The announcements signal how both the Net Zero Review and the IETF will impact the UK’s transition to net zero.

By Paul Davies and Michael Green

On 2 November 2019, the UK government announced further details on two initiatives focused on helping the UK reach net zero greenhouse gas emissions by 2050. The first of these measures, HM Treasury’s Net Zero Review (Review), will consider how the UK should fund efforts to meet its net zero target. The second measure, the proposed Industrial Energy Transformation Fund (IETF), aims to help energy-intensive industries reduce their carbon emissions. New details surrounding the proposed measures signal how both the Review and the IETF will impact the UK’s transition to net zero.

Net Zero Review

The Committee on Climate Change (CCC) initially advised the UK government to conduct a review into the costs and funding methods associated with the UK’s net zero target in May 2019. Now, the UK government has published terms of reference of the Review — a development marking the latest stage of its adoption of the CCC’s recommendations. The newly published terms of reference also reflect a focus on the practical considerations of reaching the net zero target.

The terms of reference state that the Review’s consideration of how to fund the transition to net zero will involve four primary objectives, which are to:

  • Analyse the range of choices for how households, businesses, and taxpayers could contribute towards different elements of the transition to net zero
  • Identify mechanisms to create an equitable balance of contributions
  • Maximise opportunities for economic growth as the UK transitions to a green economy
  • Evaluate the trade-offs of balancing costs, economic competitiveness, impacts on consumers, and impacts on taxpayers

The terms of reference also consider the scope of the Review, which is intended to cover the full range of governmental approaches, including taxation. However, the terms of reference specify that the Review will not seek to duplicate existing or ongoing work, such as:

  • Detailing policy to decarbonise specific sectors
  • Analysing the costs of adapting to the impacts of climate change
  • Examining the social and global co-benefits of decarbonisation

Finally, the terms of reference consider the Review’s timetable and implementation. HM Treasury will conduct the Review, with the aim of consulting widely across sectors, with further details on the precise nature and approach of this consultation process will be revealed in due course. The Review’s final report setting out principles to guide decision-making during the UK’s transition to net zero is scheduled to be issued to the Chancellor in the fall of 2020.

The CCC has responded favourably to the announcement, stating that it considers the terms of reference to be “comprehensive”. The CCC added that it “look[s] forward to engaging with the Review as it develops”.

IETF
The UK government also announced more details on the IETF, which was informally consulted on in March 2019. The IETF will focus primarily on assisting decarbonisation in heavy industry, one of the principal challenges in reaching the net zero target.

The IETF will launch in the spring of 2020 followed by a second phase in 2021, with a £315 million budget until 2023-24. These funds will provide capital investment in energy efficiency and decarbonisation projects, particularly within energy-intensive industries. A further consultation process is underway to seek views on the fund’s structure and initial investment targets.

The UK government’s stated aim is for the energy efficiency measures funded by the IETF to reduce industrial emissions by around 2 million tonnes between 2028 and 2032. The IETF’s investment is part of the UK government’s broader plan to save businesses £1 billion annually in energy costs by 2030 by improving the energy efficiency of commercial buildings. Other aspects of this plan, which were announced in October 2019, include a consultation paper setting out plans to raise the minimum energy efficiency standard to Energy Performance Certificate Band B (from the current minimum of E) for the renting of non-domestic buildings by 2030.

Implications
Whilst the content of the Review is yet to be determined, the broad nature of the terms of reference demonstrate the increasing importance placed on solving the practical challenges that will invariably result from targeting net zero emissions by 2050. The UK’s consideration of these issues at an early stage is a welcome development.

Similarly, whilst many details of the IETF remain unconfirmed, the current proposals signal a constructive step forward by acknowledging that the UK’s net zero target necessitates significant investment into the energy usage of heavy industries.
Latham & Watkins will continue to monitor developments in this area.

This blog was prepared with the assistance of James Bee in the London office on Latham & Watkins.