Henning Diederichs, Public Sector Financial Reporting Manager at ICAEW, looks at the challenges the government will need to overcome if it is to achieve its objective of decarbonising the UK economy over the next quarter of a century.
Ambition in abundance
Net Zero Strategy: Build Back Greener, issued late in 2021, is not short on ambition and strikes a very positive note about the role government can play in delivering net zero. It is littered with superlatives such as “we have shown the world that green and growth go hand in hand”.
Of course, it is right to be ambitious if we are to limit the rise in temperature to avoid climate catastrophes, and the strategy covers key economic areas where greenhouse gas (GHG) emissions need to be eliminated – power (energy), industry, heat and buildings, transport, natural resources and GHG removal.
The strategy makes the case for net zero by linking employment, ‘levelling up’ and ‘building back better’ through new jobs in green industries that help reduce carbon emissions. The words ‘opportunity’ or ‘opportunities’ are used almost 200 times, roughly once every two pages.
Political support from the top
The strategy acknowledges the complexity and transformative nature of achieving net zero for the UK as a whole. It makes the point that the public sector will also have to reduce its own footprint as well as change the way it is organised and in how decisions are taken.
To underpin the ambition of the government and how seriously it is taking this endeavour, two Cabinet committees dedicated to climate change have been created:
- the Climate Action Strategy Committee (CAS) – chaired by the Prime Minister, which considers matters relating to the delivery of the UK’s domestic and international climate strategy; and
- the Climate Action Implementation Committee (CAI) – chaired by the COP President, which considers the delivery of COP 26, net zero and building the UK’s resilience to climate impacts.
The strategy says that the above committees are supported by well-established and robust governance at an official level. This includes a cross-government Director General group that was established in 2019 to ensure a whole-of-government approach to climate policy, with oversight at the most senior levels. Chaired by the BEIS Director General for Net Zero and International, this group brings together officials from across government, creating a whole system perspective, to support the delivery of significant climate announcements, including those contained in this strategy (p.249 paragraph 7).
Integrating net zero into decision making
The Environment Bill requires the government to reflect environmental issues in national policy making through consideration of five principles (p.250 paragraph 11):
1) The integration principle – policymakers should look for opportunities to embed environmental protection in other fields of policy that have impacts on the environment.
2) The prevention principle – government policy should aim to prevent, reduce or mitigate harm.
3) The rectification-at-source principle – if damage to the environment cannot be prevented it should be tackled at its origin.
4) The polluter-pays principle – those who cause pollution or damage to the environment should be responsible for mitigation or compensation.
5) The precautionary principle – where there are threats of serious or irreversible environmental damage, a lack of scientific certainty shall not be used as a reason for postponing cost-effective measures to prevent environmental degradation.
Key channels through which these principles will be applied are via Spending Reviews, application of the Green Book investment appraisal criteria and the investment and lending activities of arm’s length bodies. For example, the British Business Bank has adopted net zero as a core objective and the new UK Infrastructure Bank is also tasked with helping the UK transition to net zero emission by 2050.
Some of these themes were discussed at our Public Sector Sustainability conference, The road to net zero.
A balancing act
The language used to describe the objectives of the two banks is worth noting. The British Business Bank has net zero as a core objective, which should restrict its ability to lend to projects that are not in line with clean climate objectives. The UK Infrastructure Bank on the other hand appears to have ‘net zero transition’ as just one of its many objectives.
In practice, some infrastructure assets will be built for non-climate related reasons, examples include roads and airports. Many spending and investment decisions will involve competing demands between climate and economic growth. This will, at times, be a difficult balancing act with political, fiscal as well as economic factors all playing a part.
Government leading by example
The strategy optimistically proclaims that the public sector will lead by example during the transition to net zero.
A major source of carbon emissions from the public sector is direct emissions from buildings (responsible for 2% of the UK’s total emissions), which the government seeks to reduce by 75% by 2037 from a 2017 baseline. This is an ambitious and laudable target, but what is less clear is how this is to be funded. A recent government report, State of the Estate 2020/21, estimated that it would cost £11.4bn to maintain and improve the condition of locally managed schools in England. To address climate resilience and net zero carbon, the ‘Schools Rebuilding Programme’ (p.44 figure 28) was announced in June 2020, the first since 2014, which will raise the standard of school buildings across the country by carrying out major rebuilding and refurbishment projects.
The strategy highlights that the Public Sector Decarbonisation Scheme is providing more than £1bn in grants over 2020/21 and 2021/22 to fund heat decarbonisation and energy efficiency measures. A further £1.4bn is pledged for 2022/23 and 2024/25.
The Net Zero Estate Playbook is a guide issued by the Cabinet Office on decarbonising government property that provides some advice on how to access the Public Sector Decarbonisation Scheme. It states that a business case will need to be written at least once in the decarbonisation process, if not multiple times, to agree funding and the approach for each stage of delivery. It goes on to say that in order to obtain funding, a fully developed Green Book compliant business case should ideally be written by someone with the Better Business Cases Practitioner qualification.
The process of obtaining funds seems quite onerous for smaller public bodies and cash-strapped local authorities, which might not have the resources required to put in bids of sufficient quality. This in turn could easily mean that monies are not being allocated to those properties most in need.
