The Climate Change Act is flawed

How to make it work better.

The Climate Change Committee will this week publish its advice on the 7th Carbon Budget. Expect controversy. Although the Carbon Budget covers what may feel like the distant future to many – 2038 to 2042 – it will force some awkward conversations. Past budgets have focused on the relatively straightforward task of decarbonising our grid. Switching from a grid powered mostly by fossil fuels to one powered by zero carbon renewables (with batteries and some nuclear) is a gargantuan task, but it isn’t one that requires the public to radically change their lifestyle.

Carbon Budget 7, by contrast, will have to deal with hard-to-decarbonise sectors like aviation and farming. It won’t ignore home heating either – with bans for new gas boilers likely to be back on the table. It is likely to become a flashpoint for dissatisfaction with Net Zero and when Carbon Budget 7 is laid before Parliament there’s a genuine risk that the opposition will vote against it, breaking a long-standing cross-party consensus on climate.

It is also an opportunity - an opportunity to think again from first principles – about the UK’s legally enshrined approach to decarbonisation. Is the Climate Change Act with its expert-advised Carbon Budgets fit for purpose?

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Let’s start with what’s worth keeping. Politics is as short-termist as it gets. Climate change, by constrast is about as long-term a problem as you can get - requiring sacrifices in 2025 to prevent uncertain harms in 2070. The default for problems like climate change is to be ignored, until it is too late. Britain without the commitment mechanism of the Climate Change Act (or something like it) is likely a Britain where climate almost always loses out in policy debates.

It’s worth stepping back and remembering why we care about this in the first place. Climate change isn’t just a long-term issue—it’s already making extreme weather more frequent (don’t believe me, look at insurance premiums) and some places must now regularly contend with lethal levels of heat and humidity. And while there’s always uncertainty in forecasting, the big risk isn’t the median outcome; it’s the tail risks—the small but real chance that warming triggers more severe disruptions than we expect.

That could mean even more frequent floods, wildfires, and droughts, but also the second-order effects: pressure on food supplies, displacement, and economic shocks as extreme weather makes some regions harder to live and work in. We’ve already seen glimpses of this in recent years, but the concern is how much worse it gets as warming continues.

Given that, it makes sense to have some kind of system to keep emissions reductions on track. The Climate Change Act was meant to be that system, but it has real flaws—ones that make it harder to pursue the kind of policies that could have the biggest global impact.

1. Carbon Leakage: Carbon Budgets are based on emissions produced within the UK’s borders, but climate change is a global problem. Swapping British manufacturing for Chinese manufacturing cuts emissions domestically, but raises them globally.

2. Undervaluing Innovation: Carbon Budgets undercount innovation’s impact on climate change. When a new green technology is developed only its impact on domestic production emissions counts, but its impact on global emissions could be far greater if adopted overseas.

3. Central Planning: The Climate Change Act mandates detailed delivery plans for each Carbon Budget. Crucially, if a delivery plan is not credible, the Government can be sued. The result: legally compliant plans rely on deploying mature technologies (renewables, heat pumps, and EVs) rather than creating the conditions for market-driven innovation.

Climate is a global problem

In absolute terms, Britain’s contribution to climate change is small. Annually, we emit close to 1% of global greenhouse gas emissions. China emits in 15 days what Britain emits in a year. And China’s emissions are still growing. All carbon emissions end up in the same place.

This, by the way, is not an argument that Britain’s efforts are futile. Britain’s Net Zero target does not exist in a vacuum. Britain is one of many countries to have voluntarily pledged to cut emissions to Net Zero by 2050. If we were to drop this commitment, then there’s a decent chance others would follow.

It is, however, a reminder that we care about emissions whether or not they were produced within our borders.

Councils shouldn’t have net zero targets

Reaching Net Zero by 2050 will be a gargantuan effort. We often describe things like decarbonising power as ‘the easy bit’ but we are still talking about a massive transformation. Yet many council leaders around Britain seem to believe the 2050 Net Zero is wildly under-ambitious. Under Mayor Sadiq Khan London is targeting Net Zero by 2030. Bristol, Leeds and Birmingham are also targeting 2030.

