Environmental Audit Committee

Wednesday 17th June 2026

(began 2 months, 1 week ago)

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14:49
None Portrait Speaker 1
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Dependent, which means the actual impact of this decision and the actual impact of decisions. They are strategic. They are large scale. They are uncertain. And the choices you make are a function of all the decisions that are made between now and some point in the future. To do that, you can't use a model that simply looks backward and assumes that the economy stays as it is, and a lot of the public finances, because they look short term, do exactly that.

Assume the economy is as it is. What happens if you change taxes or change spending against this unchanged background is as it is. What happens if you change taxes or change spending against this unchanged background?Economy stays as it is and a lot of the public finances, because they look short term, do exactly that. Assume the economy. The name of the game here is to not assume the economy stays as it is, but to take some actions which make profound differences to the structure of that economy.

And for that, there's no single model that can tell you that because you're in the world of risk and uncertainty and risk and opportunity. So you need the insights from an array of models, all with different strengths and weaknesses. And there's a program within government and within the Treasury that is aiming to look at risk and opportunity analysis rather than cost benefit analysis, in order to assess these uncertain structural change issues and to avoid locking in to choices and investments that may look okay in the short run, but which in the medium to long term, you start to regret and which become very expensive to retrofit and replace.
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14:51
None Portrait Speaker 4
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So these are definitely economic and fiscal issues, right. I mean, on the welfare side, we're we depend tremendously on, on, on nature for recreational activities and so on. But most of the kind of productive it's part of the productive asset base of this country. So, uh, that's what the Natural Capital Committee would tell you in its building up of these natural capital, um, estimates, which, um, so I think it's definitely an economic, it's also a fiscal issue. The difficulty with nature is, as I said before, it's sort of there are little incremental changes which happen over time.

We lose nature. We don't notice that we're losing value. And then suddenly it's likely that we regret some the path we've taken or whatever. And nature provides rather surprising values that you never really anticipated. So I'm thinking about a study in the US, for instance, where there was a disease which knocked out bats. Bats eat a lot of insects that hit agriculture. And so agricultural land prices went down by something like 10%. It hit GDP in agriculture because of this loss of, of, of a kind of apex species.

So there are lots of examples of surprising things that we wouldn't have anticipated, which, um, which also affected in that case the ability for those municipalities that were affected by that to, to borrow money. So it ended up costing them in terms of fiscal revenues. So it's clear, I think, that that nature has all of these values. There are some which we don't know about. So we we need to build in kind of buffers in order to, to think that think that through.

So it's both for sure.
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14:53
None Portrait Speaker 1
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Uh, the answer is a resounding yes. And that was the conclusion. It would not surprise you, but that was the conclusion of the Dasgupta review as well. Um, these are assets. And part of the problem here is we have a system that focuses on the flow of economic goods and services, which is GDP, right?GDP is the measure of any quarter or any year's flow of income or output or expenditure. What it doesn't look is that the underlying assets, the stock, the capital that generates that flow.

Um, now we know what that is. It's, you know, it's physical produced capital, the infrastructure, the machines, the buildings. It's our human capital, the skills and training of the workforce. It's our intangible capital, the ideas and the institutions. These are all critical to a country's resilience and a country's productivity growth prospects. But also within that is natural capital. And unlike the others, which more or less are going up, according to the world Bank and its Comprehensive Wealth of Nations report, natural capital is the only one that's going down.

And because these assets are complements, they are not substitutes. So you can't replace an ecosystem with a motorway flyover. Um, because they're complements, you kind of go at the pace of the slowest. So you can have the best factories and the most educated workforce in the world. But if the industrial zone is flooded or people are suffering heat stress and they're in hospital, they will not go out and interact productively in the economy. Um, so this is a critical part of our asset base and our infrastructure base.

And it suffers, I think, to some extent from the same issues of underinvestment that I think have been at the heart of the UK's slow productivity growth. I recently wrote a paper with Terra Ellis, um, former deputy head of the Government Economic Service, where we found that on a like for like basis, the UK has roughly 40% less capital per worker than our competitors in Europe and in the OECD. I mean, it's not a surprise, therefore, that we are somewhat less productive, if you extend that to look at some of the issues relating to natural capital, you have the same issues of underinvestment in things that generate productivity in the future, which of course are the source of healthy public finances as well.

