Here in London Her Majesty’s Treasury (HMT) is in a tight spot. Most of us working on climate change and finance are not sure how committed the residents of Horse Guards Road are to a rapid decarbonisation of the UK economy, and the new Conservative administration hasn’t inspired much hope. And to date, complaints have largely fallen on deaf ears. Coating the front door in fake blood, as Extinction Rebellion recently did, doesn’t seem to have worked yet, either.
All this may be set to change, as an official process is underway: the House of Commons Treasury Select Committee’s Green Finance and Decarbonisation of the UK Economy inquiry. Over 800 pages of evidence have been submitted over the summer and are now published on the Committee’s webpage. Later this year the Committee is expected to call for oral evidence on opportunities for the UK from decarbonisation; the benefits of growth in green finance; how to deliver a regionally balanced just transition across the country; and, last but not least, HMT’s role in meeting the UK’s commitments on climate change.
A gloomy landscape
HMT is in the driving seat of UK decarbonisation and climate resilience, deciding the speed at which the country transitions to a low carbon and climate-safe economy. A proactive, ambitious and well managed transition will provide the public with a stable and fair economy at a cost of roughly 1-2% of GDP up to 2050. Alternatively, a disorderly last-minute transition will come at enormous extra financial cost and irreparable damage to the climate as tipping points are breached.
The overriding impression from the evidence is that HMT is setting the speed to “dead slow”. Picking up the pace will require some courage, but with a roadmap it will become much more manageable. Having reviewed the evidence submitted to the Committee to date, here are some of the most popular directions of travel suggested:
- Net-zero policy embedded across all levels of government, including HMT and the Cabinet Office;
- A national capital raising plan to support the UK’s plans for net-zero emissions and climate resilience, sharing benefits across the UK regions for a just transition;
- Public sector finance “greened” and climate risk incorporated into Whole of Government Accounts;
- The costs of inaction incorporated into public sector investment appraisals;
- Enhanced finance for sustainable infrastructure, and improved public institutions to deliver infrastructure finance – the Treasury itself recently consulted on whether to create a new UK infrastructure bank;
- Energy efficiency to be made an infrastructure investment priority, together with changes to regulations to support financing of retrofitting and renovating;
- Investment in innovation and the low carbon transition to create tens of thousands of jobs and increased tax revenues;
- Ending UK financing of fossil fuels through UK Export Finance;
- Enshrine in legislation the expectation for all listed companies and asset owners to disclose recommendations of the Taskforce on Climate Related Financial Disclosures by 2022.
Changing the culture of public spending
So far, the government’s green finance policies have not reached this level of ambition. The Green Finance Strategy published in July contained useful elements but fell short of the expectations set by legislating for net-zero emissions by 2050. It does not constitute a plan for financing the UK’s climate transition. The UK Government’s leadership on sustainable finance and investment risks being seen as just greenwash unless further significant actions are taken.
The public investment put forward in the Green Finance Strategy is a fraction of that required for UK decarbonisation, for example allocating £5m for energy efficiency in buildings where £1bn extra is needed every year to 2035. This reflects a common sentiment found throughout the evidence submitted to the Committee that HMT does not consider greening the UK economy as an investment, but rather as an expenditure. Narrow use of quantitative estimates without consideration of upside and downside risks associated with individual policy choices does not provide a full picture of the economic value at stake. Many of the possible impacts of climate change are subject to high uncertainty and not fully captured in cost estimates, yet the economic impact of worst-case scenarios would be potentially harmful to the UK economy. The potential economic disruption caused by decarbonisation can be largely mitigated through government planning however, the potential upside benefit from economic transformation is huge.
Taking climate risk seriously
HMT’s understanding of the climate transition needs to change so its actions address the scale and urgency of the challenge as well as the extent of public investment that will be required across the economy. The costs of inaction need to be fully included in investment appraisals, and climate change risks must be considered in GDP forecasts. Public finances should be greened, and climate risks considered in the Whole of Government Accounts. This will represent a significant culture change for HMT and may require a change to the way the department is governed.
The Select Committee’s inquiry looks set to have a major impact in the autumn, with oral evidence sessions likely to be a highlight of the political season. It could kick-start a cultural change within government, particularly if HMT understands better the cost of inaction and wisely invests in the benefits of a managed transition to a decarbonised economy and net-zero as fast as the science demands.