The cost of decarbonising Britain may just have gone up

Signals matter in politics. And for investors. That’s why Theresa May’s decision to abolish the Department of Energy and Climate Change (DECC) has put her government on the back foot when it comes to the environment and green investment.

For most environmentalists and climate campaigners, the strong impression is that this was a signal to the many Tory Brexiteers for whom climate scepticism was ranked a close second to their Euroscepticism in their priorities.

For investors, there is genuine alarm that the business climate for low carbon energy in the UK—regarded during the Lib Dem-Conservative Coalition as amongst the most stable and attractive in the world—has just become even worse than it was in the first disastrous 14 months of Conservative majority rule. Brexit and DECC abolition looks radioactively toxic to international green capital. In the real world, those perceptions matter. Long term capital-intensive investments can suddenly become even more expensive when the risk premium rises. The cost of decarbonising Britain may just have gone up.

Yet as we are increasingly finding with our new Prime Minister, the truth may be a little more complex—and the signals even fuzzier. For her decision to appoint Greg Clarke as the new Secretary of State for Business, Energy and Industrial Strategy has helped to reduce the adverse reaction to the abolition. Clarke is remembered positively from his days shadowing the DECC in David Cameron’s Opposition days. And coupled with the appointment of Nick Hurd as Minister of State for the new department, who likewise has a strong record on climate change, many feel the situation can be rescued.

Apologists for DECC abolition do have two potentially good arguments. First, energy and climate change have been kept together. Before the DECC was created these policy areas were in separate Whitehall silos. This meant that the capacity and incentive to square the circle of decarbonising the UK’s power supply, which is an essential first step to achieving climate objectives, was severely restricted. Keeping these two together was a necessary condition to retaining any climate credibility.

The second apologist argument comes from the second half of the new Department’s title—“Industrial Strategy.” If Clarke can build on the work Vince Cable and I pursued for a green economy, and build a low-carbon industrial strategy, the decision may yet be vindicated. Vince and I between us developed sectoral strategies for offshore wind, nuclear, ultra-low emission vehicles and industrial heat decarbonisation. In my view we need to see similar strategies now for energy efficient construction and tidal lagoons—and ministers should consider whether sectoral strategies are also needed for carbon capture and storage, interconnectors that make it easier to share renewable energy, and energy storage.

The potential for Britain to be internationally competitive in at least some of the new emerging low-carbon industries is real. A truly innovative and forward-looking industrial strategy would seize the opportunities that regions like Humberside and Yorkshire had in offshore wind, with the attraction of companies like Siemens to Hull. The firm was planning to export offshore wind turbine machinery from a hub in the city. That was a huge green investment with the potential to turn round 100 years of industrial decline in the city. But it’s now at risk—thanks to the Brexit vote. What will the Department for BEIS do now for Hull?

Will we see any low-carbon industrial strategy emerge at all? I’m sure Clarke left to his own devices would fashion one. But he may not be. Enter stage left the Treasury and Number 10.

The Coalition made huge, record-breaking strides in investment in renewable energy and in reducing carbon emissions. But we would have done far more if it weren’t for George Osborne. So what position Philip Hammond takes on Greg Clarke’s priority list will be critical.

To be fair to the new Chancellor, he made some excellent speeches on climate change as Foreign Secretary. Furthermore, given he and the Treasury are having a thinly-disguised panic about the UK’s short and medium-term growth prospects post-Brexit, he should be looking for any sources of home grown growth that won’t damage the deficit: enter stage right energy infrastructure, record low interest rates and the levy control framework (the off-balance sheet low-carbon investment budget).

And there’s more: the ability of energy insulation programmes driven by tax-free regulations to keep unemployment low in all regions of the UK has previously been massively under-rated by the Treasury (though if the word “regulations” gives this right-wing Cabinet the heebeejeebies, call them “standards”.) Such programmes cut fuel poverty, reduce NHS spending and cut people’s energy bills, a point lost on Osborne.

But could the real problem come from No. 10? No one really knows what Theresa May thinks about all this, bar her decision to close the DECC down. The nearest insight we have comes from an article this April by May’s new Chief of Staff Nick Timothy. On the Conservative Home website he wrote: “the unilateral and monstrous act of self-harm—or rather, act of harm inflicted upon industrial Britain by Parliament—that was the Climate Change Act.”

That does not sound promising from an environmental perspective. Worse, the article from which the quote is taken showed little appreciation of the true economic causes of key challenges for Britain’s energy intensives. What needs to be focused on are the real reasons that the UK industrial electricity prices are higher than, say, Germany’s, or the impact of US shale gas on the global terms of trade in energy intensives, or how the vast majority of the problems faced by the UK’s steel industry is simply caused by steel dumping by China (which of course we now have much less ability to counter outside the EU).

And note, Timothy is a huge fan of “Industrial Strategy,” with his interest in Birmingham, Joseph Chamberlain and Aston Villa. So we can ask whether the DECC’s abolition is a good thing for the climate or not, but the answer may yet be determined by whether we end up with a “Timothy” industrial strategy or a “Clarke” version.

My fear is that May has constructed a Cabinet that is more sceptical of climate change than any other cabinet since it became a lead policy problem. From Chris Grayling to Sajid Javid, Cabinet Ministers in key departments for the low carbon agenda have a track record of opposing climate action. Coupled with the delay and distraction that inevitably follows the creation of a new department—made exponentially worse by Brexit—and it’s hard to be convinced that the downgrading of Climate Change in Whitehall is an attempt by May to seize the environmental high ground.