What has been announced?
Prime Minister Rishi Sunak has today set out a “new approach” to meeting the UK’s net-zero commitments, which he said would be defined by pragmatism, proportionality, and realism. He framed this as being driven by the need to maintain democratic consent for this huge undertaking, by being honest with the public, dispensing with “wishful thinking,” and reducing the burden of the transition on ordinary people. He also positioned his approach as a credible third way between the two extremes of “climate zealotry” and “climate denial.”
Sunak stressed that he remains committed to the UK’s overall 2050 net-zero target, as well as its international obligations under the Paris Agreement and endorsement of the Glasgow Pact. He claimed that due to technological innovation and changing consumer preferences, some of the more onerous and interventionist measures the Government had previously announced were not necessary—and that the UK could still meet its obligations without them. For example, he noted that the cost of offshore wind had come down by 70% since 2016 and that demand for EVs consistently outstripped expectations.
The Prime Minister announced that the transition to EVs would be eased, with the ban on the sale of new petrol and diesel vehicles pushed back to 2035 from 2030, bringing the UK into line with the European Union. In the same vein, he also announced that people will have more time to make the transition to heat pumps—and pledged never to force anyone to rip out their old boiler for an expensive heat pump.
In terms of sugaring the pill, in addition to announcing extra funding for boiler replacements, he cited lifting the ban on offshore wind, new carbon capture and storage, funding for nuclear—Sizewell C and small modular reactors (SMRs)—and speeding up the expansion of the grid and rollout of energy security projects.
Why has Sunak done this?
One former Cabinet Minister said to us today: “This shift is an example of a second-rate Prime Minister, surrounded by third-rate advisers, panicked by the abysmal polls.” Another Conservative MP, though, said that he stood wholeheartedly behind the decision: “The PM is being honest about the true cost of the unnecessary rush to net zero, and has put forward a policy which doesn’t pander to the virtue-signalling minority.”
This second quote serves to illustrate the apparent rationale underpinning the Prime Minister’s decision. It is clear that the victory in the Uxbridge and South Ruislip by-election, and the success in promoting the Ultra Low Emission Zone (ULEZ) as a wedge issue, are seen by many in the Conservative Party as a blueprint for how they can improve their chances at the next election.
Beyond the electoral incentives, the Prime Minister would argue that this decision does not set the UK apart from its international competitors; rather, it brings the UK into line with the European Union, which has decided to postpone its own ambition to ban the manufacture of petrol and diesel vehicles.
In the media today, the Home Secretary said, “We are not going to save the planet by bankrupting the British people.” This is a sentiment shared by many in the Conservative Party who publicly remain in favour of the net-zero by 2050 commitment but see today’s announcement as a positive step towards a more balanced approach.
It’s important to note that Sunak inherited the bulk of the policies which form the basis of the Net Zero agenda. It’s true that he voted for many of them before he moved into No.10, but this is part-and-parcel of parliamentary politics; he’s hardly emerged as a green champion since becoming an MP in 2015.
The proximity of the general election leaves little doubt as to the timing of Sunak’s announcement—it’s now or never. He is clearly trying to frame himself as the “change candidate” at the next election, even differentiating himself from his Conservative predecessors. Sunak will in all likelihood seek to place himself front-and-center of a presidential-style campaign. This change in approach clearly signals that Sunak and his team favour a “Sunak vs. Starmer” election, rather than Conservative vs. Labour, as he currently polls better than his party.
The Conservative Party reaction
With a general election fast approaching and many Conservative MPs at least privately working on the understanding that they are heading for opposition, perhaps what we should be looking for is how potential leadership candidates are positioning themselves on a topic which is only going to grow in importance.
We have already highlighted Home Secretary Suella Braverman’s vocal support of today’s announcement, and Business and Trade Secretary Kemi Badenoch—another leadership hopeful—was working hard on Tory WhatsApp groups this morning defending the policy. This contrasts with more measured reactions from the likes of former Cabinet Minister Simon Clarke, who cautioned that the Party “should be exceptionally careful of seeking to extract political advantage on this issue.”
It is no secret that the Prime Minister is leading a divided party on this matter, as the Conservatives continue to be contorted by the forces trying to pull it in all directions ahead of the election. As the Prime Minister battles to secure his own legacy, it’s possible that today’s announcement may, in the end, amount to nothing as he stares down the barrel of an ever-more certain defeat at the General Election. As a Red Wall Conservative MP told us: “Of course I welcome it…but it’s too little, too late.”
Labour tells business: “You can trust us even if you can’t trust Sunak”
“This is no way to run a government,” a senior Shadow Cabinet source told EGA this morning. This after Jonathan Reynolds, the Shadow Business Secretary, had called the leak “a farce” last night; and Shadow Climate Secretary Ed Miliband tweeted that the Prime Minister was “rattled, chaotic and out of his depth” while doubling down on Labour’s plan to “cut bills and deliver energy security.”
In our conversations with Labour contacts, all are also clear that this is a pretty brazen attempt at a political trap: back the government’s change of direction or risk being branded a cost-of-living villain. With the Uxbridge by-election seared on their collective memory, they know they must navigate this carefully.
