British chancellors and the Treasury haven’t traditionally cared for the climate. It’s time they prioritised the green economy and put money behind the cause of Net Zero
There’s no quicker way to make a Treasury official back away than asking for money. I’m not suggesting that those working inside Great George Street aren’t paying for rounds at the pub, but that government departments and prime ministers have traditionally had better results taking a bag of rocks to the blood donation centre.
The problem with this tightfisted attitude is that all problems and requests are treated equally, no matter how urgent they are. In recent years, the government has made progress in setting ambitious climate targets, but the Treasury stone wall is now causing serious problems in meeting them.
History shows that chancellors aren’t interested in climate. When was the last time that the man at the top of the Treasury (they have all been men) showed leadership on the issue? When was the last major speech about the connections between climate and the economy? I’m not talking about the odd mention but recognising the financial risk and economic opportunity of Net Zero.
First up: Rishi Sunak. In fairness, the current chancellor has had other pressing economic problems on his hands. But throughout the pandemic (and his time in the job), he has never really bought into the green recovery: that is to say, tackling both climate and the Covid-19 economic crisis together. The phrase “green recovery” has passed his lips just once in parliament without prompting, since the pandemic struck; while in the spring Budget, he mentioned Net Zero just twice.
“As well as investing in infrastructure, we want to create green jobs. This will be a green recovery, with concern for our environment at its heart, and as part of that, I am announcing today a new £2 billion green homes grant.”
Rishi Sunak, 8 July, 2020
He showed some interest in the more technical policy area of greening the financial system in his recent Mansion House Speech on 1 July. But Sunak’s biggest show of interest in climate was under the spotlight with veteran journalist Andrew Neil on the new channel GB news. After being pressed on the costs of Net Zero, he spoke of job creation, innovation reducing costs and even economic opportunities for regions like Teeside – fundamental topics that could form the basis of a potential speech.
The current health secretary, Sajid Javid, spent seven months as chancellor and, given his recent enthusiasm from the backbenches for the economics of biodiversity following the Dasgupta Review, one might have expected him to connect climate and the economy – but still, he made no major intervention during his time at the Treasury. Theresa May’s Chancellor, Philip Hammond, backed well away from talking about climate upon entering Number 11, despite an intervention on climate risk as Foreign Secretary in 2015.
George Osborne – the longest serving Tory chancellor since Nigel Lawson – is a more interesting case. At the heart of David Cameron’s modernisation project, including the embrace of green, Osborne spoke powerfully in opposition about climate in 2008. However, when taking hold of the purse strings he backpedalled, coming over almost climate-sceptic at the 2011 Conservative Party Conference.
“Britain makes up less than 2 per cent of the world’s carbon emissions to China and America’s 40 per cent. We’re not going to save the planet by putting our country out of business.”
George Osborne, 10 July 2008
Back to New Labour, then. Alastair Darling also had other things than climate on his plate, with the global financial crisis. Then again, President Obama used the 2008 recovery to invest in green energy, while the Treasury on this side of the Atlantic shied away from a green recovery.
So that takes us all the way back to Gordon Brown, who in 2005 spoke to his (then) G8 colleagues about the importance of action and financial commitments.
“Environmental issues – including climate change – have traditionally been placed in a category separate from the economy and from economic policy. But this is no longer tenable.
Across a range of environmental issues – from soil erosion to the depletion of marine stocks, from water scarcity to air pollution – it is clear now not just that economic activity is their cause, but that these problems in themselves threaten future economic activity and growth.”
Gordon Brown, 15 March 2005
That was 16 years ago – two years before the first iPhone, when average CO2 levels were 28ppm lower than now and the current chancellor was still studying for his MBA at Stanford.
So why, despite 16 years of growing evidence of the need for investment, 16 years of growing physical and economic risk from climate, 16 years of promised action, are we still waiting for a major climate intervention on climate from 11 Downing Street?
