Labour has bet big on green industrial policy. But there may be there cheaper ways to net zero

Labour’s first budget in 15 years included a highly anticipated change to the so-called fiscal rules which constrain how much the government can borrow or spend. By relaxing the rules, chancellor Rachel Reeves has opened the door for additional capital spending, much of which has been earmarked for low-carbon investment.

While there has been immense scrutiny of the budget’s £40 billion in tax increases, more relevant for net zero is around £100 billion of additional public investment over five years. From a climate perspective, it is disappointing that even a revenue-starved chancellor did not have the courage to increase fuel duty. But in terms of clean investments, the budget is bold, and forgoes easier wins for long-term competitive advantage.

The budget was largely industrial policy, meaning government efforts to shape the economy by targeting specific industries with a range of policy tools. And this was woven through with “green” initiatives.

For instance, of roughly £15 billion of additional public capital investment planned for 2025, most green investment is allocated towards large industrial projects. This includes £3.9 billion for carbon capture projects to decarbonise certain industries and contracts with 11 green hydrogen producers, £2.7 billion for nuclear power, £134 million in port infrastructure to support offshore wind, and £125 million towards the new publicly-owned company GB Energy.

Preparing for the net zero end game

The government should be commended for being forward looking and preparing to reach net zero by 2050. The government’s official advisory body, the Climate Change Committee (CCC), has set out a pathway to net zero. This envisages technologies to decarbonise large industry, such as carbon capture, hydrogen power, low-carbon materials and more efficient equipment, coming online in the early 2030s, accelerating to 2040.

These are expensive technologies whose deployment will not yield the same quick savings (both in carbon and running costs) as existing clean technologies like heat pumps and electric cars. Nonetheless, it is good that the government is willing to kick-start their development.

However, notably missing is a clear strategy to meet a fast-approaching 2030 target of removing at least 5 million tonnes per year of greenhouse gases from the atmosphere – the “net” in net zero.

Read more: Getting carbon capture right will be hard – but that doesn’t make it optional

Existing technologies miss out

In contrast, we saw relatively smaller amounts committed to scaling up already mature technologies like roof insulation, electric vehicles and their charging stations, heat pumps and so on. These technologies are proven, relatively affordable, and ready to deploy. As there wouldn’t be a long wait for investment in research and development to pay off, this means they could improve productivity faster.

Here, the budget is still positive, but less bold. It commits £220 million for electric vehicle charging points and subsidies, £1 billion in 2025 towards the warm homes plan (with a further £3.4 billion investment guarantee over 2025-27 towards heat decarbonisation and energy efficiency) and £1 billion over three years towards decarbonising the public estate.

Earlier this year, we published analysis of the investment still required to reach net zero, based on the CCC’s “balanced net zero” pathway. Our work indicates that the deployment of electric vehicles and heat pumps, which are cheaper technologies, were in 2023 roughly 50% and 80% (respectively) below what’s required.

More investment in these areas could have helped to unlock easier wins from an economy-wide perspective. For instance, our analysis shows that serious public investment in electric vehicles and heat pumps could save a household with one car up to £380 per year.

In the budget, we saw £5 billion committed for housing. If delivered alongside net zero new-build standards, this could boost energy efficiency and permanently reduce bills.

Industrial strategy is courageous, but risky

The UK was one of the first countries to get serious about offshore wind, and has reaped the benefits ever since. The strong focus on industrial policy in the budget indicates the government is taking a punt on being able to repeat the trick.

This is a bold strategy, albeit one that goes with the current grain of using domestic suppliers where possible and relying less on globalised markets to meet net zero targets. But it comes with risks.

It is not clear whether the UK, primarily a service economy, will be able to compete industrially with other locations. The Middle East for instance, has cheap solar power it can use to produce green hydrogen. Similarly, China already dominates electric vehicle manufacturing.

There is potential for jobs in sectors such as finance, or maintenance and repair, in which the UK already has (or can quickly create) an advantage. But jobs in new industries like carbon capture will require strategic investment in training and skills.

The budget provided an opportunity to link fiscal policy directly to net zero targets, and the new government has put its cards on the table. It sees net zero as an opportunity for industrial renewal. The budget is courageous, in the sense that it exudes confidence in UK industry, though it places less emphasis on how this will help meet net zero targets in the most efficient way.

A different courageous budget might have placed greater emphasis on the economy-wide impacts of net zero, and greater confidence in globalisation and the rules-based international order.

Anupama Sen has received funding from the Quadrature Climate Foundation and Children's Investment Fund Foundation.

Sam Fankhauser receives funding from the UK Economic and Social Research Council (ESRC) through the Productive and Inclusive Net Zero (PRINZ) project.