The Treasury, sustainability, green finance and long-term decision making


The UK government will next week publish its Green Finance Taskforce conclusions. The Taskforce was set up to develop green finance policy and, in its words set “the direction of travel for long-term policy development” and to “help deliver the investment needed to meet the UK’s Industrial Strategy and Clean Growth Strategy”.

In the past six months we’ve had a number of UK strategies that link up the environment, sustainability, economic growth and the world of finance. The government and BEIS launched its Clean Growth Strategy (at which the birth of the Green Finance Taskforce was revealed), the Industrial Strategy launched its “Grand challenges” that included “Clean Growth”  and the Bank of England and Michael Bloomberg produced their long-awaited paper on climate finance and climate risk (via the TCFD). 

As it might readily concede, government has a patchy policy record on long-term decision-making, shirking difficult long-term decisions around taxation, pensions or care for the elderly (as the Resolution Foundation and IFS regularly point out) to suppressing headaches around challenges such as the future of party political funding.

And government has seldom fared much better or appeared united around decisions on the environment and sustainability. During the Gordon Brown Treasury years and into the coalition government period (around the future of the Green Investment Bank), there were whisperings of tensions between then DECC and HMT on environmental, energy and climate related decisions, and conflicts are said to have continued into the current government including those rumoured between No.10 special advisers and BEIS. 

In 2016 the Environmental Audit Committee (EAC) conducted an inquiry into the Treasury and sustainability whose conclusions – lost in the hubbub and turmoil around the decisions to leave the EU – criticised the Treasury’s decision-making and evaluation processes on sustainability and the environment. The EAC said the Treasury had “ridden roughshod over other departments’ objectives, changing and cancelling long-established environmental policies and projects at short notice with little or no consultation with relevant businesses and industries.”

The report suggested that the Treasury did not understand sustainability, that it did not sufficiently incorporate sustainability into its long-term decision making or economic evaluations, and that its inconsistent pronouncements around sustainability undermined the policy decisions of other departments and as a result weakened investor and business confidence.

The abolishment of Zero Carbon Homes (criticised by the Committee on Climate Change (CCC) and now regretted by many politicians on left and right) was a decision that the EAC suggested had “surprised and in some cases angered many in the industry – including the construction industry – because it had been working towards implementing the policy for over a decade” and that there was “a risk that costs to the economy and householders will increase in the long-term as a result of the last-minute decision because new homes will need to be retrofitted to improve their energy efficiency” at a later stage so as to meet climate targets.

Another EAC example of poor Treasury decision making was extinguishing the £1bn programme on Carbon Capture and Storage (CCS), where it said “the Treasury’s decision to cancel the CCS competition will delay the roll out of CCS in the UK and will increase the cost of deploying it in the future. Without CCS it could cost an additional £30bn to meet the 2050 carbon targets.”

The Clean Growth Strategy, backed by consistent advice from the CCC on the need for energy efficiency and CCS investment, has warmed to the long-term possibilities around these issues and how the UK could lead on them, but arguably a lack of Treasury support has disabled BEIS from going further in committing to the policies. It is ironic that the CCC’s advice has perhaps in the past been ignored by the Treasury when the CCC is made up of a large team of economists and has a primary mission to look at decarbonisation efforts at “lowest cost” for the UK.

How could the Treasury improve and support sustainability efforts more? The EAC’s report made several recommendations including: a greater Treasury focus on accountability and making its sustainability assessments more transparent (they were accused of being opaque), reinstating a full CCS investment programme and zero carbon homes, including wider costs and benefits in its calculations and incorporating more environmental information into spending decisions, making more use of relevant independent advisory bodies (such as the CCC) during spending reviews to scrutinise bids and ‘green-check’.

How effective might these changes be? When giving evidence to the EAC, Treasury officials did justifiably point out that they can often provide advice and evidence on decisions but in the end, it is the politicians that make the final decisions. However, there is scope for official and institutional effort to improve the economic assessments.  As the EAC has said: “Treasury’s technical and political framework for assessing environmental interventions is geared towards favouring short-term priorities at the expense of long-term environmental sustainability, even when it could lead to higher costs to the economy in the future.” And the Treasury have already made changes such as amending the Green Book and incorporating natural capital considerations. 

Yet, it has now been 18 months since the EAC recommendations were made, and in March 2017 the EAC castigated the “far from outstanding” Treasury for its “deeply disappointing” response and asked for a further reply. They have heard nothing back for now over a year.

But green finance and the alacrity of the financial sector to become involved in this issue (undoubtedly Mark Carney and the TCFD has helped) show that the Green Finance Taskforce could perhaps herald change, and the Treasury could demonstrate it is changing the way it thinks about sustainability, as well as appreciating the wider benefits of considering sustainability in economic decision making. The taskforce will report on many issues including boosting green mortgages, climate finance and making recommendations around climate risk disclosure. It will mostly focus on leveraging external investment and finance into sustainability, but it is also important that future government decisions and policymaking do not deter or diminish private investment. The report will be a good marker on where the Treasury is going.

Moreover, the Treasury has been under sustained pressure about its attitude towards long-term and strategic decision making, with some ex-insiders saying it ‘doesn’t do strategic’ and others, such as the Labour commissioned Kerslake review, asking for significant reforms in the way it operates, including more focus on the macro-economic and less ‘disempowerment’ of other Whitehall departments. And this pressure and a changing political culture around sustainability, may just bring change.  In a recent speech, Shadow Chancellor John McDonnell pledged that under Labour the OBR would include climate risk assessments in its economic forecasting.   

Within a few months the National Infrastructure Commission will make its first assessment on where major and long-term infrastructure spending needs to be made in the UK – one of its first declarations is likely to be around energy efficiency policy, which it now regards as an infrastructure priority. The big question will be to what extent the Treasury listens to its recommendations and whether it is now beginning to absorb the huge impact on the economy that sustainability can have.

But there are also wider external factors that can explain possible Treasury weakness on sustainability: much academic work acknowledges that rational long term decision-making is much more difficult than short-term, and Treasury decisions on the environment may also be related to the culture that exists within the department: 20th century traditional economics, dominant in Treasury thinking – did not pay much attention to resources and the environment in its analyses. And fashions in economic thinking are fast changing. Interestingly former Chancellor Ken Clarke commented on the Treasury: “it’s a brilliant department, the best department I ever served in, it’s like an Oxbridge college: brilliant minds engaged in open debate and completely detached from the real world”. Might it be that this detachment, has also meant it has institutionally detached itself from anything other than what it sees as pure economics when taking decisions?