Sustainability and HM Treasury Contents

4Performance on environmental sustainability

34.The Treasury uses a technical and political framework which favours short-term affordability over long-term benefits. In this chapter we explore this in more detail by looking at the Treasury’s track record in a number of specific policy areas and assessing the extent to which the Treasury’s approach to environmental sustainability is sufficiently joined-up.

Meeting carbon budgets

35.The UK has an economy wide target to reduce greenhouse gas emissions by 80% by 2050 (from a 1990 baseline). To get there the Government sets five-yearly carbon budgets. The level of these budgets is recommended by the CCC which establishes the most cost-effective pathway towards meeting the UK’s 2050 target.69 Following initial research, the CCC determined that the first sector which needed to decarbonise was the energy sector and other sectors such as buildings, transport and industry soon afterwards.70 The CCC recently reported that the Government was on track to meet the third carbon budget but, unless new policies are put in place, is likely to miss the fourth and fifth carbon budget.71 The gap between the target and the UK’s current emission trajectory is sometimes referred to as the policy gap.

36.The Treasury is in a critical position to ensure carbon budgets are met because of its control over capital spending, taxation policy, regulations and approval of major projects. During spending reviews, in particular,
the Treasury has the opportunity to draw together policy relevant information from across different departments and ensure interventions across government are working towards achieving carbon budgets. But the Treasury does not seem to be doing this. A large proportion of respondents highlighted a number of recent policy announcements which could have the opposite effect. Grantham Research Institute at the London School of Economics gave a useful summary of recent changes:

Markets are increasingly wary about the stability of policy and policy risk. Frequent changes to the subsidy regime for renewables, the abolition of rules for zero-carbon homes, the end of the Climate Change Levy exemption for renewable energy generators, the freezing of the carbon price floor after only two years of operation and cancellation of funding for the Carbon Capture and Storage commercialisation programme have helped undermine confidence in the policy environment and discouraged investors.72

37.Another major area of concern is the Government’s reluctance to give details on the future of the Levy Control Framework (LCF), the capital available to fund low carbon electricity technologies.73 The NAO recently published a report on the LCF which concluded that the Framework has not met its potential to support investor confidence.74 Matthew Knight highlighted the negative effect of this combination of factors and the harm it has done to investor confidence. He told us that the cumulative effect of the Treasury’s decisions on the industry and investors was greater than the sum of its parts. The perception, he said, is that the Government has changed its policy on energy and climate change.75

38.In its report, the NAO highlighted how the Spending Review had not contributed to closing the existing ‘policy gap’ required to meet the fourth carbon budget:

Government’s emissions projections published just before the spending review announcement forecast government was not on track to meet its carbon target for the mid-2020s (the fourth carbon budget, 2023 to 2027), with a gap of around 10%. Treasury analysis during the spending review concluded that bids would make a positive contribution to meeting carbon budgets, but might increase the gap slightly compared with the future assumed policy contributions already built into forecasts. However, it considered that there was scope to meet the gap through non spending measures or future fiscal events in advance of the start of the fourth carbon budget (2023). More recent analysis suggests that spending review bids may have improved the expected policy contribution to emissions reductions though a substantial gap remains.76

39.A failure to meet the fourth carbon budget would suggest that the Government is not decarbonising the economy cost-effectively. The CCC flagged up this shortfall in Government policy. Matthew Bell told us that the Government had committed to publishing further proposals to meet the fourth and fifth carbon budget by the end of the year.77

40.The cross-government nature of carbon budgets means that the Treasury is well placed to ensure there is coordinated action across government to meet them. Its control over capital spending, taxation policy, regulation and approval of major projects means that it can promote joined-up policy to ensure cost-effective decarbonisation of the economy. But we have seen no evidence that it does this effectively. We were disappointed to learn that the Treasury had signed off the 2015 Spending Review knowing that it would not do anything to close the policy gap required to meet the fourth carbon budget. While we acknowledge that the Treasury believes the shortfall can be made up through non-spending measures, we note that these usually manifest themselves as regulations, which the Treasury is known to dislike. The cumulative impact of Treasury decisions taken since the election, especially the cancellation of the zero carbon homes policy and the CCS competition leaves us with reason for scepticism that its attitude to other measures, especially regulatory measures, will be more favourable.