So, um, you know, growth and fiscal stability will be, or let me put it the other way around, natural capital and climate and our response to those issues are critical to issues of growth, productivity, and ultimately fiscal stability as well.
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14:56
None Portrait Speaker 1
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I think. So I think the answer is no, but I would also argue that it probably underplays the importance of investment. And it does so perforce. And here we brush up against politics. Um, if you want to. Invest more in productive assets, including natural capital and climate resilience and including in repurposing your energy system to be electrified and digital and low carbon. Um, then you need to commit some resources to that. Mostly private resources, um, but at the public finance level, that will probably mean some extra spending on public investment that requires either greater taxation, lower current spending, or some borrowing.

And we know what the politics are associated with that. And at the national level, it would require more saving to set aside for investment in order to fund well in order to supply that investment, which is another way of saying less consumption at the national level. Otherwise, you're going to have current account deficits and problems with inflation and the bank responding with higher interest rates. So there are big political and macro issues that are pressing down from the top. On how the Treasury responds to these issues.

And, you know, as part of the mechanism, you'll get inappropriate assessments and inappropriate modelling. But it comes back to the point I made at the beginning. I think if there is leadership and a green light given at senior levels, the Treasury is much more inclined to take seriously the right analytical and methodological approaches which it recognises. And indeed, in the case of the Dasgupta Review, internally commissioned.
14:58
None Portrait Speaker 4
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Can I just say something about that?So so let's let's let me tell you what the Treasury does do in relation to some of these things. So, um, we, my colleague Mark Freeman at York and I are currently undertaking the review of the discount rate for the Treasury Green Book. So the green book is the, is the guidance on cost benefit analysis, which is a way in which government trades off different, you know, sort of policy proposals and regulatory change and infrastructure projects. So how is it, how is um, how is climate and, um, and nature treated in that context with climate change, what we have is a very kind of solid policy at the moment on pricing carbon.

You have a target for net zero and you have an abatement cost price, which tells you how much, um, any project that increases or decreases carbon efficiency or costs, how you price that into and trade that off against other types of expenditures in, in government. Right?So that's a really solid system, I think for, for pricing carbon, you have a target and you have an associated price for nature. What we don't have any of that whatsoever. So not only do like in transport, for instance, the value of time, which is a key determinant on what transport projects the benefits of transport projects, the value of time saved, that increases at the rate of income growth because people become more and more, you know, as people get richer, their time is worth more.

And so the price goes into the cost benefit analysis. That does not happen for nature, for ecosystem services. In, in the appraisal, there is no such correction, but you would expect the same thing to happen. You know, as we get richer, as particularly as the environment gets more scarce, our valuations go up. That is not built into the the Green Book framework. So there's definitely some some things to do. Our recommendations are on the discount rate review.

There's one I can tell you about the others I can't tell you about yet, but we're just asking, um the Treasury to follow the results of the environmental discounting review that we did after the, after the Dasgupta review in 2021, which is to say, let's take this pricing issue very seriously in the analysis of projects.
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None Portrait Speaker 1
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Yeah. So, I mean, there's a yeah, there's a cliche that says, you know, the you want to save the planet. Um, actually, the planet will be fine without us. In fact, we're the biggest problem for the planet. What we really care about is us. And what we really care about is what climate and nature does in terms of provisioning the goods and services that lead to wellbeing and prosperity. Um, so the issue here in terms of, you know, protecting nature and preventing environmental degradation is about enhancing the things we care about.

Now, some of those will be material prosperity, but there'll be lots of other things. And when you this is indeed why we wanted to focus on wealth and assets and capital, because capital and assets are what generate a source of wellbeing. Note wellbeing, not just GDP. GDP may be part of that, but it's not the only part of that. Um, we care about nature intrinsically, but the biggest threats really are the impact on nature on very core elements of our ability to interact socially and economically, our ability to go out and be productive without facing heat stress, without facing flooding of our properties and our factories and our infrastructure, without watersheds, um, that aren't stable, that encourage both floods and droughts within a changing climate, our ability to export goods and services, like had we acted earlier and more strategically on electric vehicles, we might not be having to import them all from China.

