Following the Paris Agreement when countries across the world agreed to step up their net-zero ambitions, the spotlight was firmly fixed on the UK as it hosted the UN Conference of Parties (COP26). This was the time for UK manufacturing to shine and demonstrate it is part of the solution to net zero, not part of the problem. The UK manufacturing sector has had a key part to play in the transition to a net-zero carbon economy, not only by cutting its own greenhouse gas emissions but also, and more crucially, through the innovative products, processes and services that are an integral part of the green industrial revolution.
The overwhelming majority (98%) of manufacturers are aware of the Government’s net-zero target. But being aware is one thing and achieving it is another. Yet the manufacturing industry is ready to step up to the challenge. 77% say net-zero by 2050 will be achievable in their business. Manufacturers are taking action, and many are already investing in process and energy efficiency improvements.
WHY MANUFACTURERS MUST PAY ATTENTION TO CLIMATE CHANGE
In its Net Zero Review in December 2020, HM Treasury acknowledged that ‘climate change is an existential threat to humanity. Without global action to limit greenhouse gas emissions, the climate will change catastrophically with almost unimaginable consequences for societies across the world’.
To tackle the challenge head-on, in 2019 the UK became the first major economy to implement a legally binding net zero target to reduce GHG emissions to reach ‘net-zero by 2050.
WHAT DOES IT MEAN FOR THE MANUFACTURING SECTOR?
In short, action is needed urgently and at scale.
Industry is one of the largest greenhouse gas (GHG) emitters in the UK, accounting for 21% of emissions, only slightly less than surface transport. The manufacturing sector itself is responsible for 11% of total UK GHG emissions (e.g, about half of the overall industry’s emissions). Buildings also account for another significant portion (17%) of the total emissions of which commercial and industrial buildings represent about half.
Net-zero means limiting overall GHG emissions to 100% below 1990 levels across the whole economy. Any remaining emissions which cannot be eliminated in the first place must be balanced by finding ways to offset GHG from the atmosphere.
In many sectors, existing technologies can reduce emissions to actual zero (e.g. electricity generation). Other sectors will face real challenges to get to zero, for example, some energy-intensive industries, agriculture and aviation. Therefore, some emissions will remain and will need to be taken out of the atmosphere through natural or technological solutions.
THE MANUFACTURING INDUSTRY IS RESPONSIBLE FOR 11% OF TOTAL UK GREENHOUSE EMISSIONS
In its Industrial Decarbonisation Strategy (March 2021) the Department for Business, Energy and Industrial Strategy (BEIS) stated some bold ambitions for the manufacturing sector:
- Two thirds (67%) of emissions from the manufacturing sector are to be eliminated by 2035.
- This must increase to 90% by 2050 from 2018 levels.
- For the remaining 10% to be offset by carbon-sequestering methods.
Net-zero is fast becoming industry’s biggest priority while juggling the existing challenges of Covid-19 pandemic and Brexit. In a workshop of over 100 members from across the country, almost half (49%) of them said they consider net-zero extremely important for their business with a further 42% considering it somewhat important.
9 IN 10 MANUFACTURERS SAID THAT NET ZERO is IMPORTANT TO THEIR BUSINESS
Over three quarters (77%) of manufacturers say they intended to set net-zero targets for their business within the next 24 months. These figures represent a major shift in attitude from 18 months ago where there was awareness of net-zero but not enough understanding to take decisive action.
77% of MANUFACTURERS INTEND TO SET NET ZERO TARGETS IN THE NEXT 24 MONTHS BUT ONLY 2 IN 10 ARE CLOSE TO ACHIEVING THIS
The scale of the issue is clear, but the sense of urgency is somewhat lacking.
Clearly, Covid-19 has taken much of the immediate priority for businesses, but these good intentions will only be meaningful if impactful action is taken shortly after the targets are set. If not tackled early, climate change will reach a tipping point, becoming impossible or very difficult and costly to reverse. The later we start, the bigger the risk. In fact, if implemented without delay, net-zero will cost less than 1% of the UK annual projected GDP over the period to 2050.
The long-term 2050 goal seems far away, but what we do this next decade will determine our success. To achieve what is needed in 2030, we need to be well on our way in the next five years.
Embracing net-zero will play a key role in boosting resilience in manufacturing businesses. The pandemic has demonstrated that manufacturers who had built sustainability into their businesses were better able to weather the storm and begin to recover faster.
If planned and implemented carefully, net-zero is a major opportunity to build back better. Manufacturers hold the key to helping others transition to the low-carbon economy. Net-zero will drive the green and digital industrial revolution, not just domestically, but also internationally as other countries awake to the need for these green technologies, products and services, all of which can be supplied by the UK to its trading partners across the globe.
