The Treasury’s Net Zero Review: bedrock of a just transition?

With COP26 coming to Glasgow this November, all eyes will be on the UK. This is the moment for the Government to take every opportunity to lead by example in the drive to cut emissions in a fair and equitable way, says Esin Serin, as she evaluates the Treasury’s recently published Net Zero Review interim report.  

Reaching net-zero emissions requires coordinated and consistent action across all levels of government. Without this, hard won credibility can be quickly lost. Her Majesty’s Treasury’s ‘Net Zero Review’ – the interim report of which was published in December – has the potential to embed a coordinated approach across government under a shared objective: making the transition to net-zero just. The interim report is a comprehensive account of what it takes to fairly distribute the costs and benefits of net-zero. The final report – due in the spring – can now point to an ambitious policy agenda that delivers on the Government’s ambitious rhetoric. The UK getting its own just transition strategy right is imperative before asking other countries to follow the lead at COP26. 

The latest Climate Change Committee (CCC) advice effectively brings forward by nearly 15 years the UK’s former 2050 target of an 80% reduction of greenhouse gas emissions from 1990 levels – which, of course, was replaced in 2019 with the significantly more ambitious target of ‘net-zero’. The need to go further and faster makes understanding and effectively responding to the distributional impacts of the low-carbon transition more urgent than ever.  

Clean growth potential paving the way 

The Net Zero Review states an objective to consider “how government policy can … maximise the potential growth opportunities from net zero”. The acknowledgment of the potential for clean growth is evidence of a crucial paradigm shift in Treasury thinking, which should create the opportunity for all departments to be more ambitious and coordinated as they work to deliver net-zero. 

The Treasury reiterates in its interim report recently announced policies, including those for a Green Industrial Revolution, designed to help the UK make the most of the opportunities presented by decarbonisation. But for the UK to cement its ambitions, existing policies need to be incorporated into a redesigned and long-term industrial strategy with clean growth at its core. That strategy should account for how different policies in different contexts can be coherent and complementary and show how policy choices will drive positive systemic impacts. This includes assessing specific growth opportunities, for example from technologies for zero emission vehicles and carbon capture and storage, with regard to their potential to deliver net-zero along with other overarching government objectives. Those wider objectives include boosting productivity, driving a sustainable, inclusive and resilient economic recovery from COVID-19, levelling up across the UK, and redefining the UK’s role in the world.  

Fiscal challenges are looming 

The CCC estimates that low-carbon investment in the UK each year needs to grow five-fold from circa £10bn in 2020 to circa £50bn by 2030. Of course, the fiscal space will be severely constrained because of COVID-19. Policy and strong institutions will be critical to bring down the cost of capital and leverage the maximum amount of private sector investment possible. Unfortunately the Treasury’s interim report lacks detail on an overall systematic approach to finance, which is needed now to frontload investment for net-zero in this decade.  

The recently announced National Infrastructure Bank will be a pivotal institution to crowd in private finance and bring forward net-zero-aligned infrastructure projects at scale. If the Treasury moves quickly, the Bank’s initial investments have the potential to support the recovery from COVID-19. Setting out a concrete plan for the Bank’s implementation should be the utmost priority for the Treasury. This should include making any explicit sustainability mandate clear, and processes to ensure projects are rooted in regional development plans and needs. 

The transition to net-zero will bring structural change that will drive the need for fiscal reform. As the transition accelerates, some revenue sources are likely to decline: for instance, a transition to electric vehicles is alone estimated to put at risk around £35bn per year of current government tax receipts, the majority coming from fuel duty. Carbon prices have an important role in fiscal reform, with the potential to raise much needed revenues. With higher public debt levels resulting from the response to the pandemic, and the need to prevent a distorted recovery that locks the economy into a high-carbon path that is costlier to reverse later (see Burke et al., 2020 and the IMF, 2020), it is very timely that the Treasury’s Review considers an increased carbon price in the UK. A higher carbon price would also be a clear sign, ahead of COP26, that the UK is walking the walk at home before asking other countries to be more ambitious. 