But behind the scenes, the message from Labour to business is absolutely clear. They know multi-billion pound, long-term investments essential to the net-zero transition need policy certainty and they are willing to give that certainty to business. “It's astonishing that [the Prime Minister] thinks you can run a modern, western, industrialized economy relying on private investment like this,” as a contact said to us.
Labour has been holding its fire on responding to specific commitments until it’s seen the detail of what the Government has to say. Another Shadow Cabinet source says: “We won’t be in the business of rolling back net zero, but we also won’t do it in a way that the public perceives as punitive.” In addition to the direct costs to voters of new cars or boilers, high in their mind is the fact that any spending the Government stops now becomes a “new” spending commitment for Labour.
Throughout the day, Labour spokespeople have been relatively quiet. Labour sources tell us the car industry and energy industry will make clear their views. “[Car firms have] backed [the Government] with new plants, despite all the Brexit frictions. But why would they do that now, when they can't rely on the policy framework?" another contact said to us.
Instead, Labour prefers to zoom out—the Opposition doesn’t accept the framing that green policies cost more overall. After focusing on what they say is a bad decision by a weak Prime Minster willing to damage Britain’s business investment and geopolitical position, our contacts move on to say that there is a powerful argument for net zero where a cross-government industrial strategy built on green technologies is a way to drive growth, jobs, and incomes.
It's a political tightrope, but one Labour believes they can walk across.
Business reacts
Business groups reacted with surprise and concern when the news emerged last night. Unusually, individual major investors such as Ford, VW, and E.ON also spoke out directly themselves in surprisingly angry terms. Car manufacturers, who have already invested huge sums on the basis of the 2030 target, hit out at the new uncertainty. Ford stated that business needs “ambition, commitment, and consistency” from Government and said these changes could undermine all three. They will have found little reassurance in the Prime Minister’s actual speech today.
The policy changes in themselves are perhaps less significant than what they represent: a break in the political consensus on net zero and a change in the Government’s approach. Business expects Government to refine and finesse policies. That is accepted and welcomed. The sense, however, that the announcements today are not just pragmatic, proportionate reforms but a far more fundamental change in direction is behind the business reaction. Implying the Government no longer sees net zero as an opportunity but rather a burden to be mitigated is a significant change.
If this is how No.10 is now thinking about net zero, it will raise business’ concerns about the credibility of other net-zero commitments. Comments from members of the Cabinet about “arbitrary targets” jar with investors who instead see legislation that they thought they could rely upon. It is these commitments, targets, and laws which they are being asked to invest against. Global businesses who have to choose where to locate their capital will not want to have to think of the UK Government as an unreliable partner. Whether they will accept that today’s announcements are a measured response required to maintain public confidence in net zero is unlikely.
Having introduced uncertainty into their net-zero policy framework, business will be demanding clarity, and quickly, from Government. Business will now look at any announcements in the Autumn Statement and long-awaited response to the Inflation Reduction Act, with a new and greater degree of skepticism. And a loss of credibility in Government announcements has a real price, as investments that are made in the UK in these sectors will now include a higher political risk premium. The danger is also that today’s announcement helps the EU, US, India and China in the fight for green investment.
What comes next?
Rishi Sunak and his team will be broadly happy with the reaction to the intended change of policy direction in the Conservative political ecosystem. The party and center-right media are broadly supportive, with many MPs actively delighted and relishing the opportunity of contesting this policy space with Labour ahead of the General Election. As set out above, this is not universal across the party, and the next weeks should reveal the depth of opposition and the extent to which rebels are up for a fight. Will those with misgivings swallow them in the name of party unity, leaving a relatively small number of hard rebels, or will dissent spread?
Either way, getting the party on board is only the first step. The real test will be in how this lands with the wider public, and whether this helps narrow the gap in the polls and helps the Tories to hold on in the upcoming by-elections in Mid Bedfordshire and Tamworth. If the policy does appear to be paying dividends in terms of public opinion, we should expect more calls for the Government to be even bolder, both in slamming the breaks on net zero as well as adopting “true blue” policies across the board from tax cuts to deregulation.
This heralds another evolution in the complicated relationship between the Conservative Party and business. Sunak has made it a priority to improve this relationship, which had suffered under his predecessors, driven primarily by Brexit and its handling. Indeed, this was seen as crucial to his pitch around restoring competent and responsible government and to kick-start the economy. However, on the backfoot politically, it looks like he is going to prioritize his base—as such it is unlikely that the backlash from business will prompt a rethink.
One other thing to look out for is how the courts interpret this policy shift. Significantly, in June 2022, the High Court ruled that the Net Zero Strategy was insufficient in terms of the Government’s obligations to set out how it will meet its legally-binding carbon budgets under the Climate Change Act. This, in turn, compelled the Government to set out how it will deliver net zero in more detail earlier this year. Any reversal from these commitments could prompt another defeat in the courts, although cynics might claim that as with small boats, this is a fight the Government wants to be seen to be having with the legal establishment in the interest of its target voters.