Long-term climate resilience is inherent to ‘going net-zero’
The good news is that the shorter-term measures taken to build resilience against future pandemics are part of what is needed to build the longer-term resilience against climate change.
Net-zero is firstly about reducing and eliminating as many GHG emissions as possible, and only then offsetting the remainder that cannot be abated. So, what then do manufacturers need to consider when it comes to emissions?
The first step is to select a baseline (e.g. measure or calculate the last two years’ emissions) and set a target to reduce carbon emissions that is relevant to the business, possibly guided by a sectoral target (net-zero by 2050 or earlier).
Carbon emissions will come from the three areas of operations of a business – upstream, core direct company, and downstream activities – and they will be accounted for three ‘scopes’.
- Scope 1 emissions (directly generated by manufacturing operations) are under the business’ direct control so energy and process efficiency management is key to reducing them.
- Scope 2 emissions (indirect, from purchased energy) will depend on the carbon intensity of the energy supplier, so mostly on the choice of supplier.
- Scope 3 emissions (value chain): are likely to constitute the bulk of the emissions, and are not directly under the business’s control, so more difficult to manage. They are, however, influenced by supplier selection, supplier development, product design and marketing. The first step is to make an inventory of these emissions and deal with them at a later stage, although there are actions that can be taken immediately depending on the level of the organisation’s commitment.
What is the route to get to net-zero?
There is no single route, and it will be an iterative process as emission reductions are tracked and reviewed over time. Make UK is working with Inspired Energy Plc to produce a roadmap for the manufacturing sector to get to net-zero. However, there are some starting blocks that manufacturers can begin to build on:
- Introducing low-cost energy and process efficiency measures such as automatic door closures, variable speed drives, LED lighting with motion sensors and small process changes (e.g., programming temperature controls)
- Changing behaviours (e.g., not lighting the whole factory up when not needed or making sure that idling engines are turned off)
- Creating a ‘green fund’ with the savings made over the first two years to use for the medium/high-cost investments such as process improvements, equipment replacement (e.g., compressors, boilers, pumps, ventilation/cooling systems), or onsite generation which will reduce carbon emissions more significantly.
- Focusing on building improvements which are important but can be a challenge particularly when leasing buildings and sites which may require permissions for on-site generation (solar panels) or even when owned in the case of very big old spaces.
- Carbon offsetting should be considered as a last resort when all the other measures to reduce the emissions have been exhausted.
Most manufacturers have already taken measures contributing to reducing their carbon emissions, even if they were not necessarily intending to tackle net zero in the first place. Some are replacing or upgrading equipment, conducting energy surveys, submetering and a handful are already under a SECR6 or ESOS7 obligation.
Net-zero will inevitably reduce costs in some areas. Indeed it should be possible to see quite short paybacks (i.e. six years) even for major investments as new financial products and models emerge. However, cost-cutting should not always be the motivator. Some of the major benefits can only be reaped after more substantial investments.
VALUE CHAIN (SCOPE 3) EMISSIONS
The interdependency of all factors in the value chain has been highlighted by net-zero, just as the Covid-19 pandemic has done. Scope 3 emissions are those of the value chain, both upstream and downstream. They usually constitute the largest proportion of an organisation’s emissions. Scope 3 emissions will always be someone else’s scope 1 and 2 emissions. Conversely, every company reporting on its own carbon emissions is key to the overall net-zero objective because once everyone has dealt with their scope 1 and 2 emissions, it will become more straightforward to access scope 3 information.
Why manufacturers should engage with their value chain
The low-carbon economy is one of the most significant opportunities for manufacturers to innovate and create new products and services to help all the players in the value chain. Although they are outside a manufacturer’s direct control they can be influenced, hence the importance of dealing with them too.
Managing scope 3 emissions will drive suppliers, customers, and employees towards the low-carbon economy, enabling manufacturing businesses to maximise mutual benefits and reduce costs throughout a like-minded and therefore effective value chain. For this, engagement with the value chain is necessary.
However, this can be a daunting prospect given the sheer size of the value chain. During a workshop with manufacturers, Make UK found that only 14% of members engage with their value chain. Moreover, six in ten manufacturers do not think that their carbon footprint has any influence on their ability to conduct their sales activity. This may be because the green economy is still in its infancy.
