Sir Keir Starmer has finally bowed to pressure to scrap his plan to invest £28bn a year on green projects. Rachel Reeves had already weakened the policy last year, confirming that the target is subordinate to Labour’s fiscal rules and will be phased in over the next parliament. But Labour is now formally abandoning the specific number, although they are still committed to more green investment to hit their 2030 net zero goal for the electricity sector, set up a state-owned energy company, and incentivise insulation. With this opening, the Conservatives should take the opportunity to set out, and win the argument for, an alternative, market-based approach to climate change.
Labour’s green pledge was set to be the main fiscal dividing line between the two parties – perhaps alongside any Conservative tax cuts made in a pre-election budget. The Conservatives had sensed a political opportunity to repeat their traditional attack lines against Labour for reckless spending. That’s why ministers have been insisting that Labour will have to put up taxes to pay for the extra investment or that interest rates will rise in response to increased government borrowing. These Conservative criticisms, coupled with a poor Labour communication strategy focused on the financial inputs rather than the economic and climate outcomes of the spending, made the pledge hard to sustain.
But even with the dropping of the £28bn figure, the quantum of investment required to hit our climate goals – and the balance between private and public finance within that – is a legitimate and important debate for the next parliament. While environmentalists rightly worry about the creation of dividing lines over the basic science of climate change and the need for further action to reduce emissions, we shouldn’t be afraid to debate how best to reach net zero.
Conservatives should be careful not to criticise green investment as unaffordable or undesirable. The Climate Change Committee has estimated it would need to reach £50bn a year by 2030, albeit mostly from private sources. Simultaneously, green investment can bring multiple benefits besides emissions reduction: renewable energy and electric vehicle investments will lower fuel costs; and insulation of buildings and active travel infrastructure will improve public health and save the NHS money. Furthermore a lot of investment is needed regardless of net zero, to expand capacity in our economy, meet the needs of a rising population, and renew ageing infrastructure.
But, the required money doesn’t necessarily need – and indeed shouldn’t – rely so heavily on public investment, or indeed from borrowing. Instead, in developing their response to Labour’s green prosperity plan, the Conservatives should take inspiration from their own strong track-record on attracting private investment into green sectors off the back of limited public subsidies and tax cuts to stimulate demand.
The Contracts for Difference scheme, for example, has unlocked over £120bn of investment in renewables since 2014. By offering generators a guaranteed strike price for 15 years and encouraging competition, it has pushed down prices for new offshore wind projects by two thirds. Similarly, very low benefit-in-kind company car tax rates have kick-started the UK’s EV transition, with corporate fleets accounting for well over half of all EV sales last year and providing a pool of second-hand EVs to widen access to this green technology.
These examples can provide a blueprint for unlocking private investment in other sectors, such as homes. Giving stamp duty rebates to homeowners who retrofit their properties within two years of purchase and permitting landlords to deduct the costs of energy efficiency from their tax liability would help trigger a wave of investment in decarbonising homes. These incentives could unlock substantial private finance if coupled with the creation of new financing mechanisms to enable households to secure take out loans against their properties rather than individually.
A fully-costed green investment plan to fill existing gaps with targeted tax cuts and private capital would complement other policies announced over the past year. At the Autumn Statement the Chancellor announced several welcome steps to address some of the main barriers to faster climate action, such as streamlining planning approval for major infrastructure projects, increasing capital allowances for businesses to invest in new plant and machinery, and expansions to grid capacity. The extension of carbon pricing to more of the economy, with a border adjustment to create a level playing field with imports, was another key plank of a conservative approach to net zero.
The Conservatives should go into the election campaigning proudly on their climate record, capture the narrative from Labour, and show how only their approach can finish the job. But to follow this electoral strategy, they need to set out an alternative way to boost green investment from the private sector, not simply criticise public investment. It’s crucial, politically and economically, for conservatives to win the argument and remind voters that a market-led approach to net zero will succeed in limiting climate change and lead to more growth and lower costs.
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