UK green industries fear threat from US climate bill

The UK push into emerging green industries including hydrogen, carbon capture, batteries and floating wind turbines is under threat as the US and EU boost incentives for domestic green technologies, business leaders and politicians have warned.

Industry groups are urging Rishi Sunak’s government to set out more ambitious plans to cut greenhouse gas emissions and develop clean energy manufacturing and jobs, or risk being left behind by competitors in the two much larger trading blocs of North America and Europe.

British politicians have also sounded the alarm about a wave of “protectionism” prompted by the Biden $369bn green incentives bill, known as the Inflation Reduction Act. It has triggered an EU response this week, with European Commission president Ursula von der Leyen indicating the bloc will loosen state aid rules on tax credits for green investment.

The UK-based CBI employers group said the British economy was at risk in a global “subsidy arms race” for green growth. Almost 20,000 businesses within the “net zero economy” now contributed £71bn to the UK, it estimated in a report released on Tuesday.

“A fire has been lit” by the US IRA legislation, said Chris Stark, head of the Climate Change Committee, the independent government adviser. The incentives were generating “a massive interest now with people around the board room table . . . The risk for us is that capital will flow to that area.”

Ed Miliband, shadow energy secretary, said the UK needed to keep up with the US and EU “instead of standing on the sidelines and squandering the massive opportunities we have, the government should be acting with a British version of the Inflation Reduction Act”.

Labour has drawn up plans to borrow £28bn a year for a “Green Deal” which would lead to state co-investment with green energy companies. For now, the Sunak government is ideologically opposed to state intervention on that scale.

Conservative MP Chris Skidmore, who recently published his Downing Street-commissioned review of Net Zero, told the FT that Britain would lose out if it allowed a “wall of international capital” to go elsewhere and urged a response. However, he cautioned that the UK should seek to build international supply chains and not put up protectionist walls.

The UK now generates 38 per cent of its electricity from renewable energy, thanks in large part to its windy location; former prime minister Boris Johnson touted the country’s future as the “Saudi Arabia of wind”.

But Britain could lose out in the quest to develop the next wave of green technology, energy industry experts say.

Lord Adair Turner, the former chair of the Financial Services Authority who is now at the Energy Transitions Commission, said entrepreneurs might look across the Atlantic to take advantage of IRA incentives. “If you’re somebody who has an early-stage technology and want to prove it to then develop a business, it may be now that you’ll think ‘I’ll go over to the US’,” he said.

The UK had become “a less attractive investment destination” in just the last 12 months, said Nick Cooper, chief executive of Storegga, a developer of carbon capture and storage. The pace in the UK had decelerated since the country hosted the COP26 UN climate summit in Glasgow.

Storegga was now “routing new funds and new people towards the US rather than hiring people and spending in the UK”, Cooper said.

The chancellor’s Spring Statement was the last chance for the government to “decisively stick both feet in” behind its net zero emissions policies, Ruth Herbert, chief executive at the Carbon Capture and Storage Association, said. “What the IRA shows is how a bold economic strategy can actually turn heads and make businesses think about relocating.”

Another industry highly vulnerable to foreign competition is electric vehicle and battery making. The UK has a target to phase out new sales of petrol and diesel engines by 2030, providing a spur for domestic EVs.

But Jeff Pratt, managing director of the Coventry-based UK Battery Industrialisation Centre, a £130mn government-funded pilot to test battery production techniques, said the UK was failing to compete with subsidies that could help to convert scientific research into commercial ventures.

“The world has turned,” he said. “We’ve got America putting masses of money into electrification and we’ve got Europe looking at that. The UK is going to have to look up again and say: ‘What do we do?’.”

David Bott, chief innovation officer at the Society of Chemical Industry, a trade group, said chemical companies that supply battery manufacturers were increasingly indicating that Germany was more attractive.

“For the last 12 years, we’ve had the government saying they don’t want an industrial strategy, driven by their free-market beliefs, and the rest of the world is not playing that game — they invest government money to ensure they get government returns,” Bott said.

The UK’s nascent hydrogen industry also says investment commitments have begun slipping as a result of the IRA package.

Clare Jackson, chief executive of trade body Hydrogen UK, pointed to three examples of Britain losing ground: a European-based maker of hydrogen products had withdrawn planned investment; an international group with North American operations was asked to justify new UK investment to the board; and another company had dropped a UK project from first to sixth place on its delivery timeline.

Yet with the government battling to tackle Britain’s fiscal black hole, some industry and policy experts are advocating a more selective approach to industry support.

“Trying to be a world leader in green hydrogen, wind, solar, batteries and carbon capture is a lot for a country like the UK,” said Chris Jackson at Protium, a UK company involved in green hydrogen projects. “We’re not going to win the whole energy transition.”

Nonetheless, Ana Musat, executive director policy at trade body RenewableUK, said tax breaks and investment allowances were needed to persuade companies to keep investing in Britain.

Ministers are grappling with the challenge, but the Treasury is loath to spend much more money on nascent technologies. In part it is hamstrung by fiscal constraints, but also by the view in its ranks that investing in new technology involves “deadweight cost” — spending money on investments that would have happened anyway.