Pressure from the value chain is already starting
Major manufacturers who will have themselves made net zero commitments and made changes to their own operations to help bring everyone along the line to achieve net-zero will be relying on their value chain data to inform their own scope 3 emissions. So, for those supplying these key customers, being able to respond to their requests for information will be key to maintaining their competitiveness.
Manufacturers are innovative and want to be part of the green industrial revolution. Today, we have a markedly different and encouraging picture from just 18 months ago with over half (51%) of manufacturers already having acted specifically on net-zero. In addition, amongst those who had no intention to do anything about net zero, the vast majority have in fact already taken measures which could be contributing to reducing their scope 1 and 2 emissions (reducing their energy intensity by increasing their energy efficiency).
Having engaged with many manufacturers on this topic over the last few months, Make UK has found for the most part manufacturers felt more inclined to engage with their value chain on their scope 3 emissions and many have been inclined to explore net-zero in more depth.
Apart from the lack of knowledge, the other main barrier to taking action is access to finance, and this is particularly the case for SMEs, who are already burdened by the financial consequences of the Covid-19 crisis and the new EU Trade and Cooperation Agreement (TCA) conditions.
About 40% of carbon emission reductions for the manufacturing sector are expected to come purely from the deployment of efficient and best available technologies, so investing in energy efficiency and process improvement is very important. This can be done by applying for grants and loans or by taking advantage of tax incentives.
Grants and loans
National funds: one of the most important of these is the Industrial Energy Transformation Fund (IETF), open to businesses of any size in England, Wales or Northern Ireland and targeted at existing industrial process energy efficiency and deep decarbonisation projects in the manufacturing sector. It is designed to complement other government programs of innovation and early demonstration support with feasibility studies and deployment projects of technologies proven to work and ready for commercialisation on industrial sites.
Other national funds such as the Industrial Energy Efficiency Accelerator exist to help resource low-carbon innovation and efficient technology processes, the Heat Networks Investment Project to help connect buildings to a centralised heating system and manufacturing technology that contribute to the green economy.
Make UK members comment that the projects providing a route to commercialisation are the ones for which they lack the most support, rather than the earlier innovation projects. Indeed, the current EITF eligibility criteria, although recently adjusted to include smaller companies (250 employees), still deny access to many SMEs because the project size must be over £100,000 per site. Also, the fact that the fund is accessed via competition is deterring many.
Despite the myriad of regional funds available (which are somewhat unevenly distributed), SMEs often do not have the resource to investigate each one of these and to identify the one that is right for them.
If we are to succeed in decarbonising the bulk of our manufacturing sector, which is composed of 80% of SMEs, what is needed is a streamlined national funding system. This should be accessible to all companies of all sizes and from any region, covering smaller ‘close to commercialisation’ projects (in the order of the £10,000s), as long as they aim to reduce carbon emissions or improve energy efficiency (of their processes, buildings).
Not only should these funds be accessible to energy-intensive (dispersed) sites, but they should also help the less energy-intensive SMEs in dispersed sites, the all-important non-foundation industries such as automotive, food and drink, electronics, which according to the Industrial Decarbonisation Strategy still emit 25% of industry’s total emissions.
– Environment levies have been increasing significantly as the UK moves away from fossil fuels but for large emitters from energy-intensive industries there are exemptions and compensations for these costs. Smaller, but still high (but not necessarily intensive) emitters (e.g., metal processing) are not eligible to these compensation schemes and as a result are unfairly penalised without any recourse to any alleviation. These SMEs are essential to maintain a thriving value chain in the country and need as much help as they can to decarbonise their operations.
It is also possible to earn revenue from energy management, by engaging in demand-side flexibility, if the operations allow the ability to control energy usage at short notice, or to generate energy to balance the supply and demand of the National Grid and the District Network Operators. However, this is complex and specialist help is advised to ensure the adapted solution is found.
– Tax incentives for net-zero projects: Changes to the capital allowances scheme were introduced in the Budget which will help with net-zero projects. The £1M annual investment allowance was extended to December 2021 so it is worth accelerating investments to fit them into 2021 to take full advantage of the extension. The 130% super deduction was introduced on main rate pool assets and qualifies for the £1M investment allowance. In addition, the loss relief carry-back has been extended from one to three years. A 50% first-year allowance for Special Pool assets e.g., all plant and machinery, integral building structures were also introduced. These can be claimed even for projects involving some grants (although the grant element itself cannot be included in the claim).
The 130% super-deduction has been welcome and Make UK’s analysis from earlier this year suggests that a quarter of companies will bring forward investment plans in light of the new super-deduction and a further quarter will increase investment plans. That said, it is of limited help as it is in place for only two years, which does not match the longer investment cycles needed for this type of capital expenditure (e.g., for plant machinery or other technologies) which usually last at least 10-20 years. If a piece of equipment has not reached its end of life before the term of the scheme and provided the expected return on investment there will be no or little incentive to replace it.
