Commentary

Putting Net Zero Testing at the Core of UK Tax and Spending Measures

Oscar Warwick Thompson, Head of Policy and Communications at UKSIF, calls for a net zero test for government fiscal policies. 

Similarly to the reaction from many business groups, commentators, and others, last month’s Spring Statement from the UK Chancellor of the Exchequer came as a disappointment to many of us working in the sustainable finance sector. 

While the Spring Statement is generally a low-profile event focusing on government’s response to the latest forecasts from the Office for Budget Responsibility, the Chancellor on this occasion delivered notable tax and spending measures amid pressures to address the ‘cost of living’ crisis facing households. Given this reframing and high expectations from observers in advance of the Spring Statement, UKSIF hoped for greater ambition on measures shaping the future growth of the green economy and putting the UK on a firmer path to meeting its 2050 net-zero target.  

We did see a positive announcement scrapping value added tax (VAT) for the installation of certain energy-saving materials, such as heat pumps, solar panels and roof insulation – a welcome measure to boost energy efficiency in homes and promote the UK’s energy security. There were also tax breaks to help businesses to reduce emissions from their buildings. Taken together, these measures send the right signals and reflect the pressing need for the UK’s building stock to be more aligned to net zero.  

However, these measures alone will not drive the dramatic improvements in energy efficiency necessary to achieve the UK’s emissions goals.  

Energy security strategy 

The decision to reduce fuel duty on petrol and diesel by 5p per litre for one year (there is a strong chance this will be retained ahead of the next election in 2024) was particularly unwelcome. 

Moreover, a number of signals from government in this week’s British Energy Security Strategy, such as a renewed commitment to approve new oil and gas licences in the North Sea, highlight the need for a far more ambitious approach on fiscal policy. An approach that can drive forward at pace the decarbonisation of the real economy at the urgency and scale needed. UKSIF believes the UK’s fiscal policy should more clearly recognise the close interlinks between the twin ‘cost of living’ and climate change crises we face, as well as the necessity of safeguarding the UK’s energy security in light of Russia’s invasion of Ukraine.  

A good example of how these important links are seemingly being neglected by government can be seen in the one-off rebate to reduce households’ energy bills from this October, which will cost the Treasury around £9 billion. Although offering swift relief to households, it is effectively a ‘one-off hit’.  

With energy prices expected to rise much further, UKSIF believes there are far more effective, and cost-efficient, ways to address in fiscal policy the series of crises the UK faces. These include a comprehensive programme to boost energy efficiency in homes (a key omission in the Energy Security Strategy) to bring forward the UK’s 2035 target for all homes to achieve an energy performance certificate (EPC) rating of C or above. Such a step could meaningfully alleviate the ‘cost of living emergency’, with energy efficiency measures protecting those on low incomes from high energy bills. This group spends three times as much of their household budgets on energy as the richest families, according to the Resolution Foundation 

Net zero test 

A new commitment to promote energy efficiency in homes, helping remedy the notable failures of the previous Green Homes Strategy, could reduce families’ energy bills for years to come, help save on energy use and reduce our reliance on oil and gas imports from abroad. Additional energy efficiency measures should be considered, including those that could help ‘flatten’ energy demand in households, ensuring energy capacity can be reduced at certain peak times of the day. 

The very narrow focus adopted in the Spring Statement and lack of recognition that a ‘greener’ economy can help address the cost of living makes the case much stronger for consideration for a ‘net zero test’ to be applied to government’s policy decisions.

At UKSIF, we have been calling for some time for every Budget Statement delivered by the Chancellor to include a dedicated section on net zero, highlighting how the tax and spending decisions announced bring the UK closer towards a net zero future, mirroring the net zero test called for by many groups. We hope this would, in time, lead to a far firmer expectation of Treasury that each Budget, and indeed other fiscal statements, have net zero at their core. In time, we would like to see how a net zero test could be extended to nature, too. 

A net zero test that is applied to all tax and spending decisions announced in the Spring Statement, Budget and Spending Reviews could avoid various missed opportunities we and others have noted at recent fiscal events. Given that government spending represents more than 40% of national income, it is critical public funding is being invested in measures that are safeguarding the environment and promoting a greener economy, as opposed to funding activities harming the planet and incentivising negative behavioural changes. 

The UK Climate Change Committee (CCC) has, on a number of recent occasions, called for a net zero test to be introduced to ensure all UK policy decisions are subject to a rigorous assessment of how they contribute to meeting net zero. The Committee recommends this should be cross-cutting and rigorously incorporated across Whitehall’s policymaking, with the aim to fully embed net zero considerations across government policies.  

Whitehall departments, which will be responsible for the Technical Screening Criteria for the UK’s green taxonomy, will then have insight into the extent to which sectors’ activities are sustainable, and this could inform their approach to embedding net zero in decision-making.  

Other groups have called for a very similar test, including the World Wide Fund for Nature (WWF), trade unions and business organisations such as the Confederation of British Industry and Energy UK.  

WWF’s recent report is a particularly useful contribution to this debate, highlighting that a net zero test could involve two main elements: a ‘budget tagging tool’ assessing the alignment of all spending and taxation policies with a range of climate and other environmental criteria, and an ‘emissions estimate tool’, which calculates the potential impact of policy decisions made in budgets and spending reviews on greenhouse gas emissions, in order to assess the overall impact of fiscal events on progress towards net zero. 

Another step government could consider is further reform to the Treasury’s Green Book, which is the guidance issued by Treasury on how to appraise policies, programmes and projects.  

Last year, Treasury conducted a review of the Green Book, and this could be re-examined regularly to ensure sustainability factors are embedded in the appraisals. Broadly, a more holistic view from government is needed that goes beyond simply viewing its policy decisions impacting traditional economic growth measures, such as GDP. 

UKSIF would like to see government give consideration this year to committing in future to some form of a net zero test for its policies, drawing on the momentum driven by an increasingly wide range of organisations.  

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