Faced with a generational triple challenge of delivering a carbon-neutral economy, energy security, and the multi-trillion-pound investments required to make it happen, the government has draped its green ambitions in red, white and blue.
The energy security plan (official title “Powering Up Britain’) is awash with Union flags. From the agency that will develop atomic energy, Great British Nuclear, to the programme to improve domestic energy efficiency, Great British Insulation, it feels like a patriotic rebranding of existing plans and consultations, with very little new money.
It may be a matter of presentation, but it’s a mistake to view the race to net zero as a parochial issue. This is a global competition for technology, innovation, skills and investment. When it comes to money, Britain already finds itself outmuscled by global competitors.
Last August, US President Joe Biden announced the Inflation Reduction Act (IRA) – a $369bn subsidy plan to secure green industrial investment.
The financial incentives to move factories and development to the US are already turning heads in Britain, with the domestic car industry particularly vulnerable as it transitions to an all-electric future.
The European Union has responded to this huge protectionist move with one of its own. A response that could be worth €250bn in subsidies is being finalised in Brussels.
The UK of course would once have benefitted from collective European muscle flexing, but now it poses yet more competition, and much closer to home.
Faced with two industrial giants engaged in a transatlantic arm-wrestle, the UK has effectively said it cannot compete.
Can being smart make up for being small?
Instead of trying to keep up in a subsidy race, Chancellor Jeremy Hunt is hoping being smarter will make up for being smaller, helped by the financial clout of the City of London.
Writing for The Times today, he is explicit: “Our approach will be different – and better. We are not going toe-to-toe with our friends and allies in some distortive global subsidy race.”
Rather than fight a subsidy battle he thinks he is destined to lose, the chancellor hopes the City, and UK innovation, can deliver the investment, skills and jobs required to transform energy supply and the economy.
He cites planned reforms of insurance regulation as allowing investors to free up some of an estimated £100bn in capital for green industries.
To put that in perspective, the Treasury’s own estimate is that the UK requires £60bn a year to hit domestic net-zero targets, and the chancellor has already cited the same reforms as the resource for science and tech investment.
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There is some state funding for green technologies in this announcement, though very little we did not already know about. Some £20bn will go towards Carbon Capture, Utilisation and Storage (CCUS) projects, a nascent technology still unproven at scale.
Much smaller pots will be aimed at green hydrogen, which has industrial applications that might in time help decarbonise the energy transition’s huge demand for steel, as well as for insulation and setting up Great British Nuclear.
A generous direct subsidy is hard to beat
Yet even with a little state help and a favourable private sector investment environment, a generous direct subsidy is hard to beat. Volkswagen, for example, has already paused its European battery plant plans until it hears whether the EU can match a $10bn subsidy from the US.
The green transition is an opportunity for growth as well as a challenge. As every developed economy turns its attention to the energy transition the Treasury estimates it could be worth £1trn to UK business by 2030.
And there are huge investments required at home, starting with the expansion of the electricity grid to distribute huge volumes of new renewable energy, all of which will require cables to go under or over communities, and through the labyrinthine planning system.
The UK is already importing the green transition
The UK does have advantages in fundamental green industries. Geography has bestowed extensive coastal waters where wind power and expertise flourishes, with floating wind farms the next frontier. Yet the Crown Estate benefits from the licences (through ownership of the seabed) and many of the companies delivering the infrastructure are Scandinavian, demonstrating that the UK is already importing the green transition.
Unless flag-waving becomes a renewable energy source it will take more than patriotism to keep up in this global race.
Is there method to the madness? Donald Trump and his acolytes would have you believe so.
The US president is standing firm among all the market chaos.
Just this weekend, after US stock markets suffered their sharpest falls since the onset of the pandemic, Trump reposted a video on his social media platform Truth Social. This was its title: “Trump is purposefully CRASHING the market.”
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The video claimed the president was engineering a flight to US government bonds, also known as treasuries – a safe haven in turbulent times. The video suggested Trump was deliberately throwing the stock market into chaos so investors would take their money out and buy bonds instead.
Why? Because demand for treasuries pushes up the price of the bonds, and that, in turn, lowers the yield on those bonds.
The yield is the interest rate on the debt, so a lower yield pushes down government borrowing costs. That would provide some relief for a government that has $9.2trn of government debt to refinance this year. Consumers also stand to benefit as the US Federal Reserve, the US central bank, would likely follow suit, feeling the pressure to cut interest rates.
A trader works on the floor at the New York Stock Exchange. Pic: Reuters
Trump and his treasury secretary, Scott Bessent, have made it a key policy priority to lower yields. For a while, it looked like the plan was working. As stock markets tumbled in response to Trump’s tariffs agenda, investors ploughed their money into bonds instead.
However, Trump may have spoken too soon. On Monday, the markets had a change of heart and rapidly started selling government bonds. Thirty-year treasury yields hit 4.92% on Wednesday, their biggest three-day jump since 1982. That means government borrowing costs are rising – and not just in the US. The sell-off has spiralled to government bonds worldwide.
Rachel Reeves will be watching anxiously. Yields on Britain’s 30-year government bonds, also known as gilts, hit their highest level since May 1998. They registered a 27 basis point jump to 5.642% today – that’s on track to be the largest one-day move since the aftermath of former prime minister Liz Truss’ “mini-budget” in October 2022.
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‘These countries are dying to make a deal’
This is a big deal. It is the sharpest sell-off in the US bond market since the pandemic. Back then, investors also rushed into bonds before dumping them and the motivations, on one level, are similar.
In 2020, investors sold bonds because they had to cover losses elsewhere in their portfolios. When markets fall, as they have done over the past few days, lenders can demand that an investor who has borrowed money stump up more cash against the value of their loan because the collateral against those loans has fallen in value. This is known as a “margin call”. Government bonds are easy to sell as investors “dash for cash”.
There are signs that this may be happening again and central banks, which had to step in last time, are alert.
The Bank of England warned today of the growing risks to financial stability. “A sharp increase in government bond yields could crystallise relatively quickly,” it said.
There are other forces weighing on government bonds. With policy uncertainty unfolding in the US, investors could also be signalling that US debt isn’t the safe haven it once was. That loss of confidence also seems to have hurt the dollar, one of the world’s safest places to park your money. It’s had a turbulent journey but is down 1.15% against a basket of safe haven currencies since Trump announced widespread tariffs on 2 April.
Some are even wondering if China could be behind some of this, dumping US government debt as a revenge tactic to hurt a president who has explicitly said he wants bond yields to come down. The country holds $761bn of US government bonds, second only to Japan. If this is the case, then the US-China trade war could rapidly be evolving into a financial war.
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