Is the UK’s drive for growth compatible with its climate targets?

Britain’s Labour government has reinstated climate change as an important objective of central bank policy but it is sending mixed messages on the centrality of the goal as it seeks to revive growth in the UK economy, experts say.

Chancellor Rachel Reeves told the Bank of England’s (BoE) financial policy committee in its annual remit letter that the climate and nature crisis is the greatest long-term global challenge and the risks it poses are relevant to its primary objective of maintaining financial stability.

“The Committee should consider how these risks could impact financial stability over the near and longer-term, including, where appropriate, through its stress testing frameworks, ensuring that risks stemming from possible and severe global climate scenarios are reflected in its analysis on climate risks,” she wrote.

She also noted that the government’s economic strategy includes the aim “to deliver long-term growth and accelerate the transition to a climate resilient, nature positive and net zero economy”.

However, Reeves said at the World Economic Forum in Davos that she would prioritise growth over reaching net zero if forced to choose.

“Growth is the No 1 mission of this government, because growth underpins everything else, whether that is improving our schools and our hospitals, or indeed being able to get to net zero,” she said.

In a speech today, Reeves confirmed the UK government’s support for a new runway at London’s Heathrow airport, a move criticised by campaigners and other politicians as incompatible with efforts to tackle climate change.

Conflicts in government over growth and climate

Under former governor Mark Carney, the BoE was considered a world leader in addressing climate change but it has slipped down the Green Central Banking Scorecard compiled by thinktank Positive Money after Reeves’ predecessor Jeremy Hunt removed climate change from his remit letter in 2023.

The Labour party has pledged to make the UK a “clean energy superpower” and the world’s “green finance capital”, as well as double onshore wind, triple solar power and quadruple offshore wind by 2030.

David Barmes, a policy fellow at the Grantham Research Institute, said the inclusion of nature in the remit, in addition to the climate crisis, was a new focus that could result in the BoE shifting or recruiting some more staff to work on that issue.

Some experts noted there are conflicts within the government between those who are more committed to the climate agenda – like energy security and climate minister Ed Miliband – and others who prioritise growth, leading Labour to tone down the green rhetoric since taking power last year.

“It’s a bit difficult to tell how much of not emphasising ‘green’ quite as much is just for the optics, and how much is actually a change in policy vision,” said Theo Harris, assistant researcher at the New Economics Foundation thinktank.

Economist Ann Pettifor said the Labour government was too much in thrall to the financial sector in the City, especially after recent financial market turbulence hit the value of the pound and sent the cost of government borrowing higher.

“Number 10 is essentially run by the right of the party and the right is scared of the markets and of the City, and feels that they have to do everything they can to placate the City,” Pettifor said.

In a letter to Prime Minister Keir Starmer from the BoE’s Prudential Regulation Authority in January, most of the focus was on promoting competitiveness and growth.

The only mention of climate was a suggestion that it wants to simplify the number of principles that the authority has to take into consideration when making regulations.

Barmes said the BoE was still doing plenty of work on the climate issue but was not talking about it as much because it had been accused of being distracted by social and environmental issues when inflation soared after the pandemic and the Ukraine war.

“The green agenda went a little bit out of fashion during the inflationary episode … The bank didn’t stop working on climate issues but started doing it more quietly.”

‘Monetary and fiscal policy should work together’

Pettifor said Reeves’ task of reviving growth was being made more difficult by the BoE’s strict focus on trying to bring down inflation. The BoE’s primary mandate is to keep inflation low and stable at around 2%, in contrast to some central banks like the US Federal Reserve which also has a mandate to promote full employment.

“Monetary and fiscal policy should be working together and not be in conflict as they are at the moment,” Pettifor said. “Andrew Bailey is actually a fiscal conservative and he’s trying to impose that policy.”

To try to rein in inflation in recent years, the BoE embarked on a policy of “quantitative tightening” to sell government bonds back to the market, in addition to raising interest rates, dampening economic growth.

“The monetary regime is clamping down on the whole economy to see inflation back down to the target, but at the same time governments need to invest public money to meet all of our climate goals and to lift the economy out of the slump and raise standards of living,” Harris said.

Harris said he hoped the government and the BoE would be able to turn their focus back to the climate issue once inflation is under control.

He said the BoE could buy bonds issued by the National Wealth Fund to support investment in renewables, a key part of the government’s industrial strategy, which could also help keep inflation under control in the long run.

“A lot of these transition investments contribute to the structural robustness of the nation because you reduce your reliability on fossil fuels which have consistently been the primary driver of inflation,” he said.

The bank should consider introducing a dual interest rate to subsidise investment in renewables, Harris added.

Barmes called for the bank to also adopt an “adaptive” inflation targeting framework to take account of the supply shocks that are likely to become more pronounced due to climate change, noting that currently there is the risk of a “doom loop” where higher inflation forces the bank to raise rates, hurting investment in renewable projects, exacerbating global warming, and leaving the economy more exposed to further supply shocks.

“The adaptive inflation targeting proposal is intended to allow monetary policy to navigate supply shocks in a more sensible way and give fiscal policy more room to prevent and mitigate these shocks,” he said.

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