– Manufacturers have welcomed the R&D Tax relief for scientific or technological projects with no obvious scientific or technological solution and more projects could be eligible than at first glance: while buying and installing of capital equipment does not qualify for R&D tax relief, if its installation involves engineering challenges which have no existing solution, then it may well qualify.
– The Patent Box scheme gives access to a reduced corporation tax rate of 10% on relevant intellectual property profits (e.g., sales of products/components, licences…).
REPORTING AND COMMITMENTS
Making a net-zero commitment makes a business truly credible. It also sets the process of aiming towards net zero in motion and gives an understanding of what the journey entails. Reporting formalises the commitment, giving it context and structure, and doing it publicly drives accountability. Therefore, as soon as some action has been taken, it should be reported and communicated, and for those who have already acted before the baseline years but not communicated anything about it, there is nothing to stop them from reporting their good progress to date.
Commitments are mostly voluntary
From our discussions with manufacturers, we have found that most businesses are driven to implement a carbon reduction plan mainly to build or maintain their reputation and keep their competitive edge depending on the market sensitivity to carbon emission reduction, combined with some mandatory emissions reporting.
Indeed, customers are increasingly expecting businesses they work with to address their impact on the environment and mandatory schemes (e.g., SECR322 or ESOS4) put the company’s emissions directly in the public eye, although these only apply to a small number (albeit larger) of emitters.
The choice of the scheme under which the reporting will be done depends on whether carbon emissions are measured or not: science-based targets (e.g. quantitative data) are required by some initiatives (mainly the SBTI23 and B-Corp) while qualitative information is sufficient for the Carbon Disclosure Programme (CDP). Scopes 1 and 2 are the only ones legally required so this is where the focus should start. There is no legal enforcement mechanism if companies do not reach their target, but it is in their interest to build their sustainability credentials to maximise their competitive edge.
There is also a clear direction from government (despite the lack of coherence) as the policy landscape is rapidly being adapted to cover net-zero, through the introduction of new policies or by expanding the scope of existing ones to include more companies. Finally, rising carbon and fossil fuel/transport costs are also a significant driver for businesses to move away from fossil fuels.
Communication is critical
The reasons for companies to communicate are multiple, e.g. being under mandatory compliance obligations (SECR25, ESOS, TFCD), wanting to make public statements for PR reasons (in reaction to something or to lead/follow others, including roadmaps), voluntarily as this makes good business sense (e.g. Race to Zero). We found that over a quarter (28%) of manufacturers planned to disclose their net-zero ambitions and progress and that they communicate (or want to communicate) mostly with their customers and employees, followed by capital providers (lenders/investors,) and then their suppliers.
Potential employees, and particularly the younger generation looking at prospective employers’ environmental credentials, so it is vital to communicate these to attract talent. Sharing internally the company’s net-zero plans, engaging staff and encouraging behaviour change are all key success factors, but whatever is communicated must be backed up by real data.
Without culture change, nothing happens
Culture change takes time and requires real engagement with people. It works best when net-zero is embraced by the top levels of management and embedded in everything the company does. In many big organisations, it is now quite common for executive remuneration to be linked to environmental performance. It is essential to involve staff directly, so they are engaged at a personal level. Data is key to demonstrating to the employees the impact of their efforts, gaining their trust and understanding.
Make UK is committed to supporting its members on this challenging journey. Supporting members through a series of workshops, Make UK provides manufacturers with the basic information they need to get started on, or to further their journey, to net-zero, signposting them to guidance and tools as well as encouraging them to sign up to the Government’s campaigns on Race to Zero.
The workshops that Make UK holds with members aims to demonstrate that manufacturers can help our planet and that many actions can be taken in a cost-neutral manner, ultimately leading to profit and long-term resilience.
Make UK explores the key considerations for manufacturers as they either start or accelerate their net-zero journey. It looks at emissions, funding, commitments, and reporting requirements. It also offers recommendations to Government to ensure that the UK manufacturing industry does not just have all the tools and techniques at its disposal, but the right policy environment, with which to achieve net-zero.
Make UK is backing manufacturing – helping our sector to engineer a digital, global and green future. From the First Industrial Revolution to the emergence of the Fourth, the manufacturing sector has been the UK’s economic engine and the world’s workshop. The 20,000 manufacturers represented by Make UK have created the new technologies of today and are designing the innovations of tomorrow.