So these are all core economic decisions. Um, the notion that there is a trade off or a horse race between the environment and growth is a fundamentally flawed one. Now, that doesn't mean there aren't elements of consumption that you might want to do less of in order to protect the, you know, the nature, but the reason you want to protect nature is that if you undermine nature and if you undermine natural capital today, you'll have less consumption in the future, conventionally measured as well as less nature to appreciate.

So I think I actually think if you only care about growth, I'm not saying you should only care about growth, but even if you did, investing in protecting natural capital and investing in, uh, the climate transition should be a core amongst your objectives. And finally, as to the sort of infinite consumption, actually, um, you know, most of our growth now comes from, uh, not from material inputs. We use fewer and fewer material inputs. Uh, surprisingly enough, we have done in this country really since the 80s, um, and even in America, um, that is the case.

And increasingly now it's about to become the case in fast growing parts like India and China. Um, where growth comes from is ideas and innovation. You get more out of the resources you have and driving innovation through things like electrification and renewables allows you to get much more through abundant resources at much lower cost. That's both good for the environment because you're not digging and mining and burning, but it's also good for productivity. Um, because that's what productivity is. It's getting more out of your resources.

So you have not just a, you know, safer, quieter, more environmentally secure economy, but you have a more efficient, innovative and productive one as well. That strikes me as being right at the core of what the Treasury's objectives are about. Yes.
15:04
15:05
None Portrait Speaker 5
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Okay.
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15:06
None Portrait Speaker 1
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These are very good points. And we are offshoring in level terms, although our offshored emissions and our offshored natural resource consumption is also falling, but from a higher base, and it's been falling, you know, it hasn't been falling for as long. Um, but what we're seeing is that as China and as India start to change their productive bases and they produce the goods and services that we import, but with a much lower carbon footprint, indeed, those countries are leading the way now in decarbonization. Um, then that effect is, is more limited than, than would otherwise have been the case.

So yes, there is some offshoring, but I think it's really important to recognize that the fact that we haven't decoupled growth from resource use should not surprise us because we haven't bothered to try. And if you don't apply policies to try and incentivize that change, then go figure. People will absolutely go and pillage nature for what it's worth to make a profit. I think were we to try and try and do that, what you tend to get is quite resourceful. Innovation, um, that delivers results that land you better than where you would have liked to have been.

Put another way, whether you give two hoots about the climate, we should have shifted to renewables and electrification years ago. We didn't because we didn't have the incentive to do so. But that would have been a far more efficient and productive economic and energy resource base than the one that we have now using fossil fuels, which are a technology that really was appropriate for the 18th, 19th and 20th century. Not appropriate now.
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None Portrait Speaker 4
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A really nice answer.
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None Portrait Speaker 4
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Well, um, that's a long question. And, uh, yes, so, so these. For sure. Like these, these local issues become extremely important and they shouldn't be ignored from the kind of what I can't help thinking though, is that the way in which policies, particularly with regard to nature, are being implemented, lacks an overarching strategic story which people can get behind. What they have at the moment is this kind of battle between housing developments and biodiversity, net gain policies, where anything, any kind of, um, habitat that gets knocked out has to be replaced.

And typically it's replaced by the developer in, uh, in the locale of that. So that works on, in a sense that it makes people happy in the locality. But actually the value of that is all kind of capitalized in houses that people who are relatively wealthy end up owning. And so it seems very firstly, not very good in terms of the overall strategic objectives of, of nature restoration, because it's piecemeal, nibbling around the edges of a, of a bigger natural capital question, but also, um, problematic in terms of the um sense in.

Which local, you know, the winners and losers of this particular Sense in which local. You know, the winners and losers of this particular process. So I. The political economy of this is clearly difficult when it. When it comes to land. And that is where most of the action is when it comes to nature restoration. And yeah, it's not easy, but we need to. What I'm saying here is that the Treasury needs an overarching strategy that it can articulate and people can get behind.

So that to avoid that kind of local NIMBYism, I guess.
15:12
None Portrait Speaker 1
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Yeah. All I would add is, you know, a move to wealth accounting will start to account for all of that because to the extent that people do value these assets that aren't properly scored on the balance sheet, that will start to be corrected. So I think you get 90% of the way there through moving to supplementary wealth accounting. You keep GDP, you don't replace it. GDP is good at what it does, but you need to know its limitations and you move towards assessing the underlying assets that generate GDP and much else besides.