In the past, Britain Remade have criticised councils with ultra-bold targets for hypocritically blocking new green developments. For example, Medway Council declared a climate emergency and then subsequently blocked the installation of solar panels on their own rooftop.

But here’s the real problem. Local targets can be counter-productive at a national scale. Cities, and in particular, London are greener than rural areas for a simple reason: density. When we live at higher densities, we drive less and we get the bus (or tube) more.

But one key way councils can reduce domestic local emissions is by insisting on ever-stricter building standards: for example, mandating the installation of heat pumps and top-notch insulation. In London, to make it easier to cool down properties without using air-con, there’s a requirement that new homes have windows on at least two different walls.

But here’s the problem: there’s a trade-off. The more requirements we load onto developers, the more expensive it is to build new homes. If dual-aspect rules were scrapped, more homes would be built each year in London. And in turn, more people would move to the capital. In the quest to have Londoners live in greener buildings, fewer Brits end up living in places that allow them to live green lifestyles.

Restricting domestic fossil fuel extraction is inefficient climate policy

One of the biggest flaws of targeting carbon production (as opposed to consumption) is its failure to consider additionality.

Climate campaigners love, more than anything else, to campaign against fossil fuel extraction. It is much easier to persuade people to oppose fracking than it is to accept pylons. Campaigns to ‘keep it in the ground’ generate thousands of sign-ups, campaigns to mandate heat pump usage by contrast mostly just generate grief on social media.

Here’s the problem. Restricting domestic fossil fuel extraction is, at best, an extraordinarily expensive way to cut emissions.

All things being equal, if you bring new supply onto the market, prices fall. And when prices fall, people consume more. But here’s the thing, the extent to which prices fall, and the extent to which falling prices lead to more consumption depends on a whole bunch of things.

One impact of more fossil fuel extraction in Britain is that barely profitable projects elsewhere in the world are ‘crowded out’ of the market. In other words, one extra tanker of gas from the North Sea doesn’t mean one extra tanker worth of gas burnt. Or for oil, OPEC responds by cutting supply to keep prices high.

Economists estimate that for every 100 barrels of oil brought onto the market only about half to a fifth are actually additional. In other words, for every 100 barrels of oil drilled in the North Sea, 50-80 fewer barrels are drilled elsewhere. It’s similar for gas though slightly more new gas supply ends up getting burnt.

There’s another important feature. British oil and gas extraction is, by global standards, pretty green. We’re not as green as the Norwegians, but we emit less when we extract fossil fuels than your average oil and gas field.

To be clear, unless we assume an essentially near one-to-one crowding out effect, more North Sea exploitation will almost certainly lead to higher emissions on a global scale. But the emissions savings we are talking about from stopping North Sea oil and gas extraction are much smaller than most of us assume. And there’s real economic costs to supply restrictions, the North Sea is a big employer and pays well. Jobs will be lost, tax receipts will be lower, and prices will be a bit higher. Our enemies, like Russia, will be able to sell more oil and gas allowing them to fund their wars for longer. Crucially, we could cut emissions elsewhere for substantially less pain.

And it’s not just fossil fuels. If Britain builds another runway for Heathrow, more transatlantic flights will land and take-off in the UK. This is straightforwardly bad for our carbon budgets, but it is far from straightforward that each and every flight is truly additional. Many would land in Amsterdam or Paris if the option of Heathrow didn’t exist. The emissions wouldn’t go away, but we would be a bit poorer.

Put simply, focusing on domestic production emissions makes extremely costly emission reduction strategies look better than they actually are.

We should care more about carbon leakage

Britain’s industrial energy costs are the world’s highest. There is a live debate over to what extent climate policy is responsible for this rise (see Foundations and Adam Bell’s reply), but one thing isn’t up for debate. Energy intensive businesses are dying in Britain.

Our chemicals industry has shrunk by 37% in the last three years. Steel, cement, and glass have all seen similarly big declines in recent years. From an economic perspective, this is a disaster.