The strategy states (p.256 paragraph 45) that “the National Procurement Policy Statement (NPPS), published in June 2021, sets out clear principles that contracting authorities should be following organisationally. Tackling climate change and achieving net zero is one of the key considerations established – this should then be woven through individual procurements (for qualifying procurements).”
Taking account of carbon reduction plans of suppliers is a key policy and came into effect in 2021. It requires suppliers to commit to achieving net zero by 2050 and to detail their organisation’s UK greenhouse gas emissions via the publication of a Carbon Reduction Plan. Failure to do so could exclude businesses from the supplier selection stage of contract bidding.
Using procurement as a mechanism to enact change has the potential to drive significant progress in decarbonising the private sector too and the £292bn of annual procurement spend will send a clear signal to the market that carbon reduction is real.
Skills within government
The strategy reminds us that a new unit was created in September 2020 to oversee the delivery of better training, knowledge and networks that the over 440,000 people working in the Civil Service will need. The new unit – the Government Skills and Curriculum Unit – is expanding its curriculum to include specific training on climate change.
In ICAEW’s response to the BEIS Select Committee inquiry into net zero governance, we emphasised that hiring staff with the relevant skills and knowledge will be challenging given the current demand for skilled staff and we highlighted how PwC is looking to recruit 100,000 people over the next five years in a major push in this area.
Given the long-term nature of net zero, it would not be good value for money to rely on consultants and we therefore agree with the strategy of upskilling the existing workforce. It will take some time but it is, in our view, the right course of action to take.
The strategy correctly identifies local authorities as being key to the success of achieving net zero, stating that of all UK emissions, 82% are within the scope of influence of local authorities.
Three key areas are identified to support local government in developing and delivering their net zero delivery plans:
- setting clearer expectations – clarify how the partnership with local government should work;
- Providing resources – via dedicated funding streams and non-ringfenced funding; and
- building capacity and capability – support ambition and share best practice
While BEIS is taking overall responsibility for improving coordination with local government, other departments will continue to lead on specific policy areas such as the Department for Transport on the decarbonisation of transport.
The strategy goes on to say that this coordination will be achieved by establishing a Local Net Zero Forum to ensure that there is direct input from local leaders. Chaired by BEIS, the Forum will be cross departmental and bring together national and local government senior officials on a regular basis to discuss policy and to discuss delivery options on net zero.
While we do not question the good intentions of this strategy, the UK has one of the most centralised governments in the world which doesn’t always result in efficient interplay between central and local government. The strategy does little to address the concerns raised by the National Audit Office (NAO) in its report, Local government and net zero in England, which include:
- a lack of overall expectations about local authority’s role in achieving national net zero target;
- exactly how the government will work with them to clarify responsibilities for net zero; and
- funding issues.
The NAO report also notes that an informal stocktake found around 45 policy areas across five departments that are likely to impact on the opportunities, decisions and barriers for local action on climate change (p.8 paragraph 12). It went on to say that this poses a significant risk of inconsistent goals and messages.
The strategy also recognises that the 22 dedicated grant schemes require more coordination to reduce bureaucracy and encourage more efficient and integrated decision-making.
We are concerned that local authorities lack the capacity to engage meaningfully with net zero. For example, many local authorities announced climate emergencies but have then failed to act on these announcements. As highlighted earlier, having to obtain funding from different grant streams is not an effective way of allocating money and may exclude local authorities that need it most. While the UK Infrastructure Bank will also be able to lend up to £4bn to local authorities, increasing debt may not always be the best solution for many cash-strapped local authorities.
The strategy outlines the broad direction of travel for all sectors of the economy. One could argue that it doesn’t contain enough detail to be really useful but then at 367 pages, it is probably already long enough. Instead, it provides a useful overview and the supporting plans on specific areas such as transport, energy, etc, should then provide the detail necessary to put firm action into place. However, it has also been said that the supporting documents don’t provide enough detail either.
Few can doubt that the government has the ambition to be carbon neutral by 2050 but a number of key elements are still missing – mainly funding. There appear to be too many different initiatives and funding pots, and it is difficult to see what funding is practically available. Funding initiatives do not always equate to new money being made available, sometimes it is money that was already promised or was initially allocated for another policy area.
There also needs to be more transparency on the overall amount of funding and how it is being used so that it is possible to evaluate how much progress is being made at a sector level.
Another area of concern is the interaction between central and local government. Local government will have a vital role to play in achieving net zero but years of austerity have left them ill equipped to take on such a mammoth task, lacking both financial and human capacity.
Central government has already been reporting on some key sustainability metrices via the Greening Government Commitments. That is a good start, but the heavy lifting is yet to come.
Surveys have shown that the public is behind the sustainability agenda, at least as long as they don’t have to pay for it. This will present a challenge for politicians of all parties as the ambition to go green may encounter resistance when some of the more difficult decisions need to be made.
Saving the planet was never going to be easy and the government has set out some ambitious targets for public bodies to play their part in that cause. While there is a lot still to be worked out, what is clear is that sustainability is now at the heart of decision-making across the entire public sector and real change is possible.
Find more information on the profession’s engagement with net zero on ICAEW’s Climate Hub.
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