The Social Market Foundation cautions that without more ambitious policies, potential opportunities will be missed
One year after the implementation of the U.S. Inflation Reduction Act (IRA), the direst concerns about its negative effects on the UK’s green economy have not manifested. However, there is undoubtedly no space for indecision in net-zero policies if the UK aims to capitalize on the thriving market for green products.
This is the central message conveyed by a report issued by the non-partisan think tank Social Market Foundation. The report contends that the U.S. Inflation Reduction Act (IRA) has not triggered the anticipated surge in economic protectionism, but rather invigorated the global market for environmentally friendly products.
The IRA, which was implemented a year ago, seeks to channel substantial subsidies and incentives into clean technologies within the U.S. This initiative is projected to generate millions of jobs and significantly reduce the country’s emissions, benefiting both the environment and American clean tech innovators. Nonetheless, it has also sparked concerns among trade, technology, and clean energy experts in the U.K., who caution against a potential migration of investments to the U.S. This has consequently placed considerable pressure on government officials to formulate a more ambitious green industrial strategy. However, these calls have not yet been met with a substantial response.
However, according to SMF’s analysis, the impact of the IRA on the U.K. green economy has not been as harmful as initially feared. This is mainly because the U.S.’s introduced content requirements for “green” trade have demonstrated greater flexibility than anticipated, affecting only a minority of goods within a few sectors. The report also highlights that the U.K.’s exposure to U.S. trade barriers is limited, as only 13 percent of its goods are exported to the U.S. In fact, the most significant trade partner for the U.K. is the EU, and the report notes that the EU’s decision to cap its target for EU-produced content at 40 percent has left opportunities open for British manufacturing in the EU market.
Given this context, SMF takes a more optimistic stance in its evaluation of the IRA’s potential benefits for the U.K. It contends that the significant climate legislation actually offers a substantial chance for British exporters. This is due to the fact that the legislation has accelerated the competition to develop clean technologies capable of lowering emissions, reducing energy costs, and diminishing dependence on oil-producing states. In light of this, the think tank encourages policymakers not to view the IRA as a danger, but rather to recognize it as a significant new avenue for pursuing green economic prospects.
The revolutionary climate legislation actually offers a significant opening for British exporters, as it has ignited a competition to advance clean technologies.
Furthermore, the report highlights that following the implementation of the IRA, governments globally have streamlined the permitting process for clean energy and technology initiatives within national planning systems. They have also set clear objectives for clean power generation and the production of clean technologies, fostering a much more favorable ecosystem for developers and investors in the green technology sector.
“One year later, we can confirm that the concerns of British policymakers regarding the Inflation Reduction Act have not come to fruition,” stated Gideon Salutin, researcher at SMF and the report’s author. “Rather than regarding it as a menace, they should acknowledge its potential for U.K. manufacturers, provided the correct measures are implemented. Valuable insights can be gleaned from international experiences, including determining the appropriate amount of public funding, streamlining regulations, and selecting optimal trade collaborators. This journey is not about speed but establishing enduring partnerships.”
However, this situation doesn’t imply that the U.K. can become complacent. Quite the opposite — the SMF emphasizes that the U.K. must implement several policies and regulations to maintain its significant role in the markets that the IRA has catalyzed globally.
Looking ahead, the U.K. should prioritize securing a trade agreement with the EU to expedite trade in net zero goods within particular industries, according to the think tank’s viewpoint. While U.K. exports to the U.S. constitute a relatively small portion of the total exports, the same cannot be said for the EU. The EU is the U.K.’s biggest trading partner and has initiated its own ambitious regulatory approach in response to the IRA, as the think tank elucidated.
The report further emphasizes that the U.K. must significantly increase its investment to foster and bolster emerging green sectors. In contrast to the U.K., other OECD nations have allocated much higher funding towards the growth of green markets, as highlighted in the report. For instance, the U.S., Canada, Japan, and New Zealand have unveiled funding ranging from 1.7 percent to 3.5 percent of their annual GDP over the next decade. Additionally, EU regulations allow countries to match foreign incentives. To approach a comparable level of investment, the U.K. would need to allocate a minimum of $68 billion over a 10-year period, on top of the existing commitments to clean technologies and climate initiatives, according to SMF’s calculations.
The report arrives at a time of increasing apprehension regarding the U.K. government’s dedication to net zero policies. Notable Cabinet members and even Prime Minister Rishi Sunak have expressed worries in recent weeks about the potential for decarbonization to impose additional expenses on consumers who are already dealing with inflationary pressures. Policymakers have raised concerns about the viability of several initiatives, including the scheduled discontinuation of petrol and diesel car sales by 2030, the zero-emission vehicle mandate, and the phase-out of gas boilers by 2035.
