U-Turn on Net-Zero Raises Serious UK Market Risks

Blain’s Morning Porridge – 20th September 2024: U-Turn on Net-Zero Raises Serious UK Market Risks

“U-Turn if you want to, this lady is not for turning.”

Rishi Sunak’s U-Turn on Net Zero is politically expedient, but raises serious long-term questions about the investibility of the UK economy and its place in the world, but… hey, it might just win them some votes (just don’t let your kids know!)

Just 2 months ago I wrote: “Dangerous times ahead as politicians weigh up the pros and cons of sacrificing long-term climate and environmental goals for short-term electoral gains”, in a Porridge entitled “Political Expediency vs Saving the Planet”. (July 24^th 2023.)

Last night the BBC punched the Rishi Sunak Government between the eyes – releasing its scoop on Sunak’s half-cooked plans to weaken key green commitments in a gamble the ULEZ effect will win votes in the coming general election. All is fair in love, war and elections.

• ULEZ effect: In July the Tories held on to Boris Johnson’s Uxbridge seat by painting the Ultra Low Emission Zone pollution charge on older vehicles as a perfidious additional Labour tax on workers. (Actually…. it was Boris Johnson who introduced ULEZ as his headline policy while Mayor of London.) 45% of Tory voters said they voted Tory because of the direct cost ULEZ would impose on them personally, even though less than 10% of UK vehicles are liable to the tax under the scheme. It was a fantastic success for the Tory vote gathering machine.

From a purely economic perspective it’s an irrefutable fact the UK needs a carefully considered and costed plan to transition the UK economy towards clearly stated net zero, renewable power, energy efficiency and environmental improvement goals. The plan should involve careful consideration of infrastructure, commercial and population needs. It should include a clear innovation strategy and subsidy programme to encourage research, invention and technological roll-out. The USA is turbocharging its green energy transition via the Inflation Reduction Act, while Europe’s Green Deal seeks to achieve similar, (but is stuck in the Brussels bureaucratic treacle). Here in the UK? Nada.

I just know you are smiling reading the above paragraph. That would something a competent government might do.

Competent government would have planned and instigated the energy infrastructure programme needed to enable a new national grid to power up an EV on every doorstep, charged industry with figuring out how to make heat pumps work in older housing stock, realised and acted upon the need for new Gas investment to power energy transition, and been building new reactors (figuring it’s not 2 new Nuclear stations but 20 that are needed tomorrow if we are all going to drive Teslas). Nope.

For the last 13 years (just in case you missed it), the Conservatives have been leading the UK. Sunak is quite right when he said “I am proud Britain was is leading the world on climate change.” Yes, we are… but, last night’s leak revealed electoral expediency as his primary driver. Jacob Rees-Mogg, minister for Jurassic England put it succinctly last night: “taking the burden off taxpayers during an inflationary period is the right thing to do and will prove an election winning strategy.”

Is that all that matters?

I can’t, hand-on-heart, argue that delaying replacing gas boilers with heat pumps, putting back EVs by 5-years, or forcing seven recycling bins on every household are retrograde steps that will doom the planet, but they were clear statements of intent that businesses planned around – BMW will be massively peeved the promise they got last week on EVs by 2030, which underlay the decision to build Minis in England, has been so quickly disregarded.) Our Net Zero ambitions gave the UK serious Climate Change soft-power, and gave us an oversize seat at the table.

Perhaps the most interesting thing Sunak said is: “For too many years politicians in governments of all stripes have not been honest about costs and trade-offs. Instead, they have taken the easy way out, saying we can have it all.” To repeat, for the last 13 years the Tories have been leading us, so its essentially this Tory dissenting with what the other Tories have done. OK. Glad we go that sorted. This morning a number of Tory MPs are expressing their fury at the Environmental U-Turn. A divided party? Nothing changes.

Chris Skidmore, the govt’s former net-zero Tzar, was in New York on a climate conference when he heard: “If this is true, the decision will cost the UK jobs, inward investment, and future economic growth that could have been ours by committing to the industries of the future.” Meh.

