Britons face new taxes or reduced public spending to pay for the country’s rapid transition to net zero, the Treasury warned yesterday, as splits emerged at the top of government over the costs of decarbonisation.
Boris Johnson pledged that Britain could meet its ambitious net zero targets “without so much as a hair shirt in sight” as he set out a cross-government plan to realise the country’s climate change ambitions.
But a separate document published by Rishi Sunak, the chancellor, warned that, even under the existing plans, the government would have to deal with a £37 billion-a-year black hole in its finances because of loss of revenue from fuel duty.
It added that if more money were needed to decarbonise, this might require funding through “additional taxes” or cuts to “other areas of spending”. It added: “Depending on choices made by the government the transition to net zero could have potentially significant implications for the UK’s fiscal position.
“If there is to be additional public investment to support decarbonisation, it may need to be funded through additional taxes or reprioritised from other areas of government spending.”
The Treasury explicitly ruled out additional borrowing. “Seeking to pass the costs on to future taxpayers through borrowing would not be consistent with intergenerational fairness nor fiscal sustainability,” it said. “This could also push up the economic cost of the transition.”
Under the net zero plans published yesterday:
• The government will invest £26 billion to decarbonise the economy, with new money for nuclear power plants, home insulation and electric vehicle charging points.
• Homebuyers will face having to improve the energy efficiency of houses under the terms of their mortgage. Gas boilers will be phased out over the next decade.
• Ministers also pledged £500 million towards an innovation fund for green technology, including funding to directly capture CO2 from the air.
• There will also be £124 million of new money to support tree planting and peatland restoration, adding to the £640 million Nature for Climate Fund.
The Treasury’s downbeat tone was in contrast to Johnson’s emphatic promise that Britain would not have to “sacrifice the things we love” to meet its climate commitments and his insistence that doing so would benefit the economy by turning a “green industrial revolution into sustained economic growth”.
The prime minister argued that “the unique creative power of capitalism” would produce the cheap technologies that would let Britain prosper while avoiding catastrophic climate change.
The Treasury took a cooler view, saying while green investment “could provide a boost to the economy”, there was also a risk it could “displace other, more productive, investment opportunities”.
Sources said that earlier versions of the Treasury document had contained starker warnings about the cost of the transition but these had been watered down. “It is a very heavily scrubbed document,” one source said.
The paper estimated that from 2026 the additional public and private sector capital investment required to decarbonise would amount to more than £50 billion a year, peaking at above £60 billion by the mid-2030s. The Treasury said that it was “uncertain” how much of this increased investment would result in long-term GDP growth. It warned that, if it failed to do so, it could lead to reduced economic prosperity.
It said there would have to be new taxes or charges to pay for the loss of revenue from fuel duty and other emission-based taxes equivalent to about 1.5 per cent of GDP in each year.
Sunak’s team also warned that the costs of pursuing net zero would not be felt equally across society. For example, the net zero strategy offered more than £600 million in grants to “support the transition to electric vehicles”, but the Treasury analysis said that this could disadvantage poorer Britons. It also said that the cost of improving insulation would vary hugely between properties.
Downing Street said that there was no reason why taxes would need to rise or public sector spending be cut to pay for the new commitments. “This is a period over effectively three decades where we both individually and as businesses need to make significant changes in our approaches so that we can tackle climate change,” a spokesman said.
A Treasury source insisted Sunak was clear that unmitigated climate change outweighed the risks of “not taking action at all”.
Ed Miliband, the shadow business secretary, said the net zero plan had been “torpedoed by the Treasury”, adding: “It has failed to recognise that the prudent, responsible choice is to sufficiently invest in a green transition.”
Rebecca Newsom, of Greenpeace UK, said that “the Treasury might actually be starting to get it”, by accepting that combating climate change would be cheaper than doing nothing.
It all sounds good but the strategies lack clear details
The government hopes its net zero strategy will set an example to other nations before the Cop26 climate conference and encourage them not just to submit stronger emissions reduction targets but also detailed plans for achieving them (Ben Webster writes).
The UK has already set itself some of the toughest targets of any country: cutting emissions by 68 per cent on 1990 levels by 2030 and 78 per cent by 2035. Emissions have fallen by 44 per cent since 1990 but this has largely been achieved by changes that had little impact on daily life, such as switching from coal to gas, wind and solar to generate electricity. The net zero strategy is supposed to set out how the more challenging reductions needed will be delivered.
There is clear progress on key sources of emissions, including gas boilers and cars, but the strategy lacks detail and defers too many key decisions to be convincing.
Ministers are relying heavily on the private sector to deliver the reductions, claiming there will be “up to £90 billion of private investment by 2030” in the green transition. But that figure relies on huge assumptions that companies will be willing to invest.
Boris Johnson also wants to avoid any sense that people are being forced to change their lifestyle and this has resulted in big holes in the strategy, such as how to cut emissions caused by meat and dairy consumption.
The handful of strong new measures include the zero emissions vehicle mandate, which will force manufacturers to sell a rising proportion of electric cars and vans, and £620 million extra to support electric vehicle grants and chargers.
But new cars running on petrol and diesel will remain on sale until 2035, meaning tens of millions more will be sold between now and then and they typically remain on the road for more than 12 years. The strategy lacks a clear plan for driving down average emissions of all new cars and reversing the trend towards larger, fuel-hungry SUVs.
Homeowners will also be more willing to switch from a gas boiler to a much more expensive electric heat pump with the opportunity from April to obtain a £5,000 grant. But the £450 million announced over three years is enough for only 30,000 per year. That is far short of the trajectory needed to meet the government’s target of 600,000 heat pumps a year from 2028.
The shortlisting of two carbon capture and storage projects for £1 billion of public funding is a step forward but a similar sum was offered by previous governments and cancelled. The projects have yet to pass value-for-money tests and the government acknowledged that they “carry with them significant risks to deliver by the mid-2020s”.
Ministers are also unsure about the potential for hydrogen to replace gas in homes. The government argues that it cannot give all the answers because it needs to remain flexible and adapt to what the market chooses to deliver. But without stronger signals, the market may opt to stick with what works.