Cancellation of the carbon capture and storage competition

41.Lord Deben described CCS as “absolutely essential” for meeting our climate change targets cost effectively.78 The CCC recently reported that, without the reduction in emissions delivered by CCS, meeting the 2050 target would require full decarbonisation of every building and every vehicle in the stock by 2050, or closing down of heavy industry.79 CCS is a group of technologies that enables carbon dioxide to be captured, followed by transportation to a storage site, usually underground.80 It can be fitted to fossil-fuelled power plants as a form of low- or no-carbon electricity. In comparison to wind and solar, CCS is currently expensive. Matthew Bell explained that CCS was important because it would help to decarbonise a range of sectors, in addition to the power sector, such as transport and industry. Indeed, it is currently considered to be the only feasible option for decarbonising heavy industry.81

42.Stuart Haszeldine, Professor of Carbon Capture and Storage at the University of Edinburgh, explained how the cost of CCS in the UK would reduce significantly once the comparatively expensive first-of-a-kind projects had been built and their associated infrastructure and supply chains established.82 For this reason, EEF, the manufacturers’ organisation, highlighted CCS as an example of a technology which requires investment in the short-term to realise savings in the long-term.83 DECC estimated that without CCS in the UK energy mix it would cost an additional £30 billion to meet the 2050 carbon targets.84

43.For these reasons witnesses were concerned about the Treasury’s decision in the 2015 Spending Review to cancel the £1 billion capital funding available to support CCS projects in the UK, which was due to be awarded following a competition.85 Following the decision, competition bidders announced that, without government support, they would be unable to continue their projects. We know from figures provided by EEF that, before the decision to withdraw funding support, developers in the Competition spent £100 million, an amount equivalent to the Government’s investment.86 But some estimates are much higher. Stuart Haszeldine estimated the amount of private and public sector money which had been spent on CCS in the UK to date could exceed £500 million – comparable, he argued, to the cost of one CCS competition project.87

44.In its report, the NAO set out the Treasury’s main arguments for cancelling the project. These were:

a)The competition was aiming to deliver CCS before it was cost-efficient to do so; the costs to consumers would be high and regressive;

b)The competition would not guarantee the further investment required to expand CCS; and

c)There were better uses for the £1 billion, though they did not elaborate what those better uses were.88

Neil Kenward also said that the Treasury was concerned that, “the projects when up and running, would have added potentially many billions of pounds to consumers bills over the lifetime of the contracts” designed to support them.89

45.Some witnesses were concerned about the timing of the decision. Michael Jacobs told us:

“[ … ] when it comes to a spending review the Treasury is in total control and you have seven years—in fact, the original policy was longer—of consistent policy by three different kinds of Government just overturned in a unilateral Treasury decision for which was there no explanation other than that this was more money than could be spent at the time. [ … ] if there was a time to cancel it, it would have been in 2011 with the new Government saying, “Look, we can’t do this. It’s too expensive”.”90

Furthermore, delaying the role out of CCS now could mean that the UK misses the opportunity to utilise the knowledge and expertise in the North Sea oil and gas sector which is considered to be important for the development of the infrastructure to safely and effectively store captured carbon dioxide underground.91

46.Several witnesses were unhappy with the way the decision had been communicated to business, industry and investors. Matthew Knight, who said he had some sympathy for the Government’s decision, said the issue was with the “speed with which the decision was made and the lack of notice or debate”.92 Barbara Vest, Director of Generation at Energy UK said that the Government had not told the industry before the announcement.93 She described the decision as “devastating”.94 Lord Deben said that CCS was in “abeyance”.95 Michael Jacobs commented that the Treasury had treated CCS businesses in an “arbitrary way”.96 Claire Jakobsson, Head of Energy and Environment Policy at EEF highlighted how the industrial sector had been working closely with government on CCS and so it had a “huge shock” when the competition was cancelled.97 The CCC stressed the importance of a new strategy for CCS for meeting our climate change targets cost-effectively. Lord Deben called for the new CCS strategy to be included in the carbon plan, and published before the end of the year, saying:

“If it is not in that Government statement then in fact we will have made a decision about the way in which this was developed that is wholly contrary to the cost-effective way of delivering what the Government agrees has to be delivered. So that is the date, in very clear terms”.98

47.The NAO highlighted some of the immediate consequences which included loss of knowledge about the technical and project management aspects of CCS in government as people move on; a failure to utilise existing oil wells which may be decommissioned; and an impact on investor confidence.99 The latter point was picked up by our witnesses. Michael Jacobs commented that the decision was “deeply damaging” not just to CCS but to “all kinds of policy, because businesses look at this and say, “Are the Government going to go through with anything they have committed to?”.”100 Commenting on the impact on investor confidence Claire Jakobsson said:

“In terms of giving investor confidence to business for the long-term, this was not a very good signal to send. From our point of view, we saw that as a very negative result for sustainability and for encouraging business to take those kind of leaps of faith into making those investments in long-term, sustainable technologies and clean-tech goals”.101

48.Carbon capture and storage is an essential technology because it has the potential to help decarbonise a range of sectors including power, transport and heavy industry. The Treasury’s decision to cancel the CCS competition will delay the roll out of CCS in the UK and will increase the cost of deploying it in the future. Without CCS it could cost an additional £30 billion to meet the 2050 carbon targets. The way the Treasury communicated its decision to industry left businesses in “shock”, and was described as “devastating”, potentially undermining the Government’s efforts to deploy CCS in the future.