Yet here’s the weird thing, even though the decline of Britain’s relatively clean industry will lead to us importing more goods from countries with dirty grids, from the perspective of the Climate Change Act with its focus on domestic production emissions Britain is getting greener.

But here’s the thing, when this happens Britain isn’t reducing its impact on the climate. It’s offshoring its emissions. This is what’s known as carbon leakage.

In theory, you can tackle the problem of carbon leakage with a big fat carbon tariff for goods made in polluting countries and a big fat carbon rebate for goods going the other way. But, the Carbon Border Adjustment Mechanism (designed to do just that) which is soon to come in is far from comprehensive. Until it is comprehensive, carbon budgets based on domestic production will still reward us for offshoring our emissions. Bad for our economy and bad for climate.

We need to value innovation properly

Britain only represents a small share of global emissions and when it comes to preventing further temperature rises, it’s global emissions that we care about. There are two key ways that Britain can have an impact on global emissions beyond what we can cut here. First, there’s international co-operation. By keeping to our part of the Paris bargain, we make it more likely that other countries will do their bit too. Second, there’s what you could call ‘leading the way’. If Britain can successfully show how to organise a zero-carbon grid, it makes it easier for every other country to decarbonise.

When we develop cheaper clean energy solutions (e.g. a new type of SMR), there’s a double dividend. Not only do we reduce our own domestic emissions by adopting greener tech, but we also make it easier for everyone else to cut their emissions.

At the same time, not all emissions cuts in Britain show the rest of the world the way. For example, Britain possesses the oldest housing stock in the world. This creates massive problems for decarbonisation (e.g. how do you cheaply insulate and decarbonise heating in homes built 100s of years ago), but those answers have little applicability to the rest of Europe where the housing stock is significantly younger (and therefore easier to heat in a low-carbon way).

Let’s take an extreme example. If the UK were to pioneer commercial fusion, then not only would we be able to drive our emissions from energy to zero but the rest of the world would soon follow. Under our system of carbon budgets based on territorial emissions, only the former is rewarded. But let’s be clear, the carbon savings of the latter absolutely dwarf the former.

Or take Germany’s aggressive subsidising of solar when installation costs were high. As more subsidised solar was installed, the industry found new ways to cut costs and is now cost-competitive around the world. The impact of Germany’s early support for solar shouldn’t be measured in the number of solar panels installed in Germany over that period, but rather the fact that solar got so cheap that it is now part of almost every country's energy mix.

There’s a related problem. The Climate Change Act requires ministers to put forward plans and policies they reasonably believe will meet the carbon budgets. The challenge is the return for investing in innovation isn’t certain. When venture capitalists invest in startups, they do so in the knowledge that most will fail, but if they’re lucky one might be so successful that it’ll cover all the failed investments and a tidy profit.

From a global perspective, a really really big bet on green R&D could have a massive impact on emissions. But, under the Climate Change Act, ministers must reasonably believe their plans and policies will reduce emissions by however much. If there’s a 30% chance, they won’t be enough and a 70% chance that we will over-perform massively, then legally that’s not good enough.

Again, this is an extreme example. No one is seriously advocating scrapping all climate policies and going all in on R&D. But, it does highlight how a Minister tasked with hitting a tough carbon budget might be more attracted to deploying existing technologies over gambling on innovation.

Don’t forget about consumers

Of course, innovation isn’t just spending on R&D. It’s testing ideas and products in the marketplace. Consumers - and their opinions - should be at the heart of this process. After all, they’re best placed to figure out (and tell us) which green solutions work best for them. Yet, putting consumers first means uncertainty. And that’s a problem.

In a helpful post, Adam Bell describes how carbon budgets work in practice. The risk of legal action and unclear steers from ministers leaves us with the following process:

“NGOs have asked the courts whether the Secretary of State had enough evidence to have a reasonable belief their plan would deliver (the 2022 case) or whether the plan as stated had an adequate evaluation of the actual risk attached to the policies involved (the 2023 case). This means that the pressure on that central team to deliver something legally robust is intense, and this cascades down through the Department to specialist teams. Those teams are sent forms that effectively ask, “What’s the thing you’re proposing, what number of bits of kit will it deliver and when, and what number of megatonnes of carbon do you expect to save?

