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Areeba Khan

9fin’s latest feature outlines the UK’s emissions trajectory and performance, recent green policy reversals by Prime Minister Rishi Sunak, and presents our analysis of its implications for the high-yield market in the UK.

The UK was the first major economy to adopt an official net zero target. It achieved the fastest reduction in greenhouse gas emissions in the G7 since 1990. 

For example, the UK achieved a 48.7% reduction compared to a 40% reduction in Germany. This was due to emissions reductions in the electricity generation sector, driven by a sharp drop in coal’s share of electricity generation from 80% in 1990 to 1.5% in 2022.

Coal was replaced by wind turbines, nuclear power, and solar power; accounting for 25%, 15%, and 14% of electricity generation, respectively. But recently, the UK’s performance hasn’t been as impressive; it achieved a 14% reduction in emissions compared to a 17% reduction in Germany from 2016 to 2022. 

This is partly driven by slower progress in other sectors. For example, residential buildings make up an eighth of the UK’s total emissions and the UK has shown worryingly slow progress due to concerns over the increasing financial burden on households and technological issues as UK is home to Europe’s leakiest houses. 

Recently, Sunak announced a series of green policy reversals: 

Delayed a ban on the sale of new petrol and diesel cars from 2030 to 2035 

Relaxed the 2035 target for installing new gas boilers 

Abandoned tough energy efficiency rules for landlords 

Delayed a ban on new oil boilers from 2026 to 2035

The policies impact transport (23% of emissions) and buildings (17% of emissions), which are the first and second biggest contributors to total emissions. 

Sunak’s anti-green move was met with sharp criticism as well as relief depending on the beliefs and interests of the stakeholders. He defended his reversals by stating the government remains committed to net zero by 2050, but “more proportionately and pragmatically”. 

Sunak expressed concerns about the cost of living crisis impacting the UK. In a survey, FT found that 54% of UK voters prioritise the cost of living concerns over net zero goals.

i) the reversals undermine the UK’s green credibility i.e. the market does not believe the UK will be able to achieve its targets. This was reflected in the plummeting UK’s carbon price; it collapsed to £36 per tonne, less than half the level in the EU. This is especially concerning because low carbon prices do not incentivise fuel-switching

ii) The reversals undermine stability and confidence for green investors, particularly in the automotive, transportation, oil, and gas sectors. UK investors with a long-term horizon view the reversals as insignificant political noise. For example, Iam Simm, founder of Impax, believes his multinational portfolio is unaffected as long as the 2050 net zero goal applies

9fin’s credit analysts believe the developments are potentially beneficial for high-yield issuers in the automotive, oil, and gas sectors as they enable more leg-room i.e. capital expenditure can be spread over a larger number of years than previously and allow more time to explore cost-effective methods of transition. 

For the automotive industry, there is a concern that the UK lacks vital infrastructure such as charging points for EV transition, and the cost of EV transition should gradually fall over the years due to technological advancements, efficiency, and economies of scale. 

For example, the UK’s second largest car maker, Jaguar Land Rover (JLR) stated it would be entirely electric by 2025 and plan to invest £15bn over the next five years. Capital expenditure on Electric Vehicles (EVs) can be allocated over a longer time, allowing room for more flexibility and making more cash available to pay interest on bonds. JLR welcomed Sunak’s move and described it as pragmatic. 

Similarly, Aston Martin is targeting an annual capital expenditure of £250-300m on EVs; it is targeting at least 25% of its total sales to consist of electrified cars by 2025 and launch an all-electric car by 2025. 

Ford earlier this year reported delays in its EV production, suggesting the leg-room provided by the reversals is potentially warranted. However, some manufacturers in the automotive industry opposed the change as it brought inconsistency and confusion; it presented difficulties in forecasting future EV demand while setting production goals. 

Our credit analysts argue that the current policy reversals do not materially impact the HY market in the short to medium term, they only allow for more legroom and time to prepare. UK manufacturers are already invested in the transition; in a snap poll of 340 manufacturers after Sunak’s announcement, Make UK found that 92% of respondentssaid the transition to net zero was important for their business, with more than two-thirds seeing it as a commercial opportunity. 

Potential undermining of the overarching net zero target 

Meeting the net zero 2050 target may be undermined as progress in the UK as previously mentioned has been slow. According to IEA, the UK requires a 68% reduction in GHG emissions by 2030 from 1990 levels. Christian Brand, professor of transport, energy, and climate change at Oxford University believes these reversals make it very difficult for the UK to meet its interim targets. Analysis by Carbon Brief depicted in the chart below looks at emissions savings that had been expected from the UK’s policies before Sunak’s reversals. Much of these emissions savings could potentially be lost due to the rollback. 

Royal Society of Chemistry (RSC) joined other professional bodies in expressing concern for the potential deviation in the UK’s net-zero trajectory. Analysis by the Institute for Public Policy Research (IPPR) found that the UK’s commitments to invest in clean-energy technologies are amongst the lowest in the G7 group of leading Western economies. 

In particular, the green goods and services sector contributes 3.9% to the UK GDP compared with 5.8% in the European Union. The Climate Change Committee, an independent public body, formed under the Climate Change Act, estimated that the delay in the phaseout of petrol and diesel cars from 2030 to 2035 could add up to 110 million tonnes of carbon dioxide equivalent emissions. 

Bob Ward, Director at the Grantham Research Institute on Climate Change and Environment at the London School of Economics said the delay risked undermining domestic and overseas investment in a range of sectors that are developing green technologies such as heat pumps and electric vehicles. The Independent Review of Net Zero expressed alarm over the sudden policy reversals, voicing industry concerns about increasing investment uncertainty, thus enabling a higher cost of capital and cost of decarbonisation.

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