49.It is vital the Government produces a new strategy for CCS this year. Treasury should work with BEIS to ensure the new strategy is published as part of the carbon reduction plan due to be published by the end of the year. Failing to do so will make it more expensive to meet our long-term legally binding climate change targets. In creating this strategy the Treasury should investigate the possibility of using proceeds from the proposed sale of the Green Investment Bank to fund CCS.

Cancellation of the zero carbon homes policy

50.Energy efficiency, and resource efficiency more broadly, is an issue which cuts across the economy. It enhances productivity by reducing costs to both industry and households. Responsibility for promoting resource efficiency spans several government departments including BEIS, DEFRA and DCLG. The Treasury has a key role to play in promoting economy wide efficiency. It is for this reason that a number of respondents were disappointed by the Treasury’s decision to cancel the zero carbon homes policy in July 2015 with the aim of ‘reducing net regulation on house builders’.102

51.Since the zero carbon homes policy was proposed in 2006, successive governments have used the planning system and building regulations to increase the efficiency of new homes over time. All new homes would have to be ‘zero carbon’ from 2016 onwards. Mathew Knight described the Treasury’s cancellation as significant because “it is a policy that I am sure everybody would agree is completely sensible”.103 Rob Lambe also cited the policy as an example of where the industry had “come together with Government departments to do something that is arguably in the long-term interest”.104 He described the decision to cancel the policy as “arbitrary” and with “no credibility” or “substance” which produced “uproar from the industry”. He went on to say:

“[Treasury] simply said, “This is going to be a burden on industry. We need homes and cannot afford any sort of burden on industry, therefore we are going to reverse this policy that has been in place for 10 years.” It is a further illustration of decisions being made where there is a wealth of evidence to support the decision made in the first instance, but being overturned by a dearth of evidence to say otherwise”.105

The Aldersgate Group reported that this decision from the Treasury came as a ‘considerable surprise to the construction industry’ and had ‘produced unhelpful signals for investors and businesses’.106

52.Treasury officials justified the Treasury’s decision to cancel the policy on the grounds that it did not align with the Government’s aim of increasing housing supply. They explained that a specific element of the policy, the “Allowable Solutions” carbon off-setting scheme, was effectively a tax on development because it did not increase energy efficiency.107 The CCC recently made the point, however, that abolition of this policy could increase costs in the long-term because these homes will need to be retrofitted to make them more efficient in the future.108

53.In 2015 the Treasury abolished the zero carbon homes policy. Despite the Treasury’s justification for doing this, the decision surprised and in some cases angered many in the industry–including the construction industry–because it had been working towards implementing the policy for over a decade. There is a risk that costs to the economy and householders will increase in the long-term as a result of the last minute decision because new homes will need to be retrofitted to improve their energy efficiency and therefore contribute towards meeting the UK’s 2050 carbon targets. The decision harms the development of new markets for innovative energy-saving products, and wastes years of the industry’s sunk costs. We recommend that the Government reinstate the zero carbon standard for new homes.

Landfill tax and PFI credits

54.The Government has targets to divert waste from landfill and increase recycling. These are based on a waste hierarchy which scores waste prevention as best for the environment and disposal as worst for the environment, with recycling sitting in between.109 There is a target for the UK to recycle at least 50 per cent of household waste by 2020.110 DEFRA has lead responsibility for meeting its waste responsibilities but the Treasury has an important role to play through control over waste taxes and its support for schemes designed to build waste infrastructure.

