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Carbon Crunch: “Net zero will be a major driver of economic change”

Author: ICAEW Insights

Published: 25 Oct 2021

Resolution Foundation and the LSE Centre for Economic Performance say speeding up emissions reduction will require changing behaviours in addition to the UK government’s Net Zero Strategy’s focus on technological innovation.

In advance of the government’s recently published ‘Net Zero Strategy’, the Resolution Foundation and the Centre for Economic Performance at the London School of Economics (LSE) published ‘The Carbon Crunch’, a report exploring the economic policy questions arising from the need for the UK to shift to a net zero economy. 

The ‘Carbon Crunch’ was the first report on net zero of the ‘Economy 2030 Inquiry’ project, a two year collaboration between the Resolution Foundation and the LSE looking at the drivers of economic change in the 2020s including Brexit, COVID-19 and the transition to net zero. The Inquiry, funded by the Nuffield Foundation, aims to develop proposals to encourage sustainable growth and improve people’s lives.

Both the ‘Carbon Crunch’ and the government’s ‘Net Zero Strategy’ argue that the case in favour of the UK acting decisively on climate is overwhelming. However, while the ‘Carbon Crunch’ argues that achieving the transition to net zero carbon by 2050 will be challenging and disruptive, the Prime Minister’s Foreword to the ‘Net Zero Strategy’ argues that “this strategy shows how we can build back greener, without so much as a hair shirt in sight”. 

The ‘Carbon Crunch’ report points to the estimates of the Climate Change Committee (CCC), that 87% of the decarbonisation in the last ten years has been “behind the scenes” technological advances or fuel switching but that figure drops to 41% of the emissions reductions required by 2035 according to the CCC’s Balanced Pathway. 

The report states that this will have a major impact on people’s lives but laments that there has been a ”long-running absence of clear communications from government detailing the changes that net zero will require”. In particular, emissions from residential buildings will need to fall by 48% by 2035 when they have actually risen in the last ten years. This will require significant investment in cleaner energy and insulation at an estimated cost of £76bn over the next ten years. The government’s ‘Heat and Buildings Strategy’, published alongside the Net Zero Strategy, announces £3.9bn of new public funding to decarbonise heat and buildings.

One of the key themes of the report is that these costs will not be borne equally and people’s ability to absorb additional costs vary. For example, using a public charging point for an electric vehicle tends to be more than double the cost of charging a vehicle at home. Furthermore, lower-income households are far less likely to have off-street parking that would allow them to charge their vehicle at home. The government recognises this and has committed £620m in additional funding for electric vehicle infrastructure “with a focus on local on-street residential charging”.

The transition to net zero will also be disruptive for the Exchequer. The OBR estimates that the transition to lower emission vehicles will result in motoring tax revenues starting to fall by 2023-24, creating a £13bn tax gap. In addition, significant net investment is required over the next 20 years that will probably not start to result in savings until the 2040s. The CCC’s Balanced Pathway requires annual net investment of £27bn per year over the next decade. More clarity about whether the government intends to reach this level of investment and, crucially, how it intends to pay for it, will be provided in the Budget and Spending Review on 27 October.

As a result of these challenges to both the public and the exchequer, the report argues that the government must update its economic strategy and consider net zero alongside other economic drivers. The government also needs to mitigate the distributional impact of net zero policies as is acknowledged by HM Treasury’s ‘Net Zero Review’, also published alongside the ‘Net Zero Strategy’.

Both the HM Treasury analysis and the ‘Carbon Crunch’ report argue that some initiatives so far, such as electric car subsidies, have probably disproportionately benefitted predominantly wealthier households. HM Treasury concluded that there could be a “trade-off between incentivising decarbonisation and minimising adverse distributional impacts”.

Despite the challenges, the report argues there are many reasons to be positive. There is broad public support for action – 80% of adults surveyed in 2021 stated they were concerned or very concerned about climate change – and there are clear co-benefits to transitioning to net zero such as cleaner air. In addition, the UK has strong research capabilities, “revealed technological advantages” in key areas, and the government’s commitment to “lead the world” in reducing emissions in the ‘Net Zero Strategy’ as it prepares to host COP 26 in November 2021.

Oliver Simms, Manager for Public Sector Audit & Assurance at ICAEW, commented: “This comprehensive report by the Resolution Foundation and the Centre for Economic Performance suggests the path to net zero will be much more challenging than the government’s ‘Net Zero Strategy’ suggests. Ensuring that the costs are spread fairly will be one of the major challenges in the coming years for the government and the wider public sector. Clearly communicating the behavioural changes required and gaining public support for the necessary measures will be essential.

Simms believes there is a clear need for decisive and co-ordinated action across central and local government based on accurate data, assessment of the impacts across regions and income distributions, and rigorous economic analysis. 

“ICAEW members working in and with the public sector have a key role to play, which will be a key theme to be explored further at the ICAEW Public Sector Sustainability Conference on 10 December 2021,” he said. 

ICAEW’s virtual Public Sector Sustainability Conference will take place on 10 December 2021. You can book your place here.

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