UK govt spending a billion pounds less on cutting domestic emissions than it raises through carbon taxes

The UK government is spending a billion pounds less on cutting domestic emissions than it is raising through carbon taxes, research published today from the New Economics Foundation (NEF) finds. The UK emissions trading scheme, which charges certain businesses for emitting greenhouse gases, is expected to raise £6.5bn this year, but the government has only allocated £5.5bn to cutting carbon emissions.

The UK emissions trading scheme charges businesses in highly polluting sectors per tonne of carbon they emit. Over the past two years the price of a tonne of carbon in the scheme has trebled from around £28 to around £85. As a result, the amount that the government expects to raise this year has more than quadrupled, from £1.2bn in March 2021 to £6.1bn in November 2022, according to the Office for Budget Responsibility (OBR). The analysis finds that the revenue will be even higher, at £6.5bn, and will remain at over £5bn every year until 2030.

The analysis highlights that, when emissions trading schemes bring in additional revenues, the UK’s European neighbours are much better at reinvesting these into climate action. Germany, Portugal, France and Greece are all using between 90 and 100% of equivalent EU emissions trading scheme revenues to cut harmful carbon emissions. In contrast, the UK has only reinvested 20% of its additional trading scheme revenues into climate action this year, with this forecast to rise to just 69% by 2024/​25. NEF research argues that there are many sources of money for climate action, including general taxation, government borrowing and the Bank of England. But the analysis shows that, despite the government’s own Environment Act saying that taxes collected from polluters should be reinvested in compensating for environmental damage, the government is not taking full advantage of a vital resource.

At last month’s Cop27 climate summit, the international community agreed to create a ​“loss and damage” fund to provide financial assistance to poor nations stricken by climate disaster. The analysis highlights that the UK should identify new and additional finance to commit to this fund, including revenues from the emissions trading scheme. NEF analysis argues that this would recognise the disproportionate impact which the UK has had in fuelling the climate crisis, compared to poorer countries who are bearing the brunt of its impacts.

NEF recommend that the government use revenues raised from the emissions trading scheme to:

• Invest an additional £8.75bn this parliament to upgrade the nation’s draughty homes so they cost less money and rely on less gas to keep warm, plus an extra £3.6bn to kick-start an emergency basic insulation programme this winter.
• Set up a new stream of ​‘loss and damage’ finance to support low income countries to recover and rebuild in the aftermath of climate-induced disasters such as droughts and floods and heatwaves.

Dr Alex Chapman, senior researcher at the New Economics Foundation, said:

“We’re set to raise over £20bn over the next four years from our most polluting businesses but we’re not putting it to good use. This government has the opportunity to reinvest this money to cut our dangerous carbon emissions and repair some of the damage caused by the climate crisis. If we put this towards insulating and upgrading the UK’s draughty homes, we could keep families warm and save the government money. And when countries like Pakistan, who have contributed the least to the climate crisis, are struck by flooding or other extreme weather, we should make sure they get the money they need.”

Danny Sriskandarajah, Oxfam GB chief executive said:

“While the climate crisis is affecting everyone around the world it is people living in poverty who are bearing the brunt. It is a gross injustice that the largest polluters are reaping huge profits while those who have done the least to cause it are left footing the bill. The polluter should – and could – be paying for this climate damage.

“The revenues from the UK emissions trading scheme must be harnessed to support people in the UK reduce their energy bills and emissions and also to help low-income countries recover from the devastating impacts of an escalating climate crisis which is already destroying countless lives, homes and jobs. Following the historic outcome at Cop27 in establishing a loss and damage fund, the emissions trading scheme is an important revenue source that can help people tackle the climate crisis at home and abroad.”

Notes

The New Economics Foundation is a charitable think tank who are wholly independent of political parties and committed to being transparent about how it is funded.

The analysis is available at https://​newe​co​nom​ics​.org/​2​0​2​2​/​1​2​/​m​a​k​i​n​g​-​p​o​l​l​u​t​e​r​s-pay

Current government spending on climate action is calculated as follows:

The October 2021 spending review main document is available here: https://​www​.gov​.uk/​g​o​v​e​r​n​m​e​n​t​/​p​u​b​l​i​c​a​t​i​o​n​s​/​a​u​t​u​m​n​-​b​u​d​g​e​t​-​a​n​d​-​s​p​e​n​d​i​n​g​-​r​e​v​i​e​w​-​2​0​2​1​-​d​o​c​u​ments

Table 2.5 on page 73 details the government’s forecast of what it describes as ​“Core Net Zero Spend”. The forecast for 2022 – 23 is £5.5bn. NEF forecasts revenues from the UK ETS at £6.5bn for the 2022 – 23 period.

Since the October 2021 Spending Review the government has announced additional green policies. This includes the Boiler Upgrade Scheme, Innovative Energy Technologies, additional funding to the Aerospace Technology Institute, and a new HGV Demonstrator. We estimate that the total potential value of this spending is around £420m per year and hence government would still be raising more from the ETS than it is spending on climate. However, it is unlikely that the true spending level is this high in the year 2022/​23 as these policies were announced too late in the year to take full effect (for example, just 10% of this year’s Boiler Upgrade Scheme budget was drawn down in the first 6 months of the year). It is also unclear whether these policies were already factored into the forecast in the October 2021 Spending Review. As such, our analysis for 22/​23 is based on the government’s October 2021 forecast.

Analysis of the proportion of ETS revenues re-invested in climate action by other European countries can be found here: https://​www​.eco​log​ic​.eu/​18655

COP27 concluded on Sunday 20^th November, and featured a historic outcome in establishing a Loss and Damage fund. The fund is set to be operationalised over the next year, and it is crucial that when it is fully operational that it is adequately financed to ensure that climate-vulnerable countries can receive the support they need to recover in the aftermath of climate-induced events.