Net Zero, what now?

Published May 9, 2020

Carbon emissions are dropping fast – but for all the wrong reasons.

When the UK Parliament legislated for a ‘net zero’ carbon target last year, few imagined emissions to fall by more than 4% during the first four months of 2020. This has not occurred as a result of climate policy but because the coronavirus has put manufacturing, airlines, and motorists under lockdown. Demand for energy has collapsed across the world.

Staying alive

Business energy users are focussed on surviving the coming months rather than on a theoretical future carbon footprint. Discretionary expenditure is the first casualty. This is mirrored in the energy sector. Oil producers face a 35% collapse in global demand and oil below $20 a barrel. Gas, coal, and electricity demand have fallen too. Low marginal cost renewable generators may be better off, especially when underpinned by consumer subsidies.

Ultimately, low demand and low prices will inflict pain across the energy sector and make new investments harder to finance. Suppliers are feeling the pinch as consumers struggle to maintain payments and bad debt starts to mount.

Recovery after lockdown

Economists are divided about what will happen after lockdown ends or is eased. Some recovery in energy consumption may occur rapidly in parts of the economy. Elsewhere, the effects of demand destruction will be evident for years.

Growth in aviation is unlikely to resume its previous trajectory. Commuting will continue to be reduced as home working persists.

Risks to Net Zero

This uncertainty adds to the risk of investing in low carbon infrastructure. On one hand, demand destruction decreases the investment required to decarbonise energy supplies. On the other, a weakened economy, burdened by debt, may be unable to sustain the estimated £1 trillion of investment required.

Low fossil fuel prices also make the transition towards electric vehicles and away from gas heating more expensive. Persuading businesses and consumers to replace serviceable vehicles and boilers with equally or more expensive alternatives will become even more challenging.

International action

Reducing global emissions cannot be achieved unilaterally. Unless the UK and Europe pursue affordable climate policies, our efforts are doomed. The key is to make clean technologies cheaper, not simply to raise the cost of doing business. This means not only using carbon pricing to ensure emissions are reduced at least cost, but an increased emphasis on developing technologies that do not need subsidy.

International negotiations remain important. The COP 25 meeting in Madrid last year postponed discussions about global carbon markets until COP 26. The postponement of COP 26 to 2021 may improve the chances of agreement on carbon pricing once the US election and pandemic are over.

Conditional bailouts

There is discussion about the extent to which bailouts should be dependent on commitments to reduce the carbon footprint of the business. Businesses will need help to make investments necessary to thrive in a low-carbon economy while remaining competitive internationally in the short to medium term.

Low-carbon power generation benefits from the Contracts for Difference scheme. Similar funding is needed for hydrogen, energy efficiency, batteries, balancing, and carbon capture and storage. Linking some bailout finding to investment in these technologies is logical.

Political choices

Net Zero may be the right way to go, but the speed and cost of the journey must be re-examined in the light of the current crisis. Net Zero measures must be socially and economically sustainable. Climate policy must avoid a backlash from consumers, mystified at escalating UK energy prices when international costs are plummeting.

Decarbonisation, not deindustrialisation

The crisis has revealed the risks associated with outsourcing production and dependence on global supply chains. It would be unwise for the UK to continue to outsource while ignoring the associated carbon emissions. This ‘carbon leakage’ can be addressed through procurement standards, border tax adjustments, etc. and ensuring climate costs do not fall disproportionately on businesses exposed to international competition.

There is no fundamental reason why the UK’s long-term commitment to Net Zero should be weakened as a result of the coronavirus. But in the short-term the government must take care to avoid increasing the burdens on energy users if the danger of a political backlash is to be avoided.

Want to know more?

For a more in-depth article, go here. You can also listen to the an episode of The Resonance podcast on the topic here: Net Zero, What Now?, where Jeremy Nicholson and Nick Fedson from Alfa Energy Group discuss the topic in the wake of the COVID-19 pandemic in more detail.

Tags COP 25 COP 26 Coronavirus Decarbonisation Jeremy Nicholson Legislation Net Zero Nick Fedson Oil UK Climate Policy UK Parliament