What do times of economic hardship mean for the UK’s transition to net zero?

A cost of living crisis has caused widescale hardship for UK households in recent years, further compounding the impacts of a stagnation in living standards since the global financial crisis and against a background of large and persistent inequalities. While additional pressures on household budgets imply an even stronger need to ensure the costs and benefits of the net zero transition are distributed fairly, the fundamental arguments for why the UK must deliver a rapid transition remain unchanged and are in fact enhanced in the current context.

Why is climate action a prerequisite for the future wellbeing of UK society?

2023 was the warmest year on record and if emissions continue at current levels, the world is set to exhaust its remaining carbon budget for limiting global warming to 1.5°C by the end of this decade. Surpassing the 1.5°C threshold would mean an increased risk of climate-related damages affecting people’s lives, including from extreme temperatures, flooding and disruption to infrastructure and supply chains. All in society will feel the impacts of climate change, but they will not feel it equally, due to differences in their exposure and/or ability to adapt. For example, people on low incomes will find it most difficult to afford adaptive measures like air conditioning or flood insurance, and remote, low-income communities might find it most difficult to replace any losses in their income from climate impacts (e.g. due to a fall in agricultural production). Therefore, inaction on climate change would risk exacerbating the challenges already faced by the less well off in society. Delay will also imply missing the opportunity to tackle other aspects of environmental degradation which could be addressed through climate action, such as air pollution or a lack of access to green space, which also affect lower-income households disproportionately.

How can building a low-carbon, resilient economy avoid higher costs in the future?

The economic argument for the UK’s net zero transition is well-established (e.g. see Zenghelis et al., 2024; Valero and Van Reenen, 2023; Skidmore, 2023). One estimate has indicated a pathway consistent with net zero could boost the UK’s GDP by around 2% by 2030, which would continue to grow before levelling off at around a 3% boost by 2050, reflecting – among other factors – an increase in economic multipliers as less UK spending goes on imported oil and gas. In contrast, delaying necessary action would imply higher costs due to more disruptive and expensive changes that would be required later on, as well as forgone growth opportunities from serving growing domestic and overseas demand in the global transition for clean technologies and practices (such as renewable energy and green finance).

Action towards net zero can also deliver improved resilience to volatility in energy prices, as highlighted by the recent energy crisis. This resilience would come from diversifying the energy mix thereby reducing reliance on fossil fuel imports, and from reducing energy demand by boosting energy efficiency.  The UK’s heavy dependence on natural gas for electricity and heating, combined with its old and inefficient housing stock, meant that it was left vulnerable to the huge spike in energy costs after Russia’s invasion of Ukraine. This played a large part in household budgets being hit harder in the UK than in any other country in Western Europe during the energy crisis that followed. Between 2020 and 2023, the average fuel poverty gap – which reflects the difficulty for a household to move out of fuel poverty – increased by 66% due to rising energy prices, making the situation for those already in fuel poverty substantially harder.

The Government rightly stepped in to shield consumers and businesses from rising energy costs through various support schemes, at an estimated combined cost of £78 billion. It is clear that this cost would have been lower had the UK already invested more in key areas that are necessary for the net zero transition, including energy efficiency and zero carbon heating in buildings, and domestic low-carbon power. According to one estimate, households that had all the applicable net zero technologies (including insulation, a heat pump and an electric vehicle) could have saved up to £3,750 on energy bills over 2022 and 2023, the two years dominated by the energy crisis. In contrast, if the UK continues its dependence on gas at the current level, recurring gas price spikes could add around 13% of GDP to public debt by 2050, with households and businesses continuing to face substantial avoidable costs as well.

The case for speeding up the transition to electric vehicles and reducing the UK’s reliance on diesel and petrol, which are subject to similarly volatile pricing, is also supported by the resilience argument.

Together, investments in low-carbon heat, electricity and transport, combined with system-wide energy efficiency improvements, imply lower costs for households down the line, along with other co-benefits such as warmer homes and cleaner air.

Why is a focus on fairness important?

The UK public remains consistently concerned about climate change and continues to show strong support for climate policies. The foundational legislation is there, with the UK being the first advanced economy to put a net zero emissions target into law (with a 2050 target date) and the country has traditionally been a global leader on climate policy, having halved its emissions between 1990 and 2022.

The political question in light of the cost of living crisis is not one of ‘whether or not’ the UK should transition to net zero emissions on schedule, but of ‘how’ this can be done in the most fair way, given the pressures on UK households. Some households and particularly those on low incomes will struggle to afford the upfront costs of the technologies necessary for net zero. While most of these technologies have the potential to deliver operational savings once initial investments have been made, currently high upfront costs mean that the savings (and other co-benefits) from low-carbon upgrades will only accrue to households that can afford them. Government therefore has a role in anticipating the various distributional aspects of the transition and providing targeted support, while making sure low-carbon policy costs more generally are passed on fairly. Lessons can be learned from elsewhere, for example, from the relative success of other Northern European countries in decarbonising heating.

Ultimately, what the UK needs is a rapid and fair transition to net zero. Some have argued that the country cannot afford to invest in this transition during a cost of living crisis and given the tight public finances, but in truth it is inaction that would risk the wellbeing of its people and the resilience of its economy in the future. It is true that delivering the transition will require navigating the new economic and political realities presented by the cost of living crisis, but it is the only way the UK will secure a stronger, sustainable and more resilient future.

This Explainer was written by Anna Valero, Distinguished Policy Fellow at the Centre for Economic Performance and Associate to the Grantham Research Institute at LSE, with support from Esin Serin.