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In the pursuit of delivering a reasonable belief, the Government inevitably picks winners, and therefore finds itself centrally planning much of the economy.

The end result is frustrating for two reasons.

One, it tends to produce excessively statist policies. Mandates, bans, and subsidies are the order of the day. Policies are rarely technologically neutral. For example, some argue that air-to-air heat pumps could be key to decarbonising home heating because they double up as air con units in the summer - a major selling point for consumers. Yet, air-to-air heat pumps are excluded from the Clean Heat Market Mechanism and don’t attract the large subsidy that other heat pumps do.

Two, it over-emphasises technological risk, but fails to consider political risk. Mandates, bans and phase-outs may appear credible, they rely on politicians following through. But if consumers (and voters) decide they do not want a heat pump or an EV then it takes a very brave politician to follow through with a ban or mandate. We have seen this recently: the Conservatives in Government watered down the 2030 ICE phase-out in response to concerns around the cost of motoring, while Labour have recently dropped the last Government’s 2035 ‘boiler ban’.

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The Climate Change Act has undoubtedly driven Britain to rapidly cut emissions over the last 15 or so years, but what the Act hasn’t provided is a politically sustainable path to reach Net Zero over the next 25. At the same time, by narrowly focusing on territorial emissions, it has had the unintended consequence of deprioritising some of the most impactful ways to tackle the global problem of climate change.

Britain should retain a legal commitment to Net Zero by 2050, but take a new approach to decarbonisation under a reformed Climate Change Act.

Be less like a bank and more like a VC: Legal risk too often leads officials to prioritise the deployment of existing flawed technologies, while ignoring investments in potentially transformative technologies. There’s a place for low-risk bank lending, but the most disruptive and impactful businesses in the world today were funded by venture capital. Policymakers should be empowered to take big bets on green innovation with the acceptance that most will fail, but it will be worth it because the successes will more than make up for any failures.

This could mean leading a global advanced market commitment for carbon removals – committing to pay people to suck carbon out of the air in the same way the Vaccine Task Force put in massive orders for vaccines well before there was evidence they worked. But it could also mean a greater role for carbon pricing or radically reforming the retail electricity market to create space for as-yet-unknown solutions to heating, transport, and demand flexibility.

Treat climate change as the global problem it is: The Climate Change Act should no longer target reductions in territorial production emissions and instead switch to targeting consumption primarily. However, while this approach is more robust to the charge of ‘offshoring emissions’, there is a need to go further. Britain’s biggest impact on whether or not we avoid a 1.5C world will be down to us pioneering new technologies that are not just cleaner than what came before, but better in general so the rest of the world follows our lead (even if their leaders are less than committed to the concept of climate action). Spillovers from British innovation should be tracked and valued.

There should also be a greater role for international offsets. At the moment, they only play a limited role – in part, due to legitimate concerns about whether they actually reduce carbon in the long-term and their impact beyond carbon alone (e.g. tree-planting projects can involve farmers being forced off their lands). But, these criticisms do not apply to all kinds of offsets: in particular, permanent carbon removals such as olivine weathering, mineralisation, and direct air capture could play a massive role if technological developments in hard to decarbonise sectors do not pan out. Many of these methods are energy-intensive. The best place to do them will be the places where energy is abundant, cheap, and clean. It would be great if that meant Britain, but we should be prepared for it to be Norway, Morocco, or Texas instead.

Is it time to rewrite the Climate Change Act? Your response will probably be driven by your vision of decarbonisation. If your vision of decarbonisation is primarily about deploying (and bending the cost curve on) existing technologies like wind turbines, solar panels, and ground-source heat pumps, then the answer is probably no (though a reformed act wouldn’t be an obstacle to pursuing such an agenda). But if you are dissatisfied with our current approach and see the solution not in existing technology, but instead in innovation and making decarbonisation cheaper for the whole world then it is time for a rewrite.