The Seventh Carbon Budget: A foresight into climate risk and opportunity

The UK’s Climate Change Committee (CCC) has just released its Seventh Carbon Budget, a bold plan to cut greenhouse gas emissions by 87% by 2040. But what is a Carbon budget?

Carbon budgets are five-year carbon emissions limits set by the UK Government. The Climate Change Committee is an independent statutory body established by law to advise Government on its progress to reducing GHG emissions and preparing for the impacts of climate change. The seventh carbon budget, sets the carbon limit between 2038 and 2042. It’s not a government report—but an independent science based steer/ recommended roadmap for how the UK can transition to a low-carbon economy and achieve it net zero targets. Importantly, it is achievable, but requires rapid action. Something which has stalled action against previous budgets.

The pathway provides industry a clear opportunity to guide their own decarbonisation strategy, and also their business strategy transition plans for new growth in markets.

What does the carbon budget mean for businesses?

There is a lot of information that covers domestic, infrastructure and business targets recommendations. Here are the top 5 factors we see as being important for business.

The focus on electrification is central to the CCC’s vision, with a fully decarbonised power grid aimed for by 2035. For businesses, this signals a shift that is already underway. There will be increased energy infrastructure costs in the short term which will likely be passed on to customers. Therefore, energy contracts should be reviewed, and wherever possible, businesses should be looking at renewable sources—whether that means switching to a green supplier or even generating power onsite through solar or wind will create more stability. But it is predicted that a low carbon energy supply will be cheaper per unit of electricity than the high-carbon alternative.

Transport is also a major factor. The future is electric, and it’s arriving fast. The recommendations are that by 2030, nearly all new vehicles should be electric, and by 2040, the vast majority on the road will follow suit. However, it is likely that in reality, this gets pushed back.  If you manage a fleet, you’ll need to plan for the switch sooner rather than later. That includes installing charging infrastructure and taking advantage of government incentives while they last. Logistics-dependent businesses will need to ensure their supply chains are also adapting.

For those operating or owning buildings, particularly older ones, heating is a growing challenge that has been ignored by successive Governments. The mid-2030s could mark the phase-out of gas heating, and heat pumps are set to replace traditional systems. While the upfront costs may seem daunting, it is important to be building them into your medium-term life cycle CAPEX plans and align these to your climate related risk transition financing now. This will prevent a costly rush later. Businesses should also keep stock of building policies that will drive decarbonisation and be engaging with landlords to understand how regulations (when announced) will affect them. It is likely that property owners see business tenants vote with their feet, if no action is taken. If high carbon alternatives in properties are not phased out over time in line with their own net zero targets, they will seek alternative facilities.

In industrial sectors, electricity aims to meet 61% of energy demand up from 26% today. Processes that rely on high-heat combustion must find lower-carbon alternatives. Electric boilers, ovens and furnaces and heat pumps are required to electrify UK manufacturers. Businesses should start assessing their needs now to avoid disruption down the line.

Much has been hyped about the easy shift to hydrogen in heating and transport. The CCC “see’s no role for hydrogen in buildings heating and only a very niche, if any, role in surface transport”. Therefore, this means companies should sit back and expect that they don’t need to take action.

Businesses should be taking heed of the carbon budget as part of their risks and opportunities assessment. The UK economy faces both challenges and growth opportunities – particularly in electric-based products, energy storage, and other technologies that support the transition to a low-carbon future. Green finance is also a UK strength that will likely see growth. The UK’s net zero economy has been growing rapidly, contributing £83.1 billion in gross value added and supporting nearly 951,000 jobs across the country. Businesses in this space are seeing higher productivity and wages, making it an attractive area for growth and investment. Investor confidence is strong in net zero. In 2023 alone, £23 billion was invested in net zero businesses, with £20.1 billion coming from foreign direct investment, a 47% increase from the previous year.

This level of capital is fuelling innovation in renewable energy, electrification, and low-carbon technology, creating new opportunities for businesses to engage with sustainable practices and position themselves at the forefront of the green economy. But industrial sectors such as cement will face extra costs to eliminate emissions – which will lead to knock on effects in other sectors such as the construction industry. Therefore, the CCC recommends policies to help the transition for certain industries. UK manufacturers with the right mindset could decarbonise early and take advantage of growing global demand for low-carbon goods, rather than being stranded in shrinking markets for high-carbon goods and services.

Challenges from previous carbon budgets

While the Seventh Carbon Budget sets ambitious goals, it’s important to acknowledge that previous budgets have faced significant challenges. Inconsistent policy support, delays in infrastructure development, and uncertainty around regulations have often slowed progress. Businesses have frequently struggled with unclear government incentives, delaying the need to tackle heating in buildings to successive Governments, making it difficult to justify long-term investments in low-carbon technologies. Additionally, economic disruptions—such as the global financial crisis and the COVID-19 pandemic—have shifted priorities, stalling planned emission reductions.

The lesson from past setbacks is clear: a stable policy environment and strong government leadership are crucial for businesses to have the confidence to invest. But businesses need to use this information to map their climate transitions. Starting with the risks and opportunities, impacts and dependencies, and building a vision of what their business will look like throughout the carbon budget periods. Without long-term planning, there is a risk that companies will delay action, increasing the likelihood of future regulatory shocks and rushed transitions. The Seventh Carbon Budget aims to provide a clearer framework, but businesses will need to remain proactive in their strategies to ensure they are not caught off guard.

The business case for action

Beyond compliance, businesses that act now stand to benefit from enhanced investment opportunities, increased market competitiveness, and improved long-term resilience. The green economy is attracting vast amounts of capital, with firms that take decisive action securing a stronger foothold in the future market. Additionally, businesses that innovate and invest in sustainability early will have the advantage of shaping industry standards and leading the transition, rather than scrambling to catch up later.

For businesses wondering what to do next, the first step is to understand their current emissions and where the biggest impacts lie. From there, determine your marketplace climate risks and opportunities, along with those associated to your operations, and the financial impacts that they can have. This will lead to the development of a transition plan. For example, it could prioritise new services, electrification, and efficiency in operations, and sustainable sourcing. Staying engaged with policymakers and industry groups will also be key, ensuring businesses are prepared for the inevitable regulatory shifts.

The Seventh Carbon Budget is more than a government recommendation—it’s a glimpse into the future of business in the UK. Those who adapt early will thrive, while those who hesitate risk falling behind.