The government has encountered significant resistance from businesses, think tanks, and advocacy organizations that have consistently cautioned against weakening the government’s approach to net zero policies. They argue that such actions could adversely affect investment confidence in the U.K. economy and potentially hinder the achievement of statutory climate targets.
The UK must substantially increase its investment efforts to energize and bolster emerging green sectors. In parallel, recent findings from the UK Energy Research Centre (UKERC) emphasize that the UK’s progress toward fulfilling its climate and green energy obligations is at risk unless the government expeditiously formulates an “investment grade” implementation strategy to address an imminent “investment gap” in the sector.
While not overtly negative regarding the UK green economy’s capacity to sustain competitiveness post-IRA, SMF’s evaluation converges with these apprehensions. The report underscores that the government’s current vacillation on net zero policies and clean technology objectives conveys precisely unfavorable signals at an inopportune juncture. It points out:
“The ongoing discourse on environmental regulations in Britain heightens business risk and diminishes the attractiveness of the country as a potential location,” underlining the potential consequences.
Certainly, the report advocates for the government to establish additional benchmarks for renewable energy technologies, aiming to bolster investor confidence. Gideon Salutin, the SMF researcher and report author, emphasizes a different approach, stating:
“Rather than reconsidering net zero pledges, our policymakers should examine the projected returns on public investment evident in American, European, and Japanese economies. This will provide British businesses the necessary assurance and financial backing to contribute to our economy.”
As the one-year milestone of the IRA approaches, the release of the SMF’s report coincides with renewed appeals from environmental advocates for the U.K. government to move beyond hesitancy or criticism of net zero policies. Instead, they urge the government to fortify regulations that can position the U.K. favorably to lead the clean technology markets.
The government has continuously restated its dedication to achieving the U.K.’s net zero goals. It has also countered calls for participation in an expensive worldwide clean tech subsidy competition, asserting that its existing strategy provides the most effective avenue to attract investments in the green sector.
In a statement provided to BusinessGreen, a spokesperson commented:
“The U.K. holds a global leadership position in addressing climate change and advancing investments in future green industries. We have successfully attracted $141 billion in real-term private investments in renewables since 2010 and anticipate an additional $126 billion of investment spanning the economy, contributing to the creation of up to 480,000 jobs by 2030. We are in close collaboration with our trading partners and allies to collaboratively steer worldwide decarbonization efforts and foster supply chain growth.”
During a recent online briefing, Johanna Lehne, Program Lead at the environmental think tank E3G, urged the U.K. to adopt a regulatory-driven approach akin to the EU’s response to the act. She stated:
“Apart from expanding green subsidies, the EU has implemented a suite of regulatory mechanisms to support emerging industries, scale up technologies, and send robust market signals — all of which are accessible to the U.K.”
Lehne continued:
“The U.K. possesses a wide array of tools and valuable resources, including its regulatory framework and expertise in net-zero technologies, which could position it as a leader in propelling the green transition within crucial supply chains. However, swift action is necessary to avoid falling behind as the race towards net zero gains momentum.”
While the UK has secured a global leadership position in advancing clean energy, we must acknowledge that this status is not guaranteed by any means. Emma Pinchbeck, CEO of the trade organization Energy UK, emphasized that despite our strengths, we cannot afford to become complacent following the IRA’s impact, which she characterized as a transformative force in the investment landscape.
“We possess strengths in expertise and experience due to the UK’s prominent role in clean energy development,” she commented. “However, it’s important to acknowledge that we don’t inherently deserve this position. With the intensifying international competition for private investment, our lack of timely response could result in us losing ground and endangering our ambitious goals for expanding clean energy sources and decarbonizing the economy as a whole. Although we may not be able to emulate the exact strategies of the U.S., relying solely on our past achievements would be a significant misjudgment.”
The findings of the SMF’s policy note are not groundbreaking. For some time, experts have urged the UK to leverage its regulatory prowess in response to the legislation, acknowledging the country’s inability to compete with China or the U.S. in terms of subsidies. However, the think tank’s optimistic perspective that the IRA still offers substantial potential for British manufacturers and exporters is persuasive, particularly within the larger context of debates regarding the expenses associated with net zero policies. The extent to which this viewpoint will resonate with government officials remains uncertain.