Net zero

CCLA recognises that a failure to address climate change represents a risk to the functioning of financial markets as well as the health of the planet and our communities. For this reason, we have long integrated the risks and opportunities associated with climate change into our investment analysis and sought to be a catalyst for action on climate in the investment industry. As part of this commitment, we are signatories to the Net Zero Asset Managers initiative and aim to reduce the carbon footprint of our portfolios to zero no later than 2050.

Summary

• Russia is the second largest producer of natural gas in the world. The war in Ukraine has led to a global spike in energy prices.
• This is exacerbating ‘a cost-of-living crisis’, with household finances already stretched by high levels of inflation and forthcoming tax rises, calling into question whether the UK can afford to fulfil its ‘net zero emissions by 2050’ pledge.
• However, whilst there might be a short-term return to coal and increased domestic oil and gas production, over the long-term we believe that this will accelerate the energy transition. In the face of rising fossil fuel prices, renewables will become more competitive and ‘net zero’ will become a matter of ‘energy security’ not just climate action.

 

Renewables are the quickest and cheapest route to greater energy independence. They are invulnerable to Putin’s manipulations. He may have his hand on the taps for oil and gas. But there is nothing he can do to stop the North Sea Wind.

Boris Johnson, Prime Minister, The United Kingdom

 

This fight against climate change has never been more urgent. On 28 February 2022, the Intergovernmental Panel on Climate Change, the United Nations body for assessing the science on climate change, released their latest report into the impact of changing temperatures. This found that climate change is already causing ‘widespread disruption in nature’ and has ‘exposed millions of people to acute food insecurity and reduced water security’[1]. Most importantly, it stated that the window for taking the action to prevent even more significant harm was shortening.

Whilst the content of this report was depressingly similar to those that preceded it, the context surrounding its launch was not. During the final approval of the report, some members of Ukraine’s delegation had to pull out of the session to hide in bomb shelters[2] as Russia’s invasion began. Whilst this offered a small glimpse of the human tragedy that was beginning to unfold, this action also provided a stark reminder that the fight against climate change cannot be taken in isolation from geo-politics, the economy, and our everyday lives.

A key part of the transition to a net zero emissions economy is the decarbonisation of global electricity generation. This was a focus of the recent UN Framework Convention on Climate Change COP26 Conference in Glasgow where the ‘Global Coal to Clean Power Transition Statement’ was agreed. To facilitate this transfer away from coal, the most carbon intensive fossil fuel, gas, as a more efficient cleaner fuel, has come to play a much greater role in the global energy mix and is seen by many as a vital ‘bridge’ between the current era of fossil fuel-based generation and the future.

Russia is the second largest gas producer in the world, after the USA, with more than a third of Europe’s gas supplies coming from the country[3]. As a consequence, the Russian invasion has caused two requirements of governments when it comes to energy.

First, the pressing geo-political need for European countries to stop funding the Putin regime by purchasing their commodities, coupled with Russian threats to turn off the supply to Europe, has ‘caused global prices to soar’[4] and a scramble to increase the ‘security’ and resilience of energy supplies.

Second, rising energy prices are having a significant impact upon our cost of living and adds to the existing backdrop of high inflation outstripping wage increases and upcoming tax increases[5]. Whilst the UK imports less than 5% of its gas from Russia3, this has still impacted the energy prices felt by domestic consumers due to the competitive nature of the global market. This is likely to cause significant hardships for households on low (and in many cases medium) incomes that cannot be ignored.

This has led many commentators and politicians to question whether the UK can really afford to implement its plan to have ‘net zero emissions by 2050’ and to propose increased investment in the North Sea oil and gas fields, a return to fracking, and the creation of new nuclear facilities[6].

Given the urgent nature of the crisis, it is right for us to reconsider all options that could support our security and our communities at this time. However, whilst each of these could provide additional capacity, and some or all are likely to be part of the solution to the energy security problem, the ‘lead-in-times’ and other barriers for many projects are likely to render them unviable as being a significant solution to the problems that we face in either the short or the long term. For instance:

• Whilst increasing the supply of oil and gas from the North Sea is likely to be the easiest short-term solution given the countries reliance on gas, the timelines for increasing North Sea capacity are contested. These range from three years, according to the Oil and Gas Authority[7], to 28 according to the UK’s independent Climate Change Committee estimate. This, coupled with dwindling supplies, means that even without the climate imperative to transition away from fossil fuels, the North Sea can only be one part of the solution.
• In terms of nuclear generation, Hinkley Point C, the first in the new generation of nuclear power stations, is unlikely to open until 2026[8] and uncertainty regarding construction costs continues to impact future new-build nuclear. This comes against a backdrop of our existing nuclear generation capability coming to the end of its lifespan and going offline. Hinkley Point B is due to close this summer, followed by Heysham and Hartlepool’s stations next year. With existing closures in Dungeness and Hunterston nuclear power currently makes up the smallest percentage of the country’s energy mix since 1982[9].
• Finally, whilst successful in the US the viability of fracking is uncertain in a UK context. Recent work conducted by the British Geological Survey suggests that the quantity of gas that could be accessed by fracking in the UK has been significantly overstated[10] calling into question the technology’s ability to function at scale.

For these reasons, whilst we support any steps to reduce the immediate cost burden on households and reduce our collective reliance on Russia, we believe that the primary focus of any revision to our energy strategy has to focus on energy efficiency initiatives (to make our energy go further) and an increase in the pace of the shift to renewables.

This is supported by evidence. Recent years’ energy supply data has suggested that increases in renewable capacity have led to a corresponding reduction in gas use. Therefore, an increased focus on domestic renewables would allow the UK to better maximise its gas resources, cutting its reliance upon external imports, and continuing the more carbon efficient practice of using it to smooth out supply when renewable generation is not able to meet the country’s power needs[11].

This is best exemplified by a tweet from Kwasi Kwarteng, the Secretary of State for Business, Energy and Industrial Strategy.

‘Global gas prices are at record highs’, ‘The more renewable energy we generate at home, the less gas we burn to keep the lights on’, ‘Without Renewables, we would be burning more gas – very expensive gas’, ‘We need to generate more cheap, clean power at home’[12].

This means that the shift to ‘clean power’ is not just about fighting climate change, it is about our energy security and social justice. For this reason, CCLA will continue our focus on pushing for progressive public policy as the most effective way of bringing about the change we need to see. This includes our support for the new Transition Plan Taskforce announced by the Chancellor and our ongoing work with the Powering Past Coal Alliance which has demonstrated the UK’s ability to galvanise climate action both at home and overseas.