Treasury turns like an oil tanker
Despite the prime minister’s notionally ambitious green rhetoric, climate is still mainly seen as the responsibility of two departments – business and environment – rather than central to economic development and therefore within the Treasury mandate. Which means that, as far as its mandarins are concerned, green investment is just another spending request. At least for now the Treasury has different priorities.
Take the Green Homes Grant fiasco over the last year. Buildings are one of the largest emitters of carbon, responsible for 16 per cent of emissions. Many expected government stimulus for retrofits would be the flagship policy of “building back better”, lowering energy bills whilst people are at home, and providing jobs across the country to stem potential unemployment. But the scheme was pulled by the Treasury when complicated supply chains and a lack of skilled retrofitters caused delays to job creation.
On the phony pretext that there was no consumer demand, the unspent £1.5 billion was gone, and the government was left without a programme to cut emissions from buildings and household’s energy bills. This sense that climate is a problem for elsewhere in government, or even future governments, means the Treasury isn’t just failing to mend the environment, but making policy and spending on things that damage it.
The Treasury has two roles. It is responsible both for making economic policy and for governmental spending. This makes the chancellor far more powerful than their European counterparts. But when it comes to climate change, it allows the Treasury to point to progress in greening the financial system, like green bonds or the Bank of England’s new green mandate, as evidence of action while ignoring a host of more powerful policy levers on the fiscal side. It gives the impression that the Treasury is willing to set rules for other financial institutions that it wouldn’t follow itself.
The Treasury’s economic modelling isn’t dynamic. It takes a view of the UK economy as it is, not what it could or should be like in the future. This reinforces the view that climate is a cost, without guaranteed returns. The Treasury can’t currently say with confidence which sectors of the economy will grow or emerge under Net Zero. Take Clean Steel as an example. If the Treasury was to earmark a few million pounds in November’s spending review to trial a hydrogen steel plant, the UK could quickly establish a first mover advantage, growing a new economic sector. Unfortunately, the Treasury is currently unable to capture that potential to the level of certainty which justified its support for new electric vehicle factories. Instead, other European countries race ahead.
All this means a lack of ambitious and positively framed policy proposals going upwards from civil servants to Treasury ministers and ultimately the chancellor.
Climate hasn’t suited the chancellor’s politics
That lack of ideas coming up is reinforced by a lack of pressure on civil servants from Treasury ministers. Officials are failing to convince chancellors that the economics align, but there is also a perception at the top that the politics don’t either.
Chancellors are fiscally conservative beasts, there to act as a brake on the free spending of ambitious prime ministers. As long as they see Net Zero as a specific policy area, rather than central to the economy, it will land in the bucket with other political priorities, whether that’s social care, levelling up, or education catch-up.
Climate is also seen as the prime minister’s project. It was what David Cameron led on in the run up to the 2010 election with his pitch to “vote blue, go green”. Theresa May was also a strong environmental advocate. Although she may be remembered for the period of Brexit negotiations, the 2050 Net Zero target set under her tenure is still a powerful legacy. And of course, Boris Johnson with his love of boosterism and shiny infrastructure has sought to position himself as a climate champion ahead of Glasgow. There is a concern in Number 11 that if the chancellor speaks out, he’ll tread on Johnson’s toes. A more cynical view might be that future candidates for Conservative leader want to differentiate their politics, rather than follow-in behind others.
Climate policy is also regarded as a reputational risk to chancellors. After the hidden success of switching from coal to renewables, the next steps we need to take towards Net Zero are likely to be more visible to voters, and potentially more invasive in their lives. Whether encouraging behaviour change, changing taxes or new regulations on business, Sunak is cautious about anything that could harm “Brand Rishi”. The flack the chancellor received for the failure of yet another home decarbonisation scheme – the Green Homes Grant – will have served as a warning. But this will pale in comparison to the huge political risk that Sunak could pay from inaction, either from a failed COP, other countries pulling ahead, or mounting costs and impact on voters from climate change itself.