Just transition is the only way to transition 

Net-zero means real changes to every aspect of our lives. Today, a typical battery electric vehicle is 35% more expensive to buy than a comparable conventional car, and 80% of consumers surveyed in a 2018 study reported they “would not or could not afford” a heat pump installation. Especially where there is a high upfront cost attached, not all parts of society can be expected to adopt lower-carbon ways of living at the same pace.  

Macroeconomic assessments often mask the heterogenous impacts on different regions and income groups from the transition to net-zero. By building on the in-depth analysis of transition impacts on different types of households in the interim Net Zero Review, policy can be designed to deliver net-zero in a way that fairly distributes the costs and benefits of the transition while tackling existing inequalities across society. 

In 2018 2.4 million households in England were living in fuel poverty and of those, almost 90% in properties with an energy efficiency rating Band D or worse (on a scale of A to G, with A being the most efficient), many likely suffering from either damp, draughts, or overheating. Energy efficiency policies should be prioritised given that they have high economic and job multipliers, while simultaneously tackling a hard to decarbonise sector and reducing fuel poverty. In this regard the Government was right to quickly design and deploy the Green Homes Grant.    

Such measures within individual policies are welcome and through these the UK can also set a lead for other countries to follow. But to do this it needs an overarching Just Transition Strategy embedded in all net-zero policies – the Treasury’s Net Zero Review is the natural starting point for this.  

Jobs beyond the numbers 

Policy choices to be made around jobs are intrinsically linked to delivering a just transition. The decline in high-carbon industries through the net-zero transition carries the risk of worsening the UK’s already uneven economic performance across and within regions – the target of the Government’s ‘levelling up’ agenda. There is not only a disproportionate risk of employment loss for workers in high-carbon industries but also for those without adequate access to education and training opportunities, including vulnerable people who have already been hit hardest by the disruptions from COVID-19. 

The Treasury recognises the job potential from the transition to net zero: over 460,000 jobs are already supported by the UK’s low-carbon industries with the potential for many more to emerge (some replacing jobs in high-carbon industries, others additional). Of course, the issue of jobs is far more than a numbers game – the quality and location of jobs as well as the required skills all need consideration, and proactive planning for education and training will be a prerequisite to match growing low-carbon supply chains with the necessary skills. The ongoing challenges of the Green Homes Grant illustrate just how crucial this is. At the moment the Government has no such plan in place; a UK-wide energy workforce transition commission should be on the table to navigate required changes. Ultimately, on the path to net-zero all jobs will need to become low-carbon jobs.  

Leading with innovation 

The Treasury undertakes a thorough analysis of innovation in its interim review but emphasises the private over the public sector disproportionately. That risks missing out on the full economic opportunities that investment in innovation can unlock, which can include additional GDP growth and increased participation in new and high-growth global markets. 

Given the current economic crisis, and evidence from previous downturns, there is a risk that private sector investment in innovation will suffer. Especially where innovation is explicitly aligned with net-zero, the Treasury could set the basis for greater R&D support from government, for instance using targeted tax credits, direct public finance and incentives for further university–business collaboration. That should target innovation of technology as well as systems and business models. Greater and smarter government investment in net-zero-aligned innovation would also enhance the UK’s international leadership credentials. 

Final report needs to point to a strong policy agenda  

The interim report of the Treasury’s Net Zero Review is proof that delivering the transition to net-zero in a just way is taking centre stage in government thinking. But there are many more questions that need to be asked – if not answered – before the Review is finalised. There is growing understanding around the issues of a just transition to net-zero in policy and academic circles; how the Government’s policy agenda will evolve in response needs to be reflected in the final report of the Review, due in the spring. A report with thorough integration of the just transition would set a strong example to the world that can help drive action ahead of COP26 in November.  

A version of this commentary was first published by Business Green. The views in this commentary are those of the author and do not necessarily represent those of the Grantham Research Institute.