UK Spending Review: bold investment for a clean future
Daisy Jameson and Esin Serin reflect on the Chancellor’s Spending Review, delivered on 11 June 2025, its implications for clean and resilient growth in the UK, and where the focus should now lie.
In her June 2025 Spending Review, Chancellor of the Exchequer Rachel Reeves demonstrated the benefit of her reforms to the fiscal rules, something that we also recommended last year: this move is boosting capital investment to support the UK economy’s clean transition and growth, with the Department for Energy Security and Net Zero (DESNZ) now set to receive an average annual real-terms increase of 16% in its total departmental expenditure limit between 2023–24 and 2028–29, the fifth largest increase across all departments.
The Government should now focus on maximising the impact of these investments by aligning them fully with the country’s clean targets while building long-term investor confidence, including through the upcoming Industrial Strategy. Focus should also be on finding innovative solutions to supporting other countries in their transition to low-carbon, resilient economies in an effort to mitigate the impact of the cuts to international development spending.
Decarbonising energy
The clean transition in the UK requires ambitious roll-out of a portfolio of solutions to decarbonise energy. The news on two further carbon capture, usage and storage (CCUS) clusters and new funding for nuclear, including backing for Sizewell C, are important steps towards that objective. Work will now need to focus on allocating the committed funding in a way that fully supports the UK’s growth and net zero objectives alongside continued scale-up of renewables.
CCUS will be an indispensable tool for addressing emissions from a range of economic activities in the UK. It is also an industry in which the UK has geological and technological strengths to be an important player globally. But allowing the development of too much CCUS too soon in certain sectors risks creating avoidable lock-in to natural gas. Care will need to be taken to minimise that risk when translating the headline funding commitment into support for specific projects.
When it comes to nuclear, investment into increasing capacity needs to be frontloaded if the technology is to meaningfully contribute to the UK meeting its net zero by 2050 target. The Climate Change Committee’s (CCC) Balanced Pathway includes 11 GW of nuclear capacity by 2050, up from 6 GW in 2023. A large portion of current capacity is due to be retired by the end of this decade. But the benefits of new nuclear – set to come from a combination of large-scale projects like Sizewell C, which will add 3.2 GW of capacity, and small modular reactors – will arrive in the medium- to long-term given the capital- and labour-intensive nature of the technology. This underscores the necessity of maintaining support for solutions that offer nearer-term cost and emission savings alongside nuclear. The remaining spending power of GB Energy should therefore go to renewables as a priority, now that £2.5 billion of its £8.3 billion budget over this parliament is confirmed to be used for nuclear.
Energy-efficient homes
On the demand side, the Chancellor’s confirmation of £13.2 billion in funding between 2025–26 and 2029–30 to fulfil the Government’s manifesto commitment on the Warm Homes Plan is welcome. Nesta analysis has suggested this figure, together with funding through the Energy Company Obligation, could cover most of the estimated spending required between 2025 and 2029 on home upgrades under the CCC’s Balanced Pathway to net zero (though this analysis was carried out before the Spending Review detailed £5 billion of the total funding would be for financial transactions, not government capital spending).
The upfront investment into low-carbon heating and efficiency of homes will bring significant operational savings down the line, especially if combined with long-overdue action to make electricity cheaper. Such investment also demonstrates the kind of long-term thinking necessary to shield households from future potential price shocks, similar to those seen during the energy crisis. Building resilience to potential future shocks should also involve thinking proactively about appropriate fiscal responses (upcoming work from CETEx will provide insights here).
Improving transport
Transport was another highlight in the Spending Review, with funding confirmed for a range of regional transport schemes. Improving connectivity within and between UK regions through public transport options is crucial for supporting UK growth while cutting emissions. All this infrastructure should be planned and built in a way that is resilient to a changing climate, and existing infrastructure must also be prepared for these risks. The Environment Agency’s 2024 assessment concluded that over a third of the total distance of both the railways and roads in England are currently at risk from flooding, which is predicted to rise to around half for both networks by 2050.
