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Environmentalists often point out that the Treasury has a chequered record on environment and climate issues. “They [The Treasury] treat it with suspicion” says Chris Stark, the Chief Executive of the Committee on Climate Change (CCC).[1] And it’s true that, over the past decade, HM Treasury’s climate and environment policymaking has been patchy.[2]
The House of Commons’ Environmental Audit Committee (EAC) examined HM Treasury’s relationship with sustainability in 2016 and was less than complimentary. Accordingly, the Department’s outstanding policy contribution was its work on the Stern Review in 2006 but since then, policy has been heavily influenced by the whims or motivations of particular chancellors.
The Treasury needs to return to having a much more active role across government and particularly on decarbonisation and industrial strategy, as the changes required to achieve net zero emissions are fundamental and the impacts of failing on the UK economy will be even greater.
HM Treasury appeared peripheral in the decision making and policy development process when the Government’s new Industrial Strategy was developed in 2017 – this is perhaps one of the reasons it has almost been forgotten. A new overall government economic strategy for decarbonisation needs to be developed that will envelop much of the original objectives of the 2017 Industrial Strategy and one which dovetails with the stimulus and recovery responses to the current public health crisis.[3] Decarbonisation plans for each individual government department should be secondary to an overall strategic, whole-of-government plan. Each department should be obliged to conform to it.
There are signs that the culture is changing. Last year, the Treasury initiated an internal review on how to decarbonise the economy, with a dedicated and relatively senior team to lead it, and it has begun to make positive sounds about a bevy of climate-related issues, from energy efficiency to Electric Vehicles (EVs), even modifying its ‘Green Book’’ to include natural capital, and for the first time, looking for a new national infrastructure strategy with net zero incorporated as a long term goal.
The second visible change has to come in the policy response to the COVID-19 pandemic.
The pandemic has provoked a rapid reaction from Treasury. Increasing spending in order to prevent the collapse of UK businesses, alongside similar responses from governments worldwide, demonstrated the capacity of the state to act quickly, decisively, and arguably effectively. It also shows that the Treasury does have the capacity to spend at scale when crisis looms. In monetary policy (the Bank of England’s responsibility) very low interest rates also mean that, decades from now, public debt can be repaid.
The last few weeks have so far proved the fact that governments and central banks have it within their power to defeat an even more damaging crisis such as irreversible climate change. The current crisis should prompt the Treasury to reassess the severe economic risks which climate change poses.
If almost everyone agrees that more action is required to reach the ambitious goal of a net zero economy by 2050, along what broad themes should action be taken?
First and foremost, an economic recovery plan is urgently required to dig the UK out of its economic hole. It is absolutely critical that this plan aids – without hindering – the UK’s full transition to a net zero carbon emissions economy.
Certain sectors of the economy will be hit harder than others by the current crisis and unemployment will almost certainly rise significantly, so any focus must be on how to ease the labour market. And despite the prospect of’onshoring’ returning some employment to the UK, growing automation and robotics means that employment levels may never return to recent levels. The UK lags behind other major G7 economies in terms of infrastructure investment, and this is where the Treasury should promote rapid scale up. [4]
To target those suffering the most, and for speed, it should first consider an energy efficiency and heat programme for UK homes (especially while there is overcapacity in the construction sector). Rapid improvements to low carbon public transport infrastructure – where passenger congestion may now become an even bigger issue – and improving infrastructure for EVs along with optimising fiscal incentives and regulation should follow. Regulation around vehicle emissions and air pollution and projects which grasp the benefits of public health, low carbon and economic growth should be prioritised.
A prolonged period of ‘lockdown’ and increased remote-working could have a lasting impact on aviation and road traffic, and after the pandemic the Treasury should not overly favour carbon intensive sectors, instead considering a Universal Basic Income which shelters those who suffer from employment changes or job loss. Treasury bolstering and extension of the Carbon Floor Price (getting the carbon price right is obviously crucial) could help focus decarbonisation policy overall, especially in a time of falling EU carbon prices. All revenues should be redistributed to those hardest hit by the labour market transformation and shock.[5] Any tax relief for energy-intensive sectors must now be conditional on finding genuine low carbon solutions, but long-term international cooperation on this is also crucial. And planning for the ‘hardest to abate’ sectors, the Treasury should be exploring incentives for using hydrogen for freight and industry, prioritising it now for particularly hard-hit sectors such as steel or cement.
Important costs are involved in decarbonisation but the assumption in former Chancellor Philip Hammond’s leaked letter[6] to then Prime Minister, Theresa May, that these will be entirely or largely borne by the public sector is entirely unfounded[7]. There are also economic benefits to decarbonisation, and to harness this, a sophisticated cost-benefit scheme should be drawn up and be subject to regular revision.
