Energy transition: the UK’s industrial and international competitiveness

26 February 2024

Rich Hall, RSM UK’s head of sustainability, argues the need for the UK to develop a strong net zero industrial strategy to promote our international competitiveness.

There has always been a lot at stake in the transition to a low carbon economy. Not just achieving our legally binding carbon targets and demonstrating the UK’s true leadership to other nations to stimulate their own actions and hold them accountable. It was more. For the UK, it was about being at the forefront of the technologies of the future and providing the infrastructure that would decarbonise or revolutionise existing industry, protecting and creating highly paid, skilled jobs that would be the bedrock of the economy, ensuring the wellbeing of our citizens for years to come. It was, in short, about the UK’s international competitiveness.

The opening salvo of the then prime minister, Boris Johnson, within the UK’s Net Zero Strategy: Build Back Greener, reflected this. ‘Our strategy for net zero is to lead the world in ending our contribution to climate change, while turning this mission into the greatest opportunity for jobs and prosperity for our country since the industrial revolution.’

Despite the recognition of this opportunity, the government has been under scrutiny for some time regarding its net zero plans. An unlawful high court ruling in July 2022 led to the government publishing additional information to deliver greater transparency on how targets will be met. In response, the Climate Change Council (CCC) actually lost confidence in the UK meeting its goals from 2030 onwards. Despite acknowledging progress, it flagged higher levels of risk in some areas and insufficient planning in others. In December’s 2023 Global Climate Change Performance Index, the UK, which has long been one of the top ranked countries, saw a significant drop in the rankings from 11th to 20th due to its weakened climate policies as the current government flip flops on targets. In addition, Rishi Sunak, the prime minister, has been accused of attacking the CCC for independently calling out the shortcomings within the current policies to meet targets.

Why have we wandered from the path that the government laid out such a short time ago?

Understandably, the strategy always needed to be complex, covering power, industry, fuel supply, buildings, domestic transport, international aviation and shipping, agriculture, waste and fluorinated gases, and greenhouse gas removals. Should any one area slip, then meeting our targets would be threatened. Wider macroeconomic events certainly haven’t helped and have led directly to a change in policy regarding permitting new oil and gas licensing for instance. That said, other nations have managed to increase, as opposed to decrease, the speed of transition. 

Also, it’s not just that we are slipping, it’s that we are slipping across so many key sectors. The CCC calls out surface transport, energy supply, buildings, industry and agriculture and land. Each has significant areas of risk in current plans or insufficient plans in certain areas of those strands for the required decarbonisation. Only 28% of the carbon reduction required across all sectors is deemed covered by credible plans. 17% is deemed to have insufficient plans in place, and the remaining 55% is associated with either some risks or significant risks.

The truth is the strategy was always light on detail. It took the aforementioned high court ruling for the government to provide the further details which, as already stated, have raised greater concern. Beyond the strategy, we needed a bona fide industrial strategy that was mutually supportive of net zero carbon targets and outlined the associated long-term policy framework and incentives that would drive results and enable the investment of the private sector. This remains sadly lacking. Beyond this, it needed the courage to commit to these longer-term policies and avoid the pitfall of political short-termism.

So, does it matter?

Emphatically, yes, both environmentally and economically. By COP 27, we had already acknowledged that an overshoot of climate targets was likely and hence the risk of avoiding climate tipping points like the melting of artic permafrost - releasing millennia of stored carbon and potentially losing control of the climate for good - had become more and more of a threat. 

The often-seen narrative that the UK’s current carbon emissions are significantly lower than both emerging and established nations - ‘others need to do their bit, why should we disadvantage ourselves’ - is ultimately flawed.

The issue lies in a focus on production-based emissions as opposed to consumption-based emissions, ie the CO2 emitted in the production of goods elsewhere, which are later imported, or the opposite: emissions from goods that are exported. In 2021, the UK’s production-based emissions were 347.47 million tonnes, while its consumption-based emissions were 513.50 million tonnes. Our imported CO2 emissions per capita were the highest of any industrialised country, with the US and EU some way behind. Simply put, much of our footprint is ‘offshored’ and imported.

This is where the economic argument needs to be brought to bear. Recent events in the steel industry in Scunthorpe and Port Talbot highlight that a just energy transition need consideration. Whilst the move to ARC furnaces will reduce carbon emissions, it impacts jobs and means the UK will be the only G20 nation not able to handle virgin steel.

Had our nascent carbon capture and storage industry been further along or had the grid connections been in place (or at least in sight), greater options to both sites either in increased ARC furnace capacity, or retention of blast furnaces, would have been on the table.

Conversely, the government has recently granted hundreds of new oil and gas licences in the North Sea. Whilst this will secure highly paid and skilled jobs, there were no stipulations as to investments into carbon capture, carbon reduction or removal technologies applied, that would keep such announcements consistent with net zero. Further, the renewable energy industry, which for some time had been a real success story for the UK, suffered a blow through offshore wind when Auction Round 5 (AR5) for Contracts for Difference (CFDs) failed to attract bids for offshore wind projects due to the strike price being too low. As things stand, we risk sleepwalking into being neither a low-carbon economy nor a high-skilled manufacturing one.

Although we seem struck by short-term paralysis in the UK, there is an international competition for the industries of the future. In the US, the inflation reduction act pledges $370bn over the next decade and is already attracting major brands. The European Union has its Green Deal Industrial Plan and is seeking to be the first circular economy. In doing so, it will ultimately charge tariffs on any imported embedded carbon, and China (so often under the microscope) is investing significantly in technologies of the future, with BYD overtaking Tesla as the world’s largest producer of electric vehicles as an example. At a more granular level, back in May 2023, our nearest neighbours, France, detailed the €7bn euros investment in new battery factories. The UK has failed to take comparable steps.

What we require is a joined-up approach. A true net zero industrial strategy that links both our energy and industrial decarbonisation and strives to become world leaders by prioritising UK manufacturing within both the supply and development of new technologies. To secure this, we need to avoid imported embedded carbon emissions and secure long-term policy and incentives frameworks to attract finance and investment to the UK’s low carbon economy. In doing so, we still have a chance to end our contribution to climate change, whilst maintaining and creating jobs and prosperity.

How RSM can help

We have extensive experience working with clients across the energy and natural resources sector and are committed to supporting businesses in the industry.

For further information, please contact Rich Hall, Paul Watts or Sheena McGuinness.

Rich Hall
Partner, Head of Sustainability
Paul  Watts
Partner, Co-head of Energy & natural resources
Sheena McGuiness
Sheena McGuinness
Partner, Co-head of Energy & natural resources  
Rich Hall
Partner, Head of Sustainability
Paul  Watts
Partner, Co-head of Energy & natural resources
Sheena McGuiness
Sheena McGuinness
Partner, Co-head of Energy & natural resources