The Confederation of British Industry (CBI) has urged the government to introduce a wave of new tax incentives to trigger fresh investment in high-growth green sectors that can help deliver on the UK’s climate goals while boosting the economy by tens of billions of pounds a year.
According to a new report published by Britain’s biggest business group this weekend, the green economy offers unrivalled opportunities to meet legally binding commitments to reach net zero emissions by 2050 while delivering a GDP boost of between £37bn and £57bn by 2030.
But the business community increasingly fears the UK is at risk of ‘lagging behind’ competitors such as the EU, China, and the US in attracting investment into green sectors, following the introduction of new tax credits, loans, grants and subsidies through the US Inflation Reduction Act (IRA) and the EU Net Zero Industry Act.
The government has resisted calls to try to emulate the White House’s IRA, arguing such a generous package of subsidies would prove unaffordable. But the CBI and others have argued it should be possible to outsmart rather than outspend the likes of the US, EU, and China through the adoption of targeted policies and tax reforms.
As such, the CBI today proposes a new “Green Innovation Credit” with a headline rate of 40 per cent, a 10 per cent corporation tax rate for clean tech profits, and an enhanced green super-deduction rate of at least 120 per cent to boost investment in low carbon equipment.
The study – titled the 2023 Going for Green Report – argues the incentives could provide a huge boost to investment in seven key areas: electric vehicles (EVs), low carbon power, heating, and insulation, green services, hydrogen, carbon capture utilisation and storage (CCUS), and biofuels.
Each of these sectors could deliver billions of pounds in green growth by the end of the decade, the CBI said, with the export of high-performance EV intellectual property, fuel savings from the rollout of EVs, additional investment in offshore wind infrastructure, and investment to scale up the biomethane industry, flagged as the most lucrative opportunities.
“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 as the first major economy to sign net zero into law. We must now move at pace to reclaim our lead in this field and to 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, which represents many of the UK’s largest businesses, wants to see 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 for “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 both stimulate the UK economy by capturing international market share in key 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 by the CBI found that the UK’s emerging ‘net zero economy’ grew nine per cent in 2023 and is now worth an estimated £74bn. The report, developed in collaboration with the Energy and Climate Intelligence Unit think tank, found sectors enabling the net zero transition accounted for around 3.8 per cent of the national economy.
The latest proposals come as the green economy is set to become a major battleground between the two main parties at the upcoming election.
The government has consistently maintained it has helped deliver record levels of green investment that have ensured the UK has delivered the fastest decarbonisation of any G20 country over the past decade.
However, experts have repeatedly warned the UK is no longer on track to meet its emissions targets for the 2030s and the High Court recently ruled the government’s currently Net Zero Strategy was insufficiently detailed and as such was unlawful under the Climate Change Act.
In response, the Labour Opposition has promised to prioritise climate action, ramp up green investment, and deliver sweeping planning reforms as part of an effort to decarbonise the power system by 2030. But it too has faced criticism from some green groups for scaling back its initial green investment plans in response to fiscal pressures.
Keep up to date with all the latest green business news by signing up to the free Daily and Weekly BusinessGreen Newsletters.