Industrial strategy for clean energy
As new clean energy infrastructure is deployed, parallel effort will be needed to ensure the country can maximise associated industrial opportunities and domestic jobs. CCUS, nuclear and insulation materials, among others, are all areas in which our research has demonstrated UK strengths over other countries. Investment into skills and R&D announced in the Spending Review will enhance the UK’s overall ability to develop competitive products and services to serve global demand, including in clean industries. But there are important questions remaining for the upcoming Industrial Strategy – which pits clean energy as one of eight growth-driving sectors. Not least, how the Government chooses to address high industrial energy costs and expected skills gaps in growing clean areas will be crucial determinants of the extent to which the UK will be able to capture the clean growth opportunities ahead. The former inevitably hinges on the outcome of the Review of Electricity Market Arrangements (REMA), which urgently needs to provide certainty on issues like zonal pricing.
International climate finance
The Spending Review has confirmed that the Foreign, Commonwealth and Development Office (FCDO) will cut Official Development Assistance (ODA) to 0.3% of gross national income (GNI). Given this will reduce the UK’s spending on climate mitigation and adaptation around the world, the FCDO should explore innovative finance instruments (e.g. guarantees for lending by the multilateral development banks) that require no, or a small amount, of ODA for upper-lower- and middle-income countries to decarbonise or build resilience, which would preserve grant ODA for the lowest-income countries.
Defence
As expected, the Ministry of Defence (MoD) will receive an increase in its budget over the Spending Review period. In its recent Strategic Defence Review, the MoD recognised the impact climate change and environmental degradation could have on the UK’s armed forces. It has already undertaken work, with partners, to evaluate and address the risks it faces from a changing climate, to decarbonise its fleet of vehicles and provide support in the response to disasters in the UK and internationally.
As the defence budget is increased, the MoD should look for further opportunities to build the UK’s resilience to climate change and maximise the spillovers from research and development (R&D) it will undertake for the low-carbon transition. This could start with learning lessons from relevant models adopted elsewhere. France, for example, has initiated a climate and defence strategy and is actively integrating climate change considerations into the R&D efforts of the Ministry of the Armed Forces. Another example is Canada, which has a Defence Climate and Sustainability Strategy for 2023–27, is explicitly investing in climate-related defence infrastructure, and has committed CAN$10 billion over 20 years to modernise in line with climate resilience and emissions reduction goals.
Nature and adaptation
The Department for Environment, Food and Rural Affairs (Defra), which holds responsibility for adaptation and nature, has had its total departmental expenditure limit cut by 0.7%, with a 2.7% cut to resource expenditure and a 2.5% increase in capital expenditure. The increasing capital expenditure has allowed for a small but welcome rise in spending on flood defences. The Spending Review increased existing commitments to build and maintain flood defences, allocating £2.4 billion for the two-year period 2024/25 to 2025/26, to reach £4.2 billion over the three years of the Spending Review. This averages flood defence spending at £1.4 billion per year up to 2028/29, which represents a slight increase in real terms.
The Review did not, as we have recommended, explicitly take a cross-cutting approach to adaptation to identify areas where additional investment will be required to a) adapt relevant Spending Review bids to a changing climate and b) invest additionally in national and local resilience projects. However, the reforms to the Treasury’s Green Book, including accounting for unmonetisable costs and benefits, the appraising of transformational change and supplementary guidance on climate risk, are vital for understanding the benefits of adaptation going forward.
A small real-terms increase was also announced for spending on sustainable farming and nature recovery, from an annual average of £2.5 billion in 2024–26 to £2.7 billion from 2026–29. However, there is limited detail about the expenditure within this budget. The Treasury states that the additional payments through the Environmental Land Management schemes will be sustained by “rapidly winding down subsidy payments that do not provide a return on investment”. More information is required to understand the possible implications of this “winding down” on the ability of farms to pursue nature-positive farming practices, manage potential trade-offs between agricultural production and biodiversity protection, and build resilience.
Next steps
The Spending Review was bold in allocating capital spending into the transition towards a resilient and clean economy. The Grantham Research Institute and CETEx look forward to continuing to work with government to answer important questions on how these investments are managed and the future of international climate finance and nature.
This commentary was edited by Georgina Kyriacou, with thanks to Wallis Greenslade, Sini Matikainen, Rob Patalano, Bob Ward and Josh Burke for their review.