Spring Budget 2023: the impact on the UK’s green transition

On Wednesday, Chancellor Jeremy Hunt set out the Spring Budget 2023. His speech revealed key funding, tax and regulatory commitments and provided the Government’s priorities for the next six months.

Hunt celebrated the fall in inflation (projected to go down to just 2.9% by the end of the year), reductions in the deficit and also a stronger-than-expected growth forecast from the Office for Budget Responsibility (OBR), although households and economy still face significant hardship.

The budget then laid out several headline policies including scrapping the lifetime pension allowance, free childcare for under-fives, an energy price guarantee extension until June, Brexit pubs and a fuel duty freeze.

On the environment, the key takeaway is that the main green announcements will be coming at the end of the month with a big announcement expected on 30 March 2023. This date will be when the government updates the net zero strategy (as it was ordered to by the high court) and responds to Chris Skidmore’s Net Zero Review.

However, Wednesday’s budget wasn’t entirely lacking in policies that will impact the UK’s green transition.

Here are four key ways the Spring Budget 2023 will impact the UK’s green transition:

1. Energy: Nuclear commitments but nothing concrete on renewables

The biggest announcement of the day was the Government’s commitment to nuclear energy, with the Launch of Great British Nuclear (GBN). Hunt promised 25% of the UK’s energy supply to be nuclear by 2050 (up from around 11% in 2021) and, to do this, classed nuclear as green in the UK’s new taxonomy. Whilst this classification will unlock investment, it does little to bypass the issues that have stumped previous planned nuclear development (e.g. local permits, long construction times and uncertain demand).

Hunt also launched a competition to speed up development of Small Modular Reactors (SMRs) and hinted that there would be more government funding for the winners of this, year-long, competition. The effectiveness of this mechanism is questionable as the main leaders in this technology tend to be larger firms like Rolls Royce who need little incentive or capital to continue development.

On the UK’s power market, the budget reveals that the Government is “boosting longer-term public and private investment to ensure the country’s energy system is secure and clean, and to help meet the government’s 2050 net zero commitment. 

The presumption is that the details of this will be made clear on the 30th. On budget day, Grant Shapps also confirmed that the Government will confirm its position on onshore wind and solar on farmland this month.

There was also a welcome commitment to review green levies this year.

2. Technology: Big wins for carbon capture and storage

The other big headline was increased funding for carbon capture and storage (CCS). Hunt pledged up to £20 billion for early-stage development of CCS which he estimated could create up to 50,000 new green jobs by 2030. However, there were no details of how this funding would be allocated with the government claiming they cannot give details as they are “still in negotiations” over cost.

The announcement of a new ‘R&D Super Credit’ will be welcomed by some climate-focussed SMEs as it will allow them to claim £27 for every £100 of research and development spending. However, this has already been announced, is likely to only apply to a few businesses, and masks significant cuts to other R&D tax credits.

A final big technology announcement was the launch of the £2.5 billion ‘quantum strategy’ for new computer tech and $1 million a year ‘Manchester Prize’ for AI development. Given AI is having huge impact in efforts to counter climate change, this is a welcome step.

3. Infrastructure: Underwhelming pledges for transport and levelling up

Hunt also pledged £8.8 billion for sustainable transport infrastructure over the next five years. However, this masks the fact that the active travel budget for walking and cycling has been more than halved. Fuel duty has also been frozen for a further 12 months (frozen with the previous 5p cut in effect). While this reduces a disincentive for drivers, it is unlikely to lead to an increase in driving, as duty has been frozen for the last year anyway. What is more important on this issue is that, as oil prices fall, so too will the cost of driving ICE vehicles.

The Government also pledged £400 million for levelling up partnerships in specific areas and an additional £200 million for ‘local regeneration’. While this money isn’t specifically for green development, given the focus on sustainable upgrading at a local level, some of it will end up being used for green public infrastructure projects. On the circular economy, the Government pledged a ‘Landfill Tax Grant Scheme’. Hunt claims this will incentivise “remediation and redevelopment of contaminated land” from landfill sites. Unfortunately, this announcement heralds an unwelcome delay on policy following last year’s review on landfill tax.

4. Business: Tax changes and new ‘Investment Zones’

By far the most underappreciated announcement in this budget for green companies was arguably the promise of full expensing for business. This move is brilliant for green tech and energy businesses as it allows them to not pay any tax on their ‘plant and machinery’ costs and investments – getting the money back far quicker than the superdeduction it replaces. The cut will reportedly cost the government £9-11 billion a year.

Hunt also promised 12 new ‘Investment Zones’ across the UK. While this is good for green, non-spatial businesses, it will also be crucial for the just transition as it will provide funding and business incentives in key locations around the UK.

