The Sixth Carbon Budget lays out a balanced pathway for the UK to net zero

Climate commitments have come thick and fast recently – but underpinning these are far-reaching policies. In April 2021, the UK committed to its most ambitious net-zero targets to date when it announced that it would reduce net annual emissions by 78% compared to 1990 levels by 2035 – 15 years earlier than its original commitment.

This was the headline recommendation of the UK's Climate Change Committee (CCC) when it published its Sixth Carbon Budget in December 2020. It described this target as "challenging" but "feasible". The government has confirmed that it will adopt the budget, which sets out the volume of greenhouse gas emissions the UK can emit during the period 2033-2037.

The CCC also published its report on the changes to policy that it believes will be necessary to meet the budget. Most of the changes will need to be made over the next five years. This is a serious piece of work – over 500 pages – that provides a credible approach for the UK as it moves to net zero. What are the policy changes that will be needed to meet that budget? And what are the CCC's recommendations for a "balanced net zero pathway" that it deems will best allow the UK to reach net zero in 2050?

Financing the transition

The CCC estimates that that net cost of the transition (including upfront investment, ongoing running costs and costs of financing) will be less than 1% of GDP over 2020-2050. The financing conclusions are:

• UK low-carbon investment each year will have to increase from £10 billion in 2020 to £50 billion by 2030 and continuing at that level until 2050. Total investment in the UK in 2019 was around £390 billion. For investment of this level, low-risk policy in the power sector must extend to other sectors, especially residential heating and energy efficiency.
• Much of the investment spending can be recouped through lower operating costs. Savings will rise to £35 billion by 2035 and £60 billion by 2050.
• UK GDP may be boosted. As the economy rebuilds after Covid-19, increased investment may provide a multiplier effect to stimulate activity and employment. Further economic benefits may arise from innovations or other industrial opportunities.
• Health, wellbeing and the environment will benefit improving climate change resilience, cost and other benefits that come from a healthier population.

A 'just' transition

The CCC report recognises the huge implications that the transition will have for people and places in the UK. Central policy will need to join up with local, regional and devolved administrations. Vulnerable people will need to be protected from the costs and the benefits should be shared broadly.

Considerations for a just transition include:

• A fair strategy to deal with the shift of hundreds of thousands of workers out of high-carbon roles and into low-carbon ones. These workers could be different places and use different skills. Widespread public involvement and the embedding of fairness in policy and decision making will be required.
• Benefits of the transition such as better insulated homes, cheaper cars, cleaner air, quieter streets, more access to green spaces should be shared broadly across the population.
• Uneven cost distribution should be avoided. Costs should not be automatically added to energy bills, which is a regressive approach. Continuing to add climate policy costs primarily to electricity prices, but not gas prices, adversely affects particular groups and undermines the case for electrification.
• Policies must provide a competitive level-playing field. While some sectors will require subsidies, longer term policy should move away from subsidies towards an international level playing field, for example by using product standards or carbon border tariffs.
• Up to around £4-7 billion of extra funding from HM Treasury is needed by 2030, alongside an extension of funding of existing schemes such as the Green Homes Grant. This could provide the initial support needed for industrial decarbonisation and retrofitting the UK's buildings without increasing household energy bills. The vast majority of funding will however be funded and delivered privately. Offsetting revenues could be raised by greater use of carbon taxes, particularly for sectors, such as aviation, which are currently under taxed and where equity concerns are less present.

Actions in the 2020s and beyond

The CCC recommends actions in four areas:

1. Reducing carbon-intensive activities. There are two elements to this area of focus: reducing demand and improving efficiency. Around 10% of emission savings by 2035 come from reducing demand, particularly an accelerated shift in diets away from meat and dairy products, reduction in waste, slower growth in aviation and reduction in travel demand. A further 5% of savings comes from improving efficiency, particularly by better insulation of buildings, improving vehicle efficiency and efficiency in industry.
2. Take-up of low carbon solutions. Over 50% of savings will come from people and businesses adopting low-carbon solutions as high-carbon options are phased out. By the early 2030s, all new cars, vans and boiler replacements will have to be low-carbon – mainly electric. By 2040, all new heavy goods vehicles should be low carbon. Industry will have to adopt electricity or hydrogen instead of fossil fuels or install carbon capture and storage.
3. Expansion of low-carbon energy supplies. By 2035, 100% of UK electricity will be low-carbon (compared to 50% now). The largest contribution will be from offshore wind, reaching the government's goal of 40GW in 2030 on path to 65-125GW by 2050. Low-carbon hydrogen production will scale up to 90TWh by 2035 – representing nearly a third of the size of the current power sector. This hydrogen will be produced using electricity or from natural gas or biomass using carbon capture and storage. Hydrogen will be used in areas less suited to electrification such as shipping, some industry and some transport. It will also provide flexibility to deal with intermittency issues.
4. Land and removals. Nature-based removals are an important ingredient in the pathway. By 2035, 440,000 hectares of mixed woodland will be planted to remove CO2 as they grow with a further 260,000 hectares of agricultural land shifting to bioenergy production including short rotation forestry. Peatlands will need to be restored and managed sustainably. Low carbon farming practices will need to be adopted. Alongside nature-based removal, by 2035 the UK should be using bioenergy grown in the UK with carbon capture storage to deliver engineered CO2 removal at scale.

Osborne Clarke comment

The Sixth Carbon Budget will be crucial in helping to define the UK's carbon reduction agenda. Many of our clients will be watching it closely to see what opportunities it will present, not least in the field of green finance.

This budget looks ahead to 2033-2037, but it will also act as an end goal which governments will have to work backwards from, especially as it seems likely that the targets set under the Fourth and Fifth Carbon Budgets will be missed.

Of particular interest from a compliance perspective will be the measures the government will need to take to drive change, either by way of carrots or sticks, or perhaps both. The announcement is, therefore, a key part of the UK's transition towards a net-zero economy.

The second article in this series will look at how individual sectors will contribute to net zero in the UK.