55.The Treasury controls the landfill tax designed to divert waste from landfill. The landfill tax was introduced in 1996 and was the first UK tax with an explicit environmental purpose. The price of the tax has risen over time.111 Most waste businesses and organisations agreed that the landfill tax had played a positive role in helping the UK to meet its waste targets and divert waste from landfill to other ways of dealing with waste such as recycling or energy from waste.112 Dan Cooke, Director of Communications and External Affairs at Viridor told us that the landfill tax was the biggest single driver of recycling and resource efficiency in the sector over the last 10 years.113 Estelle Brachlianoff, Senior Executive, Vice-President UK and Ireland at Veolia said that the landfill tax had encouraged investment because of the certainty in the direction of travel the tax provided to the sector.114 The recycling rate for England has recently dipped for the first time since records began in the 1990s. When we asked whether the UK would reach its 50% target by 2020, Treasury Minister Jane Ellison replied: “We are committed to those targets [ … ] I cannot add a great deal of detail inasmuch as I have only just begun to look at some of this, so I do not want to tell you things that I have not yet looked at”.115

56.The landfill tax is, however, a ‘blunt instrument’ when it comes to the waste hierarchy. It has no effect on what happens to the waste once it has been diverted from landfill. Dan Cooke suggested that we were starting to see unintended consequences resulting from the landfill tax which included a rise in waste crime and an increase in the export of waste from the UK.116 The UK exports two to three million tonnes a year of waste to Europe, where it is processed.117 The Dan Cooke was critical of this, saying the UK is effectively “paying other countries to create jobs, investment and their own energy, when we could do that ourselves.”118 This raised questions about the extent to which the Treasury was concerned with supporting wider environmental goals and targets outside of the tax.

57.One measure which helped to drive recycling rates was the Treasury supported PFI credits for the waste and recycling sector. The Local Government Association described how the Government previously provided Waste Infrastructure Credits (payments to councils over the life cycle of a PFI contract), which gave a financial incentive to councils to promote recycling rather than using waste treatment facilities.119 The Environmental Services Association described how this scheme attracted much needed investment in waste infrastructure and, it argued, enabled the Government to meet its targets early.120 ESA estimated that the waste and resources management sector had invested £5 billion in new infrastructure over the past five years, and could do the same in the next five, given the right policy environment.121

58.In October 2010, DEFRA announced the withdrawal of these credits from seven out of 18 projects which it deemed were no longer needed to meet 2020 landfill diversion targets. We asked the NAO to assess the extent to which this decision impacted on the Government’s ability to meet its targets. The NAO concluded that DEFRA’s decision was rational and that it was still likely to meet its targets.122 The NAO’s assessment, however, highlighted that the main reason the Government would meet its target was because there was predicted to be roughly 6 million tonnes less waste in the system per year than expected. It is not possible to pinpoint the reason for this but it is likely to be a combination of changes in the economy, attitudes to waste, access to finance and government policy.123 The Treasury told us that there had been no indication that the withdrawal of PFI funding from certain projects had had any negative impact on the appetite to invest in waste infrastructure development.124

59.The landfill tax is now the main mechanism for driving the waste and recycling industry.125 Estelle Brachlianoff argued that the tax was not enough to develop the sector, saying, “I don’t think the landfill tax alone will help us move into the next step” and Dan Cooke argued that more clarity was needed from the Government on how it wants the sector to grow.126 Green Alliance noted that ‘the flat lining of recycling rates over the last few years suggests the landfill tax has reached the limits of its impact on recycling rates’.127 Dan Cooke also said that while DEFRA have engaged a lot with the industry, it is less clear whether there is a connection between the ideas in DEFRA and Treasury.128 Witnesses hoped that the Treasury would engage constructively with DEFRA and the industry on future policy proposals to encourage investment in the sector.129 Some witnesses pointed out that the devolved administration in Wales had taken a better approach. Dan Cooke told us that Wales was showing leadership on waste management by setting clear targets, and the Local Authority Recycling Advisory Committee praised the Welsh administration’s approach to working with local authorities to achieve a recycling rate of 59 per cent.130

60.The Treasury has, through the landfill tax, played an important and positive role in diverting waste from landfill. Businesses have had confidence in the long-term certainty of the tax and invested accordingly. The landfill tax is, however, a ‘blunt instrument’ and is not sufficiently nuanced to drive continued increases in recycling rates. We have seen no evidence to suggest that the Treasury has been working with DEFRA – which has lead responsibility for waste and recycling policy – to find new ways of boosting recycling to achieve our EU targets. The Treasury should set out in its response to this report its future plans for the landfill tax and how it plans to support further investment in the waste and recycling sectors in the future.


61.This chapter has highlighted a number of examples which show that, even where it might be possible for the Treasury to justify specific policy decisions in isolation, the sum of all these decisions harm environmental sustainability. It is clear that the Treasury is taking these last minute decisions without an overarching strategy. For example, its decisions to change or cancel long-established policies were often sudden and unexpected. The way in which it communicates these decisions and the reasons behind them were greeted with shock and uproar by stakeholders. This has had the undesirable effect of undermining investor confidence as investors become increasingly concerned with policy risk. This was compounded by the perception that the Treasury have done little to coordinate with other departments and support them to find alternative solutions to meeting their policy objectives.