A further tax change is that the Annual Investment Allowance has been increased to £1 million. This allowance allows businesses to deduct the value of their business investment from their taxable profits. While this had already been announced, it should incentivise more investment of profits back into businesses in large companies.

A final noteworthy promise was to extend Climate Change Agreements (CCA) for businesses for the next two years. This allows businesses to apply for tax relief to fund energy efficiency measures. Hunt predicts this will result in £600 million more for energy efficiency measures.

Limitations

It’s hard to pass judgement on this budget’s environmental impact before seeing the 30th March climate strategy update. However, it is overwhelming how many crucial topics the budget did not touch on:

• Nature or nature-based solutions.
• Green finance.
• Non-nuclear renewable energy.
• Green skills.
• Energy efficiency in buildings (including insulation).
• Planning reforms.
• Offshore wind port infrastructure.
• Carbon pricing.
• Grids and electricity markets.
• Agriculture.
• EVs, neither manufacture, charging infrastructure nor the second-hand market.
• The current strikes, except a brief claim that inflation was the “root cause” of them.

It is imperative that all of these receive government attention and clear strategies are outlined on 30 March 2023.

Conclusion

Although the government may yet redeem themselves with their 30th March announcement, this budget has been massively underwhelming on climate. This lack of green funding is made even more apparent when we look at our contemporaries: the IRA in the US, the Green Deal in the EU, Japanese Green Transformation Plan, and the Production Linked Incentive Scheme in India are all examples of recent green spending packages.

Without a proper package and strategy, the UK can only fall behind both on reaching its climate goals, and developing the businesses and institutions needed to remain competitive in global climate related markets. As things currently stand, the UK economy is losing out on the investment, guidance and skills needed to remain a climate leader.

Bonus: some comments on the budget as a whole:

• James Murray, BusinessGreen: “Remarkable lack of surprises. Big news for the green economy in long-awaited confirmation of budget for CCS support, SMR competition launch, and big new capital allowances for factories, etc. But also lots missing on renewables, efficiency, EVs, nature, etc, etc.”
• Keir Starmer, MP (Labour): “After 13 years of this government, our economy needed major surgery. But like millions across our country, this Budget leaves us stuck in the waiting room with only a sticking plaster to hand, the country set on a path of managed decline, falling behind our competitors. The sick man of Europe once again.”
• Caroline Lucas, MP (Green Party): “We have clean, green, abundant & affordable renewables at our fingertips – onshore & offshore wind, tidal, solar. Yet Govt refuses to unblock & upscale them, and opts for too slow, too expensive & too dangerous nuclear white elephants. Nonsensical decision-making.”
• Signe Norberg, Aldersgate Group: “With the welcome news that the economy is forecast to grow, it is vital that the UK Government uses this opportunity to secure sustainable, long-term economic growth by ensuring the country can take advantage of the economic opportunity presented by the transition to net zero. This must include investment in renewable energy to bring down consumer bills, support wider industrial decarbonisation, and generate reliable, low carbon energy. Funding for carbon capture utilisation and storage (CCUS) and the extension of the Climate Change Agreement scheme are welcome in this regard, but these commitments need to be further underpinned by a wider policy response, which drives investment towards low carbon and nature solutions and decarbonises the UK power sector by 2035.”
• Ed Miliband, MP (Labour): “The global race for the industries of the future has just been turbocharged by Biden’s IRA. The EU has a response, China has been doing a lot of this for 15 years. “Where is Britain?”
• Helen Clarkson, Climate Group: “The US, EU and China are overpowering the UK in the race to decarbonise, and unfortunately, this budget falls short of offering a plan to compete for green investment. While Chancellor Jeremy Hunt nodded to the UK’s past achievements on expanding offshore wind and rooftop solar, this Spring Budget overlooks cheap and clean renewable energy, and instead rebrands nuclear as ‘environmentally sustainable’ and throws cash at carbon capture technology. This was a missed opportunity to renew the UK’s commitment to climate leadership, seriously invest in energy efficiency, speed up the electric vehicle switch, stop subsidies for fossil fuels and increase onshore wind.”
• Mike Childs, Friends of the Earth: “Jeremy Hunt’s budget falls far short of the urgent need to address both the cost of living and climate crises. Backing expensive technologies like carbon capture, and storage and a new nuclear programme, while still blocking cheap onshore wind in England and failing to properly insulate the UK’s energy leaking homes, will leave the UK hooked on high energy costs and falling behind in the global race to benefit from the transition to greener economies. This budget will do nothing to close the glaring gaps in the UK’s failing climate plans which were found to be unlawful by the High Court last year. When it comes to the environment, this government isn’t working.”
• James Meadway, former Labour SpAd: “Slightly absurd how much attention is now paid to forecasts. These things are wildly (arguably increasingly) uncertain – if OBR says no technical recession this year, that isn’t the same as technical recession not happening.”
• The Grantham Institute also has a longer comment here.