Annual net-zero investment expected to peak at over £60bn

The Treasury has predicted that the extra private and public sector investment required to achieve net zero emissions will peak at more than £60 billion in 2033.

It said the additional expenditure is expected to boost the low overall level of investment in the UK, potentially bringing gains to productivity and economic output.

The Treasury made the prediction in the final report for its Net Zero Review – one of a slew of documents released alongside the government’s Net Zero Strategy.

It said the estimates it has provided do not capture the entirety of net-zero investment but the extra expenditure above and beyond what would otherwise be required, for example, the additional costs of buying an electric vehicle over what it would cost to purchase a petrol or diesel vehicle until they reach cost parity.

Potential additional private and public investment required to achieve net zero emissions

The Treasury said the net impact of the transition on the UK’s economic output is highly uncertain and challenging to estimate, depending on the policies used to catalyse the change and technological progress that has not yet occurred.

It said existing estimates suggest that the impact on the size of the economy is likely to be relatively small and “dwarfed” by the costs of global inaction.

Most studies into these costs do not reflect the economic impact of indirect effects and spill-overs, for instance damage to global supply chains, reduced production in other countries pushing up the costs of imports and migration from regions heavily affected by climate change: “The true cost of a warmer climate to the UK economy could be higher than current estimates.”

However, the Treasury said global inaction may be an unsuitable counterfactual when analysing the economic impact of the transition, masking differences in the economic and distributional implications of policy choices: “Instead, focusing on the economic impacts that result from UK decarbonisation policy choices should highlight the opportunities, costs and trade-offs of playing a leading role compared to free riding in the global transition.”

The report drew attention to the potential benefits of the increased investment, noting that investment in the UK has averaged around 17% of GDP since 1995 – the lowest among all of the G7 economies.

“The investment required to decarbonise the UK economy could help to improve the UK’s relatively low investment levels and increase productivity,” it stated.

“GDP multipliers for green investments in renewables can be between 2.2 to 2.5 times larger than fossil fuel energy investment, depending on time horizons and specification. This means that the investment required to reach net zero can potentially improve productivity in the UK economy and therefore long-term growth.”

However, the report also cautioned that some technologies such as carbon capture and storage will impose additional costs on an ongoing basis: “The overall productivity impact crucially depends on the degree to which the new technologies require lower operating costs and increase output compared to existing technologies.”

The Treasury said the costs and benefits of the transition will ultimately flow through to households but will not be spread evenly, depending on factors such as how much energy they use, the type of house they live in and whether or not they drive a car.

Given this variation, including within income groups, the department said it would be more effective to focus on individual technology transitions, providing targeted support for low-income groups most acutely affected by each, rather than considering the transition in aggregate and providing “universal and untargeted” support such as changes to taxes and welfare.

It said untargeted policies are “likely to lead to taxpayers providing most support to the wealthiest and most polluting households to reduce their emissions, because they emit more in absolute terms.”

The Treasury highlighted the government’s confirmation in its Heat and Buildings Strategy that it will look at options to shift or rebalance energy levies and obligations away from electricity to gas over the next decade to encourage people to switch to electrified heating. It said the government will launch a call for evidence on fairness and affordability, with the aim of taking decisions in 2022.

The report expressed concerns over the impact of the transition on the public purse from the erosion of taxes on fossil fuels, in particular, the “large and relatively rapid structural shrinking of the tax base as motorists move away from using petrol and diesel vehicles.”

“This leads to a significant and permanent fiscal pressure, which may not be offset by the temporary revenues that could be generated by making polluters pay more through expanded carbon pricing,” it warned.

The Treasury said fuel duty and vehicle taxes amounted to £37 billion in 2019/20 – the equivalent of 1.7% of GDP: “Therefore, as set out in the government’s Ten Point Plan, motoring taxes will need to keep pace with these changes during the transition to ensure the UK can continue to fund first-class public services and infrastructure.”

It said the additional fiscal costs of the transition should not be passed onto future generations through borrowing as this “would deviate from the polluter pays principle, would not be consistent with intergenerational fairness nor fiscal sustainability, and could blunt incentives. This could also push up the economic cost of the transition.”