69 Committee on Climate Change, ‘Carbon Budgets and targets,’ accessed 21 October 2016

71 Committee on Climate Change, Meeting Carbon Budgets – 2016 Progress Report to Parliament (June 2016), p11

72 Grantham Research Institute at the London School of Economics (SAT 0027)

73 Q4 [Michael Jacobs], Q70 [Barbara Vest], Q83 [Barbara Vest], Q121 [Neil Kenward]

75 Q80 [Matthew Knight]

76 National Audit Office, Sustainability in the Spending Review (July 2016), p8

77 Q42 [Matthew Bell]

78 Q51 [Lord Deben]

79 Committee on Climate Change, Meeting Carbon Budgets – 2016 Progress Report to Parliament (June 2016), p69

80 National Audit Office, Sustainability in the Spending Review (July 2016), p31

81 Q60 [Matthew Bell]

82 Stuart Haszeldine (SAT 0024)

83 EEF (SAT 0041)

84 Q59 [Matthew Bell], Institution of Environmental Sciences (SAT 0037), EEF (SAT 0041), National Audit Office, Sustainability in the Spending Review (July 2016), p33

85 Institution of Environmental Sciences (SAT 0037), Aldersgate Group (SAT 0030), Independent Renewable Energy Generators Group (SAT 0028), Stuart Haszeldine (SAT 0024)

86 EEF (SAT 0041)

87 Stuart Haszeldine (SAT 0024)

88 National Audit Office, Sustainability in the Spending Review (July 2016), p35

89 Q109 [Neil Kenward]

90 Q4 [Michael Jacobs]

91 Stuart Haszeldine (SAT 0024), National Audit Office, Sustainability in the Spending Review (July 2016), p36

92 Q72 [Matthew Knight]

93 Q81 [Barbara Vest]

94 Q82 [Barbara Vest]

95 Q57 [Lord Deben], Q81 [Barbara Vest]

96 Q4 [Michael Jacobs]

97 Q3 [Claire Jakobsson]

98 Q60 [Lord Deben]

99 National Audit Office, Sustainability in the Spending Review (July 2016), p36

100 Q4 [Michael Jacobs]

101 Q3 [Claire Jakobsson]

102 British Woodworking Federation (SAT 0025), Aldersgate Group (SAT 0030), Renewable Energy Association (SAT 0035), Alan Neale (SAT 0040), HM Treasury, Fixing the Foundations: Creating a more prosperous nation (July 2015), p46

103 Q80 [Matthew Knight]

104 Q9 [Rob Lambe]

105 Q9 [Rob Lambe]

106 Aldersgate Group (SAT 0030)

107 Q106 [Susan Acland-Hood], HM Treasury (SAT 0076)

108 EEF (SAT 0041), Committee on Climate Change, Next steps for UK heat policy (October 2016), p7

109 Department for Environment, Food and Rural Affairs, Guidance on Applying the waste hierarchy (June 2011), p3

110 Department for Environment, Food and Rural Affairs, UK Statistics on Waste (August 2016)

111 Landfill tax: introduction & early history, Standard Note SN/BT/237, House of Commons Library, October 2009

112 Q88 [Jerry McLaughlin], Veolia (SAT 0046), Renewable Energy Association (SAT 0052), Resource Association (SAT0056), DS Smith (SAT 0057), Environmental Services Association (SAT 0058), Local Authority Recycling Advisory Committee (SAT 0059), Local Government Association (SAT 0061), Mineral Products Association (SAT 0062), Green Alliance (SAT 0064), Chartered Institution of Water and Environmental Management (SAT 0070)

113 Q86 [Dan Cooke]

114 Q86 [Estelle Brachlianoff]

115 Q156 [Jane Ellison]

116 Q86 [Dan Cooke], Q88 [Dan Cooke], Veolia (SAT 0046), London Councils (SAT 0053)

117 Q91 [Estelle Brachlianoff], Renewable Energy Association (SAT 0052)

118 Q86 [Dan Cooke]

119 Local Government Association (SAT 0061)

120 Environmental Services Association (SAT 0058)

121 Environmental Services Association (SAT 0001)

124 HM Treasury (SAT 0076)

125 The Association of Directors of Environment, Economy, Planning and Transport (SAT 0060)

126 Q86 [Estelle Brachlianoff, Dan Cooke], Q99 [Estelle Brachlianoff], Renewable Energy Association (SAT 0052)

127 Green Alliance (SAT 0064)

128 Q88 [Dan Cooke]

129 Green Alliance (SAT 0064)

130 Q89 [Dan Cooke], Local Authority Recycling Advisory Committee (SAT 0059)

16 November 2016