The Treasury’s interim review is a major step on the path to net zero

The Treasury has long been seen as the block on government progress on tackling climate change – focusing on short-term economic growth, sceptical about the UK getting ahead of competitors and burned with its forays into greening the tax system. Under the Coalition, George Osborne was seen as the brake by successive Lib Dem climate change secretaries. Chancellors were responsible some of the big and destabilising policy reversals: the abandonment in 2015 of the zero carbon objective for new housing; the cancellation of Carbon Capture and Storage (CCS) and the chopping and changing of the tax treatment of electric vehicles.

For a long time, the Treasury assumption was always that maximizing growth, irrespective of the environmental consequences, was the route to a more sustainable future. A richer future UK would be better able to afford the costs of necessary future environmental remediation. As late as summer 2019, chancellor Philip Hammond was expressing reservations about the cost of the government’s net zero target.

The Treasury now accepts the imperative of tackling climate change

That is why the interim net zero review ^[1], published last week, represents such a significant change of approach. Of course, in his Budget and spending review, chancellor Rishi Sunak has committed funds to some elements of net zero, reversed tack on CCS and provided funding for future technologies, but this review goes much further in accepting that this is no longer a negotiable policy. The first words in the net zero review stake out an unequivocally: “reaching net zero is essential for long-term prosperity” and “net zero is the long-term pro-growth strategy”. It is no longer a question of economy or climate change: the Treasury now accepts that economic performance is predicated on preventing dangerous climate change. As we argued in our net zero report, the Treasury has a central role to play in delivering net zero.

The Treasury review is much more honest than other government net zero pronouncements

The Treasury does not overly resile from the Climate Change Committee’s assessment that the economic costs of reaching net zero are manageable. But unlike other government assessments it does recognise that the UK has a long way to go to meet its new target, and that there are very significant differences in the impacts between sectors and households and governments will have to help the people who are most exposed to those costs. That is a much better basis for developing policy than presenting everything as a win-win.

The Treasury also highlights the big impact on the public finances from the losses of taxes on fossil fuels – noting that up to 4% of tax revenues could be at risk, some £36bn. That comes on top of the existing pressures on public borrowing from the aftermath of the pandemic and the need to increase future public spending to provide services for an ageing population and bolster the resilience of the state. The Treasury will be on the hunt for new sources of revenue – it might be encouraged to see a recent poll from Ipsos Mori suggesting the public was finally becoming less sceptical about road pricing which is an obvious future replacement for fuel duty.

The Treasury also makes the right noises about the costs of policy uncertainty and instability

As the Treasury review points out, much of the cost of transition will fall on private actors. So it is really welcome that the Treasury explicitly recognizes the importance of policy certainty and a stable environment to reduce the costs of investing. The more government policy is unreliable, the bigger the policy risk premium and the less likely it is that the necessary investment comes forward. 

The Treasury has an important role to play here. As we argued, it needs to set out its approach to create a stable policy framework, not least on setting out a tax strategy to support the government’s net zero ambitions. The Treasury also signals the importance of engaging the public. That is very counter-cultural for the Treasury – but it needs to apply to their policy levers as much as other departments.

The Treasury now needs to follow through when it produces its final report

The interim review sits alongside other building blocks that have appeared in the last few weeks: the Ten Point Plan ^[2], the revisions to the Green Book on policy appraisal ^[3], the Energy White Paper ^[4]. But it is only an interim review and, notably, it is exchequer secretary Kemi Badenoch's signature, rather than Rishi Sunak's, which appears on the opening page. 

The Treasury now needs to put more flesh on the approach it has started to map out when it publishes its final report in the spring, and the chancellor will need to show how he will ensure that pronouncements are translated action.