Treasury says emerging low-carbon tech likely to need state support

The government may need to provide “more direct support” for testbed low-carbon technologies, according to the Treasury’s interim Net Zero Review.

The report, which is being carried out in response to a Climate Change Committee recommendation that the Treasury carry out further work into how the costs of the transition to net zero should be funded, says the case for government backing is greatest for unproven options such as some greenhouse gas removal technologies.

“Much of the finance required can come from the private sector, but the risks and uncertainties associated with novel technologies can hold this back.

“A clear policy framework setting out the government’s approach at different levels of technological development can help address these uncertainties. Where uncertainty is at its greatest, government may need to provide more direct support.

“In some limited cases, the government may need to provide greater support. This will particularly be the case for new and innovative technologies, where returns are unclear, pushing up risk and therefore financing costs. This could make projects unviable in some cases. Government intervention to share risks can help make the remainder of the project viable for the private sector.”

It says the government may need to support innovation directly, for example by funding research and development or by taking some of the equity risk directly onto the government’s balance sheet in testbed technologies.

The next stage of the review will consider in more detail the implications of passing costs through energy bills, which has been the key source of subsidy for renewable technologies during the last decade.

Private investment in low carbon technologies is also being held back by the absence of a consensus on the definition of net zero-aligned investments and the existence of various methods for evaluating climate-related risks, according to the review.

It also says net impact of the transition to net zero on growth to 2050 is “likely to be small” within the context of the wider economy’s performance over the same period.

However, the review warns that while the macroeconomic impact of the net-zero transition might be limited, there could be significant implications for certain parts of the country that contain high concentrations of jobs in heavily emitting industries.

Those working in more carbon-intensive industries are also disproportionately likely to have lower levels of education and be on lower incomes, says the review.

The Treasury says the government will also need to consider how to recoup lost tax revenues on the consumption of fossil fuels and from emissions-intensive industries, as for example petrol cars are replaced by electric vehicles.

This shift will have implications for fiscal policy, says the report: “Over time the government will need to consider how to offset these lost tax revenues – whether through adjustments to other taxes or reductions in government spending – so that the UK can reach net zero while maintaining the long-term health of the public finances.”

The Treasury has said it will now carry out more detailed analysis of the implications for households from the decarbonisation of transport, buildings and power as well as the options for managing any adverse impacts.

It will also consider how it could incorporate climate considerations into spending reviews and how the principles of the review can be embedded into policy-making across government.

The publication of the review coincides with the publication today of PwC’s Net Zero Economy Index.

This says that within the G20, the UK is one of four countries to have achieved the highest rates of emissions reductions relative to economic growth.

However, rates of decarbonisation in even these four countries fall “far behind” what is required to achieve the Paris agreement commitment to limit warming to 1.5°C above pre-industrial levels.

And it says an additional £400 billion is required in green infrastructure over the next decade if the UK is to meet its net-zero target.