Let’s be brutally honest. Does the UK backsliding on Green targets actually matter? The UK is a very small country on a very large planet. If we are net-zero and other countries aren’t – we all still lose. That’s the way many folk think.

Or you can be brave, courageous and do the right thing – which is to lead by example and do the right thing. If you plan to vote Tory – don’t let your kids or grandkids know. They will not forgive you.

What we have here is classic Government short-termism to win an election – actually, to avoid an absolutely humiliating crushing wipeout at the polls – versus their failure to put a long-term plan in place to build a more resilient, green and climate neutral UK is a position of global leadership.

If that was the only problem… but it’s not. There is growing institutional pushback against Sunak. And the longer it festers, the more a crisis is brewing for the long-term investibility of the UK – all of which I will try to explain in due course (tomorrow, based on time contraints).

Earlier this week, Bloomberg published a survey of investment managers and decision makers in the City – they were overwhelmingly negative on the Tories, a 44% majority favouring a Labour rather than Conservative government. The City is no longer a Tory Bastion.

45% of Britons still believe in the independence of the BBC and trust it as their primary news source. The Tories undeclared war on the BBC is backfiring –  their strategy has been to undermine confidence in the BBC. It’s worked to an extent – public trust in the BBC has declined 10% in the last 10-years. The Tories targeted the BBC because the old Corbyn Labour Party left the BBC the only credible institution in the UK asking difficult questions. I’ve long thought the utter tawdriness of the post Brexit Tory party was the fault of Labour failing to check and balance them as decent opposition party.

The result is we now the BBC scooping Sunak’s green U-turn, and Laura Kuenssberg’s fantastic State of Chaos currently showing on BBC2. She says very little except to set the timeline  – letting the perpetrators of the last 8 years of chaos speak for themselves. Some are properly remorseful, others look like they are trapped in the Last Days of the Bunker.

Last week we had former Bank of England governor Mark Carney deliver a delightful verdict on Brexit and Liz Truss: “When Brexiteers tried to create Singapore on the Thames, the Truss government instead delivered Argentina on the Channel”.

Yesterday, the OECD’s latest numbers showed the UK barely beats Argentina. It’s latest forecast places the UK as second worst G20 economy in 2024 with 0.8% growth. This year Germany will do worse with a 0.2% contraction while the UK expands by 0.3%. Global growth is expected to be 3% this year and 2.7% next. Europe, (no matter how many times the Treasury and The Bank try to juggle the numbers), will comfortably beat the UK with 0.6% growth this year and 1.1% next.

And speaking of Europe, while Rishi looks a’dither, Kier Starmer is in France, talking about the UK’s future relationship with Europe. He’s very aware a large part of the elderly UK electoral roll will simply never vote Labour, but he’s also aware many Labour voters were enthusiastic Brexit supporters who saw Jeremy Corbyn as a terrible alternative to Boris’ promise to get Brexit Done. Starmer is playing real politics – figuring out a large number of Brexit regretters (including myself) will see a re-engagement with Europe as necessary to re-energise the UK economy, and that a better European relationship bodes better for solving the illegal immigration crisis.

Boris won the last election on “getting Brexit done”. Five years later the government has achieved the square-root of Didley-Squat. The problem is Brexit just became another of the things the Tories never delivered. That has real economic implications – which I will write about tomorrow, as I am seriously out of time now.

Five Things to Read This Morning

Trustnet                        Who are the winners at the AI party?

BBerg                           Fed Set to Pause Rate Hikes, Bit don’t Count Out Another Increase

FT                                 Dithering and indecision: the British Infrastructure Curse

WSJ                              Justice Department Probe Scrutinises Elon Musk Perks at Tesla

WSJ                              The Fed’s Next Challenge: $100 Oil

Out of time, and back to the day job

Bill Blain

Strategist – Shard Capital