Achieving successful industrial decarbonisation isn’t just about the money – Inside track

This is the  second blog in our short series of expert perspectives on UK industrial strategy. This post is by Matthew Lockwood, senior lecturer in energy and climate policy at SPRU and co-director of the Sussex Energy Group at the University of Sussex.

Green industrial growth is not only about switching car making to EVs, accelerating renewables and developing new areas such as batteries, it is also about decarbonising existing heavy industries. Iron and steel, cement and chemicals currently produce around 20 per cent of greenhouse gas globally. Industrial decarbonisation is a core part of the agenda of the US Inflation Reduction Act and the EU’s Net Zero Industry Act. A lot of policy effort is focused on developing low carbon hydrogen and carbon capture and storage (CCS) as technological solutions.

How is the UK doing in this area? Working as part of the Industrial Decarbonisation Research and Innovation Centre, we have assessed the nature of UK policy and its political drivers. There has been cross party support for decarbonising the UK’s industries and, over the last three years, the government has been developing quite sophisticated policies to support CCS and hydrogen in industrial clusters around the country. The first projects will be in Merseyside and the North East. These policies have several ‘good’ characteristics of industrial policy, as set out by experts like Dani Rodrik. For example, they have been designed with close consultation between government officials and industry; they have high level political buy-in through the levelling up agenda (at least initially); and they are subject to sunset clauses in the form of fixed terms for subsidies. However, there are two challenges for the UK to make them work effectively.

The UK lags behind its competitors in industry support

The first is co-ordinating this technology support with other equally crucial policies. Industrial decarbonisation is as much about industrial policy as it is about decarbonisation and, because many industries produce internationally traded products, how other countries support their industries matters for the UK. This can be seen especially in generous exemptions from policy and network costs in electricity for energy intensive industry in many European countries, such as Germany and Sweden, which leave UK industries such as iron and steel paying more. This matters for attempts to develop CCS and hydrogen because both require more electricity. The UK has developed schemes offering exemptions to industry, but these have been responsive in nature, lagging behind competitors and not as generous.

Beyond electricity costs, measures to prevent carbon leakage while heavy industry decarbonises, such as a carbon border adjustment mechanism (CBAM) and product standards, are now being brought in by the EU, and the UK is following suit, as the chancellor signalled in his Autumn Statement. We also need improved trade relations with the EU.

Getting all these policies aligned requires major co-ordination, which the UK does not always do well. For example, making CCS viable will require a relatively high and steady carbon price, but recent decisions on allocations work against this.

There is also a big co-ordination job needed to ensure developments benefiting from headline CCS and hydrogen policies can get through the myriad of regulatory hurdles in environmental permitting, planning permission, grid connection, gas standards, safety regulation and so on. This was a major theme for people we interviewed in industry.

Since regulatory frameworks often struggle with novel processes and technologies, developments are slowed significantly and uncertainty threatens investments. Various attempts are underway to address barriers, with recent reviews of grid connections, environmental regulators and the strategic planning system. But the number and range of regulatory agencies complicates the co-ordination challenge, and it is not clear that the Department for Energy Security and Net Zero (DESNZ), as a single government department, is best placed to take it on.

Offshore wind development is a good model to follow

There is a good case here for a task force approach to accelerate delivery. One model might come from offshore wind, one of the most successful areas of UK decarbonisation, where the Offshore Wind Industry Council has played a crucial role in bringing the government, regulators, Crown Estate, developers and supply chain firms together to identify barriers and co-ordinate action.

A second challenge, again often flagged by our industry interviewees, is long term funding predictability. The US has set the pace with the Inflation Reduction Act offering around $370 billion in support over the decade to decarbonise heavy industry. While the EU’s Green Industrial Plan doesn’t have the same fiscal firepower behind it, some European countries like Germany are also investing heavily. The UK government has made it clear that it is not willing and able to match these countries on scale; in the Autumn Statement, the chancellor made it clear that: “the UK will not be looking to match countries such as the US pound for pound on the back of policies like the Inflation Reduction Act”.

However, as much as, if not more than the level of funding, it is the uncertainty of what will be available overall that deters investors. This can be seen in the case of steel industry bailouts, which have been offered on a piecemeal basis following negotiations with individual companies and given to some but not others. It can also be seen in the hydrogen and CCS policies. While those companies who succeed in winning support get 15 year contracts, the overall funding envelope remains unclear, and our industry interviewees pointed to shortfalls between initial resources and what is needed to hit targets.

UK policy is also quite complex. With the Treasury determined to avoid handing excessive subsidies to industry, its approach involves process heavy competitions and conditional support mechanisms linked to carbon and gas prices, contrasting with the simplicity of the tax credits being offered for ten years or more in the US.

Short horizons continually hold back progress

There are deep seated reasons why successive UK governments have found it difficult to provide a relatively long term funding framework with credible commitment behind it. These include a still dominant market-led policy paradigm, sceptical of intervention to support any one particular industry or sector, and a politics highly sensitive to imposing costs on consumers and taxpayers to pay for industry subsidies. The Treasury keeps a firm grip on a system that involves annual spending rounds and three yearly reviews, too short for an industrial decarbonisation process that will take at least a decade if not more. It is very unlikely it would abandon this fiscal control to another department or some kind of arm’s length body.

However, there is one area that has seen a longer term approach, which offshore wind again is part of. Funding for renewable energy support has come from levies on electricity bills and, while the Treasury has set limits on these, it has done so through a framework introduced in 2011 and up for review only in 2025. While the treatment of particular technologies supported has changed radically and there have been recent problems with auctions in offshore wind, the overall funding framework has been stable.

The question is, how can this be done for industrial decarbonisation? The logic would be to place levies on consumption of high carbon products to fund the development of low carbon alternatives, but the idea of a hydrogen levy on gas consumers was abandoned following negative media attention. It is not yet clear whether moving this levy upstream to the companies which provide gas will work. It might be possible to use money from a UK CBAM to underwrite CCS subsidies, above and beyond the carbon price, but expected revenues are not that large. However it is done, having a similar decade long funding framework for industrial decarbonisation would go a long way to securing the necessary investment.