If anything, economic decarbonisation will accelerate growth when it is most needed. The costs of acting too late will be far greater than all others, mirroring in some ways the lack of resilience or preparedness of the COVID-19 crisis currently upon us. The Treasury-led 2006 Stern Review was the best demonstration of this possibility. Much academic work also acknowledges that rational long-term decision making is the most difficult to carry out well and this has been the problem with developing climate change policy. The current Treasury review has been explicit that it intends to instil a long-term approach – the stakes are higher than ever and all analytical tools should be mobilised to confront an existential threat. To be clear, absolutely no cost-benefit analysis worth its salt would ever consider runaway environmental collapse as the cheaper option.
Changes in Treasury practices are needed in order to adapt to the huge demands of effective decarbonisation. The Budget and the Spending Review, where departmental budgets are set, are crucial policy levers. Currently, HM Treasury uses a ‘scorecard’ to measure how each new policy is aligned with public sector net borrowing. Setting the scorecard against a net carbon contribution could fundamentally change policymaking, so that every Treasury policy had to be evaluated against its carbon impact,[8] guaranteeing that even when rapid policymaking is needed – as in the current pandemic – that decarbonisation is centrally considered, not just an ‘add on’. The Government Economic Service could also give greater focus to environmental and climate training for officials, and to ensure structural changes are consistent, further changes are needed to the Green Book[9].
Beyond installing a carbon scorecard, which would enhance ministerial scrutiny and accountability, a remedy for more consistent climate policymaking at all levels would be to further centralise climate policy within the department’s remit.[10] The title and responsibilities of the Chancellor could, for example, be amended to include climate change, with the Treasury becoming the lead department on decarbonisation policy. And in line with new thinking on how organisational leaders work best, Permanent Secretaries could be restricted to fulfilling two or three central objectives for their institutions, one being a decarbonised economy.[11]
President Macron recently attempted to give more emphasis to climate in government by designating the energy minister as the third most senior in government. This failed because even though climate rose in the policy hierarchy it was not sufficiently part of the finance minister’s remit. Instead, the Treasury should be the climate leader within government, not its auditor. Without climate policy centralised and integrated into financial and fiscal levers, the capacity for change will be inadequate, precisely because climate action is fundamental to the UK’s future functioning and economic viability.
Alasdair MacEwen is the Director of Culmer Raphael, a research, public affairs and communications consultancy. He was formerly a UK Treasury official.
[1] House of Commons, “Treasury committee: Oral evidence: decarbonisation and green finance – the economic opportunity, HC 2233”, http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury-committee/decarbonisation-and-green-financethe-economic-opportunity/oral/103489.html (2019).
[2] Examples include the cancellation of ‘Zero carbon homes”, and the more recent Sajid Javid omission in November 2019 of mentioning Paris climate targets in recommendations to the FCA and Bank of England: https://www.ft.com/content/6a6ad92a-0081-11ea-be59-e49b2a136b8d
[3] The “Clean Growth Strategy” was in 2017 and was principally led by BEIS.
[4] House of Commons, “Infrastructure policies and investment”, https://commonslibrary.parliament.uk/research-briefings/sn06594/ (2019).
[5] A tax strategy in relation to carbon is apparently part of what the Treasury net zero review is exploring. Historically, carbon pricing strategy has been dominated by politics with little coherence and consistency across economic sectors.
[6] Jim Pickard, “UK net zero emissions target will ‘cost more than £1tn’”, Financial Times,
https://www.ft.com/content/036a5596-87a7-11e9-a028-86cea8523dc2 (2019).
[7] Ambrose Evans-Pritchard, “Hammond’s £1 trillion bill for hitting net zero is innumerate nonsense”, The Telegraph, https://www.telegraph.co.uk/business/2019/06/12/hammonds-1-trillion-bill-hitting-net-zero-innumerate-nonsense/ (2019).
[8] For more explanation of the ‘scorecard’ see OBR briefing no 6 (March 2014): https://cdn.obr.uk/27814-BriefingPaperNo_6.pdf
[9] The NCC said that it had “found limited evidence of natural capital being considered in policy appraisal” after 2018 Green Book changes (See: January 2020)
[10] The Environmental Audit Committee’s inquiry revealed that, however thorough the analysis and advice officials gave, Treasury ministers didn’t always follow it – contributing to often confused and inconsistent climate policy. See EAC Report, November 2016: https://www.parliament.uk/business/committees/committees-a-z/commons-select/environmental-audit-committee/inquiries/parliament-2015/sustainability-hm-treasury-inquiry-15-16/
[11] See the convincing research from ex-government advisor Elsbeth Johnson “Step Up, Step Back, How to Really Deliver Strategic Change in your organisation” which shows that: https://www.bloomsbury.com/uk/step-up-step-back-9781472970640/
