Treasury can make net zero add up for Britain
It is exciting times for the UK’s green ambitions, and this month brings an opportunity to demonstrate a step-change in thinking, with the impending release of Treasury’s review into Net Zero.
Set to outline how both the costs and benefits of the transition can be best spread across society, as well as setting out how the government can act to reap the rewards of early action, an optimistic approach from Treasury can unlock the UK’s green revolution.
An interim update from HMT last year set a positive tone, stressing that the costs of decarbonising are dwarfed by those of doing nothing, and concluding that the effects of climate action on economic growth is likely to be relatively small.
The final review is time to put meat on these bones, detailing how to make the transition work for the UK.
As Secretary of State for Business, Energy and Industrial Strategy until just over a year ago, I made tackling global climate change the number one target and mission for the department. Climate change is both the biggest challenge facing the world today, and it is also the greatest opportunity for the UK to build back and level up after the Coronavirus pandemic. The green economy could, in my view, become a bigger jewel in our crown even than our hugely successful financial services sector. Better still, green jobs offer opportunities for everyone, from apprenticeships to re-training to cutting edge science and new enterprise. Businesses need certainty, so setting out a decarbonisation strategy for each sector of our economy, with a clear timeline and appropriate government support, is the way to achieve success with the minimum cost to the public purse.
For the Treasury, analysing how costs of insulating homes, readying the electricity network for clean heat and electric vehicles, and cleaning up heavy industry can be spread fairly is a first step. But it is vital to take a hard look at the benefits too.
How will cleaner air and warmer homes cut healthcare costs? How can new working patterns be capitalised on to cut carbon? Where in the UK will new world-beating industries be located, and how can local skill bases be boosted to capitalise?
These are just some of the questions to which we need answers.
Another challenge for the Treasury is to demonstrate an understanding of how well-designed markets and policy certainty can see the costs of clean technology plummet.
The UK’s offshore wind revolution is an obvious example, with the latest round of auctions clearing at prices below current wholesale costs. Yet failing in the effort to support building offshore wind supply chains early enough in the UK is one of the biggest strategic mistakes in recent decades. Clear and stable treasury support can make sure that industries for which we already hold comparative advantage can keep growing on British soil, offering high-skilled, well-paid jobs that will last for decades.
Learning from successes in renewable costs can help to assuage concerns that the cost of the transition will be ruinous. For example there is no reason why the cost of a heat pump can’t fall to that comparable to a gas boiler, why electric cars won’t continue to get cheaper, and why truly carbon-free green hydrogen can’t be made in vast quantities using our bountiful supply of wind energy.
These technological advances are vital for getting to net zero but will be slowed without cross-government support. Treasury holds the key to making this happen and can give the rest of government the confidence to set out the long-term, multi-decade policies needed to underpin our green revolution.
Facing up to and overcoming myriad market failures, including leaning on properly designed carbon pricing, can mobilise hundreds of billions of pounds of investment into clean alternatives and ensure that the state does not pick up the bill.
Certainty can also lock in immense clean export opportunities. Already the go-to for clean finance, insurance and law, the UK is uniquely poised to capitalise on a global boom in electric vehicles, carbon capture and the smart technology needed to get the most from renewable energy.
Forward thinking on the tax base will also be welcome, specifically on the risk to state accounts posed by dwindling fuel duty revenues. As electric cars become the mainstay, this nearly-£30bn of annual revenue will dwindle and needs replacing in a way that incentivises a switch to low carbon travel but does not penalise those still reliant on petrol and diesel cars.
A thorough assessment of a switch to road pricing, including fixing the heavy cost of fuel duty on the least well off, requires full Treasury buy-in, from extensive modelling, policies to deal with unintended consequences, and a decision at the very top to make it happen.
The upcoming net zero review is an unparalleled opportunity for Treasury to row in behind the Prime Minister’s green vision, it is not one that should be wasted.
