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UK’s net zero ambitions may require additional taxation, says Treasury

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Published: 20 Oct 2021 Update History

As the government published its strategy to meet the UK’s commitment to become net zero by 2050, an HM Treasury report has highlighted the significant implications for public spending and tax revenues in meeting the costs.

To become a net zero economy by 2050 the UK will remove carbon from power generation, switch to electric vehicles and begin to remove gas boilers from homes, according to the government’s Net Zero Strategy, published on 19 October ahead of the start of COP26.

The government's 368-page document provides a comprehensive breakdown of the actions that the government believed are required to reduce carbon emissions and the support that will be required to make the transition across the economy, including increasing R&D investment to 2.4% of GDP by 2027 (£22bn) and supporting 240,000 new green jobs by 2035.

Reflecting on the government’s plans, HM Treasury has published its Net Zero Review, examining the potential implications of the net zero transition on the households, business and the wider economy. In chapter 6, it focuses on the fiscal implications of the government’s ambitions and highlights three key pressures that face public finances:

  • A reduction in tax revenues from decarbonisation (including the eventual reduction in carbon pricing revenues).
  • The cost of public investment to support decarbonisation.
  • Pre-existing long-term fiscal pressures, including meeting the costs of health, adult social care and the state pension.

While Treasury makes clear that not acting on climate change holds significant fiscal risk, the report also highlights the uncertainty in technology and cost associated with reducing carbon emissions, and in how taxpayer support may be used to address market failures.

It concludes: “The government has already set out ambitious capital investment plans in support of the UK reaching net zero. If there is to be additional public investment to support decarbonisation, it may need to be funded through additional taxes or reprioritised from other areas of government spending.”

It suggests that additional revenue could potentially be raised from polluters via expanded carbon pricing, avoiding the need to raise other taxes, but warns: “In considering how to replace the lost tax revenues, government will need to consider both its ability to fund public services and other public policy objectives.”

ICAEW’s Managing Director, Reputation and Influence, Iain Wright, said: “We note HM Treasury’s publication of this comprehensive net zero review. We will consider the points it raises, including on the fiscal implications, and respond fully in due course.”

Further detail on funding the government’s net-zero ambitions may be published in the forthcoming Spending Review and Budget on 27 October.

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