What does the Treasury do next?
The Treasury is inching in the right direction and increasingly recognises it holds the tools required to decarbonise the economy. It has acted on the financial system, recently mandating large firms to disclose their climate-related financial risk – though still falling short of forcing companies to share how they will actually get to climate neutrality. The UK government also launched the UK Infrastructure Bank which has a mandate to support Net Zero, hopefully with further details (and money) next year.
In 2019, the Treasury commissioned the Net Zero Review, which should tell us how the UK government will pay for the transition to a Net Zero economy. It has been repeatedly delayed but the government has promised its publication ahead of COP26. The review should focus on economic opportunity and fairness but there are concerns that it will again focus too heavily on costs. Many of those working on the review are going to beef up the climate and environment directorate in the Treasury, which could begin to shift the institution faster.
The recent Commission for Smart Government is also building pressure on how the Treasury works. Its recommendations for greater cross-departmental cooperation, especially on major challenges like Net Zero, will be vital to tackling climate change and help avoid government working in silos.
What would be in Rishi Sunak’s big climate speech?
There are increasingly clear political arguments for Net Zero that the chancellor should be comfortable making.
Voters in Conservative/Lib Dem marginals want more done on climate. The defeat in the Chesham and Amersham by-election in June should cause Sunak to look again at southern Tories’ priorities. Meanwhile, the potential for jobs from investment in Net Zero is also a core demand of Red Wall Tories and voters. If the chancellor can stem the flow of votes from the leaky blue wall while being seen to deliver on jobs across the North and the Midlands, his standing in the party would be stronger than ever.
Then there are the positive economic arguments for the fiscal conservative. Net Zero does require initial investment, but as any savvy buyer knows, spending slightly more up front will save money in the long run. Value for money is crucial in government spending. Capital investment on climate doesn’t just improve our environment, but also improves health, air quality, productivity, connectivity and more. It’s not so much two birds as a flock with one stone.
There’s also potential to save money on high-carbon projects, like the infamous Cumbrian coal mine, that will only produce short-term returns and ultimately stranded assets. Our fiscal system is equally wasteful – the National Audit Office thinks there is currently £17 billion in tax relief working against our climate goals, not to mention continued subsidies to fossil fuels. And of course, there is the economic cost of not doing enough. The Office for Budget Responsibility, hardly a profligate organisation, expects debt to be 14 times higher by the end of the century if nothing more is done on climate.
Conservatives who prefer not to bet against the market should note that prices for renewable energy beat forecast after forecast. With direction from the government, businesses invest, innovate, and reduce costs. There’s every reason to expect similar forecast-busting innovations, from heat pumps to clean steel.
Finally, the Treasury should embrace climate by following the first principle of politics – the pursuit of power. Many think that the institution’s sheer size and influence already warrant it being broken up. Which is precisely why the Treasury should positively embrace Net Zero as a cause and a grand project. If finance ministers could monitor not only departments’ spending but their emissions too, they would have a whole new reason to turn down spending requests – surely a dream come true.
This autumn is not just crucial for the Glasgow Climate Summit, but a lesser spotted event shortly after it – the government’s first long-term spending review in six years. That fiscal event will decide what can be spent until the end of the parliament in 2024. Let us be clear: this is potentially our last such opportunity to make a major intervention in climate strategy. Current policies will only reduce emissions by 26 per cent of what we need by 2030.
Net Zero is a legally binding target, and the floods across northern European in recent weeks have made its urgency more real to many. The need for action is beyond doubt; the question is whether the Treasury and the chancellor get ahead of it – reaping the economic and political benefits of moving before other countries– or whether they are dragged kicking and screaming. Let’s hope Sunak starts to see the benefits soon.
Sam Alvis is head of green renewal at the Green Alliance. He is also a member of Chatham House’s Panel of Young Advisors, advising on youth strategy and climate.