Conclusions and recommendations
Importance of the Treasury
1.The Treasury, through its control over government spending, taxation policy and regulation is arguably the most important department for ensuring the UK meets its environmental obligations. It is uniquely placed to take an overarching perspective and ensure policies across government work to promote sustainability. It is clear from the evidence, however, that the Treasury has not done enough to encourage departments to work together on this issue. This is particularly the case during spending reviews where the Treasury could have done more to establish strong incentives for collaboration between departments on environmental matters. (Paragraph 16)
2.The Treasury plays an important role in ensuring policy coherence across government. However, there is considerable evidence that some of its decisions rode roughshod over other departments’ objectives. A lack of transparency over how and why the Treasury has made decisions at odds with other departments has confused businesses and impacted investor confidence. We are pleased to hear that the new Financial Secretary is concerned about the Treasury’s impact on investor confidence and we hope that this report will help identify ways the Treasury can address this issue. (Paragraph 17)
Understanding of environmental sustainability
3.The Treasury’s technical and political framework for assessing environmental interventions is geared towards favouring short-term priorities at the expense of long-term environmental sustainability, even when it could lead to higher costs to the economy in the future. In part, this is because its framework does not take account of long-term benefits adequately. Ministers cannot make well-informed decisions unless they have access to all relevant information including long-term costs and benefits. (Paragraph 31)
4.The Treasury needs to improve the way it captures and takes account of long-term environmental costs and benefits. It must ensure that it has the best available evidence when making decisions about specific interventions, for example, by including wider costs and benefits and establishing a consistent framework with which departments can provide supplementary evidence in addition to NPV calculations. It should also make more use of relevant independent advisory bodies during spending reviews to scrutinise bids and green-check – a systematic environmental stress test – initial high-level assessments prepared for Ministers to inform their decision-making. The Treasury should, after a spending review, make public who it has consulted with and how they incorporated any feedback into their decision-making. (Paragraph 32)
5.We welcome the Treasury’s work to incorporate new evidence on natural capital into its decision-making processes. A natural capital approach has the potential to help account for the long-term environmental risks. However, we want to see evidence of how the Treasury will take this work forward. In its response to this report, the Treasury should set out concrete proposals about how, and by when, it intends to take forward and incorporate new evidence on natural capital into its policy appraisal process. (Paragraph 33)
Performance on environmental sustainability
6.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. (Paragraph 40)
7.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. (Paragraph 48)
8.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. (Paragraph 49)
9.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. (Paragraph 53)
10.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. (Paragraph 60)
11.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. (Paragraph 61)
Improving performance and ensuring accountability
12.The Government’s new focus on industrial strategy has the potential to improve long-term policy-making. The Treasury could use its position to ensure that strategic choices made by the Government work across the economy to promote sustainability and in particular carbon reduction and resource efficiency. However, the analysis in the previous chapter shows the Treasury failing to support a coherent, green industrial strategy and take a long-term, predictable and sustained approach to policy making. If the Treasury is going to contribute constructively to industrial strategy it will have to reflect on, and learn lessons from, its recent past and make decisions which help, rather than hinder, investor confidence. It should commit to work with BEIS and other departments with environmental policies so that the Government’s new industrial strategies explicitly explain how the potential of the UK’s green economy will be realised and how environmental sustainability objectives will be supported. Doing so would help develop and protect skills and jobs in the construction, waste, and Scottish offshore industries, as well as their associated supply chains. (Paragraph 65)
13.A common theme throughout this inquiry has been that existing accountability arrangements are not adequate, making it difficult to hold the Treasury, and Government as a whole, to account on its environmental impact. This is something our predecessor Committee explored in the past, in light of the abolition of the Sustainable Development Commission, advocating the creation of an Office of Environmental Responsibility. The Treasury needs to be much more transparent about the reasons for its decisions which impact on environmental objectives. Recognising this deficit we propose the following arrangements to increase the level of scrutiny. (Paragraph 72)
14.In response to this report, the Treasury should set out concrete actions which demonstrate how it is working with the Office for National Statistics (ONS) and the Natural Capital Committee to integrate natural capital into environmental accounts by 2020 and how this will influence Treasury decision-making. The ONS will also publish nationally relevant indicators as part of the UN Sustainable Development Goals. We intend to look into how these new metrics could supplement traditional metrics such as Gross Domestic Product (GDP). (Paragraph 73)
15.Fiscal events such as budgets and autumn statements are key moments in the setting of a Government’s short-term agenda. The Treasury did conduct an analysis of the net impact of the 2015 Spending Review on carbon budgets. We welcome the fact that this analysis took place. However, the Treasury has refused on several occasions to publish it so it is difficult to determine how the analysis influenced the Treasury’s decisions. Members of Parliament and the public should have access to this information so that they can hold the Government to account for the decisions it takes. We therefore request that the Committee on Climate Change publish, as part of its annual progress report to Parliament, an analysis of the net impact of measures announced during the previous year’s Budget and Autumn Statement on meeting carbon budgets. (Paragraph 74)
16.Spending reviews are also key political and fiscal events for setting the Government’s medium-term agenda. The Treasury did take steps in 2015 to encourage departments to put forward information on environmental risks, impacts and obligations as part of the process. However, the Treasury did not use the opportunity to encourage departments to work across government on environmental issues. We therefore request that the NAO repeats its assessment of sustainability in the spending review after each future spending review so that the public and Parliament can monitor the Treasury’s progress on incorporating environmental information into its future spending decisions. (Paragraph 75)
Conclusion
17.The environment and the economy play an important role in supporting each other. As the Government’s economic and finance department, the Treasury is arguably the most important department for ensuring the Government meets its environmental obligations. It wields significant control over all aspects of government policy including spending, taxation policy, regulation and approval of major projects. The Treasury uses a technical and political framework for policy appraisal which results in a preference for promoting projects which deliver benefits in the short-term rather than the long-term – in part because this framework does not take adequate account of environmental long-term benefits. This could lead to higher fiscal and environmental costs in the future. (Paragraph 76)
18.Even if it might be possible for the Treasury to justify specific policy decisions in isolation, the sum of all these decisions have harmed environmental sustainability. It is clear that the Treasury could do more to support alternative policy solutions when it deems an existing solution to be unaffordable or not cost-effective. The Treasury could help to promote environmental sustainability in future by using its position in government to ensure that any strategic choices made by the Government work across the economy to promote sustainability and in particular carbon reduction and resource efficiency. This would require taking a more joined-up approach to its policy appraisal that looked at its decisions overall rather than focusing on justifying its decisions in relation to individual projects. It also needs to be much more transparent about the reasons for its decisions which impact on environmental objectives. (Paragraph 77)
19.The Government’s new focus on industrial strategy has the potential to improve long-term policy-making. However, the Treasury is currently failing to take a long-term, predictable and sustained approach to policy-making – the hallmarks of a good industrial strategy. If the Treasury is going to contribute constructively it will have to step-up efforts to reassure investors and promote industries which help environmental sustainability. (Paragraph 78)
16 November 2016