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The Confederation of British Industry (CBI) has called on the government to implement new tax incentives to stimulate investments in the burgeoning green economy, which could contribute tens of billions of pounds annually to the UK's GDP and support the country's climate commitments.
A recent report from Britain's leading business group, released this weekend, highlights the substantial economic potential of the green economy. It suggests that embracing these sectors could increase the UK's GDP by £37 billion to £57 billion by 2030 while also helping to achieve the legally mandated goal of net zero emissions by 2050.
However, there is growing concern within the business community that the UK might fall behind its global competitors, such as the EU, China, and the US. These concerns have been exacerbated by significant initiatives like the US Inflation Reduction Act and the EU Net Zero Industry Act, which have introduced a range of tax credits, loans, and subsidies to attract green investments.
Despite the government's resistance to adopting a subsidy scheme as extensive as the US's, the CBI argues for a more innovative approach through precise policy and tax reforms rather than trying to outspend these competitors.
To this end, the CBI is advocating for the introduction of a "Green Innovation Credit" set at a 40% rate, a reduced 10% corporation tax rate on profits from clean technologies, and a boosted super-deduction rate of at least 120% for investments in low-carbon technologies.
In their 2023 Going for Green Report, these proposed incentives are designed to catalyze investments across seven critical sectors: electric vehicles, low-carbon power generation, heating and insulation, green services, hydrogen production, carbon capture utilization and storage (CCUS), and biofuels. The report identifies several areas with significant growth potential, including the export of high-performance EV technology, energy savings from widespread EV adoption, increased investments in offshore wind, and scaling the biomethane industry.
"The UK is lagging behind in the global green growth race," said CBI chief executive Rain Newton-Smith. "Our US and European rivals have bolted out the gate with incentivising reform packages, securing major market share and creating skilled jobs.
"The UK initially led the pack, setting international standards and being the first major economy to sign net zero into law. We must now move at pace to reclaim our lead in this field, achieve our net zero goals, and build in long-term, sustainable economic growth. Public funding alone will not be sufficient.
"Making better use of the tax system, in the form of capital allowances, investment tax credits, and reductions to the corporation tax rate, to incentivise green investment is an effective way to drive demand for new green products and services and encourage the adoption of green technology."
She said the group, representing many of the UK's largest businesses, wants to see the government take some of the steps recommended in the report and "implement more when fiscal headroom allows."
However, she stressed that to maximise green growth and deliver on the UK's climate goals, tax reforms needed to be "part of a wider, cohesive package alongside clear government support and wider decarbonisation policy, ideally in the form of a Net Zero Investment Plan".
"As we head into a General Election, political parties have an opportunity to prioritise green growth by using their manifestos to set out a package of tax measures that provides the best value for money and impact in bringing the UK closer to its decarbonisation goals," Newton-Smith added.
Tania Kumar, net zero director at the CBI, said investing in green growth could stimulate the UK economy by capturing international market share in critical green industries and help achieve looming carbon budgets and climate commitments.
"Whilst recent announcements on full expensing, green industries funding, and targeted tax reliefs should increase investment, it is time for the government to review the tax system to ensure the UK has the right framework to support the transition to net zero," she said. "The recommendations in this report offer a starting point."
In response, an HM Treasury spokesperson said: "Having been the first major economy to halve its emissions, we're leading the world with our ambitious net zero targets, significant investment in the green sector, and innovative policy solutions.
"With full expensing made permanent, green businesses can already invest for less as the UK now has the most generous regime for capital allowances in the G7. Our newly merged R&D tax reliefs simplified the system and means green businesses in the UK benefit from the joint highest uncapped headline rate of R&D tax relief in the G7 for large companies."
Recent analysis conducted by the Confederation of British Industry (CBI) revealed that the UK's 'net zero economy' grew by nine percent in 2023 and is now valued at an estimated £74 billion. The study, developed in collaboration with the Energy and Climate Intelligence Unit think tank, indicated that sectors facilitating the net zero transition contribute about 3.8 percent to the national economy.
This revelation comes at a critical time, as the green economy is poised to be a vital issue between the two main political parties in the upcoming elections.
The current government has touted its success in fostering record levels of green investment, which it claims has led the UK to achieve the most rapid decarbonisation among G20 nations over the past decade.
However, experts have warned that the UK is veering off course to meet its 2030 emissions targets. Additionally, a recent ruling by the High Court found the government's Net Zero Strategy to be insufficiently detailed, deeming it unlawful under the Climate Change Act.
In contrast, the Labour Opposition has committed to prioritizing climate action, proposing to increase green investments and enact comprehensive planning reforms aimed at decarbonizing the power system by 2030. Nonetheless, Labour has also faced criticism from environmental groups for dialing back its initial ambitious green investment plans due to fiscal constraints.
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