it had reached “commercial agreements” to support the first tranche of CCUS projects in the UK, and confirmed in the Budget that £3.9 billion has been allocated to that initiative in 2025-26 – as part of a broader £20bn funding commitment for CCUS.

Since coming to power in July, the government has lifted the de facto ban that existed in relation to on onshore wind development in England, approved four major solar projects, and announced that a record 131 clean energy projects were successful in the last round of its ‘contracts for difference’ auction process – an initiative designed to incentivise the development of new low carbon generation.

While scaling up renewable energy generation is a central focus of the government’s plans for growth, decarbonisation and energy security, the government has also acknowledged the important role for new nuclear power in Britain’s future energy mix. In that regard, the Budget announcement confirmed £2.7 billion of funding to continue Sizewell C’s development through 2025-26, with a final investment decision due in spring 2025 – at the conclusion of the government’s ongoing ‘spending review’.

The government is also setting up a new entity, Great British (GB) Energy, which, among other things, will be tasked with catalysing private investment in energy projects. In her Budget speech, Reeves confirmed that £125 million will be allocated to the body in the year 2025-26. GB Energy will be headquartered in Aberdeen.

The physical risks of climate change were recognised in the Budget, with £2.4bn of funding to support “flood resilience” across the UK allocated for over the next two years, while a further £3.4bn has been committed to towards heat decarbonisation and household energy efficiency over the next three years, amidst plans to, among other things, support people in switching to more efficient boilers and help grow the heat pump manufacturing supply chains in the UK.

Further investment in electric vehicles infrastructure and support for ‘green hydrogen’ producers was also confirmed in the Budget, alongside rises in rates of the existing plastic packaging tax and climate change levy that applies.

Watson said the next steps for the government with its climate agenda should be to provide greater policy certainty and place much greater emphasis on the benefits of early accelerated investment in the transition to net zero.

“While it was welcome that the government confirmed, within the umbrella of the Budget, that the UK Carbon Border Adjustment Mechanism is to be introduced from 1 January 2027, what remains missing is the timing of other policy interventions – in particular, the introduction of the International Sustainability Standards Board’s recommendations regarding sustainability reporting for business and related mandatory development of transition plans,” Watson said. “Both are essential steps to provide regulatory and policy certainty for businesses – particularly those that are aligned to or supporting the net zero transition.”