Um that's tricky. We haven't done it because it's tricky. But you've got to start somewhere. And you know, even if you start with a number that isn't, you know, fully robust, it's still less biased than putting in a zero. So start with some estimate of your assets. Um, people can challenge that. And then you refine the process and the methodology until you have a proper system. You know, the GDP system, the methodologies and the surveys and all the rest of it didn't just drop out as manna from heaven.

We had to build them. And we can do the same with, with, with wealth accounting, because statistics very often are the lens through which we view the world. And at the moment we view the world through GDP. And that causes a huge amount of problems. If we start viewing the world through wealth accounting and we build on that methodology, then we'll care more about it and we'll have more incentive to put money into building the methodology. So we need to crack that, reinforcing feedback and we need to start somewhere.
15:14
None Portrait Speaker 2
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Julia Buckley.
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None Portrait Speaker 2
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I can.
15:15
None Portrait Speaker 1
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Pick up on exactly that point. Um, so actually it is in the green book. This is the surprising thing. Um, the, there is guidance in the green book that says explicitly that cost benefit analysis is not appropriate for large scale, uncertain decisions relating to structural change. It's actually in there. The problem is that it's not applied. Um, part of that problem to cut the Treasury some slack is that it's not applied because, you know, we know what to apply for cost benefit analyses.

We have models. Harried civil servants are given a task. They can run the model. They can provide the numbers for their ministers within a finite period of time. Um, being told that you shouldn't use that model, but that you should get insights from an array of models, which is the advice that I would give. Um, is not something that your officials want to hear. Um, it means spending more time. It means taking a more considered view.

It means applying an array of different models, some of which you may not be familiar with in order to get insights on the risks and uncertainties associated with a structural decision. Nevertheless, if you want to do the job right, that is what you have to do. Um, and I think if there is leadership and resource committed within the Treasury to doing that, then that's what we will do. And you know, if you look at the Chinese taking long term strategic decisions, that's kind of what they've done.

They've gone for things that look foolish, expensive, require subsidy and have no market. And ten, 15 years later, they clean up on some of the key, uh, you know, elements of the global energy system. So that kind of strategic decision making can be done. And to some extent, the guidance is in the official appraisal, uh. Literature, but it does require choice and leadership.
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None Portrait Speaker 4
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Sector. Understood.
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None Portrait Speaker 1
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Can I take that?
15:27
None Portrait Speaker 5
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Yeah, yeah.
15:27
None Portrait Speaker 1
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So so responding to that question requires expressing what the counterfactual would be, as in what would the, you know, compared to what?Um, now we've been knocking the Treasury to some extent and we've been looking for examples of, um, you know, decisions that were made that have shown, uh, you know, to yield an opportunity. And Ben, Professor Graham has also noted that policy consistency and credibility is massively important when it comes to leveraging private sector funds and reducing risk premia. Um, well, let me give you an example that covers all of those in a way that has been beneficial.

I think it's the, you know, it's, it's the setting up of the Climate Change Act. Um, you know, we now have a series of rolling governments, rolling budgets that are presented to Parliament approved by governments and independently monitored by the Committee on Climate Change. And that has ultimately meant that there is a policy framework which is long term and consistent, which the Treasury has had to ascribe to and respond to, and the private sector, knowing that the Treasury is going to do that, has had greater clarity and therefore leeway to invest funds in the hope that those returns will accrue.

So in that respect, we are doing better. Indeed. If you, you know, go outside the Westminster bubble or the UK bubble, um, you know, countries abroad, um will, will complement our ability to achieve that. And we are seen as climate and nature leaders for all the problems that we face. So I think there are examples there. Um, but they do require leadership. They do require strategic decisions and they do require a framework that is long term credible.

I think the Climate Change Act is a positive example of such a framework.
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None Portrait Speaker 5
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I.
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None Portrait Speaker 8
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Mr..
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None Portrait Speaker 4
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So I.
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None Portrait Speaker 1
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I wouldn't disagree with any of that. And indeed, I made the point that actually we, we, um, we have quite a positive reputation on all these fronts internationally. So that that shouldn't stop us aspiring for some time. But, but you're absolutely right. And, you know, there are examples we've talked about which we should be very proud of. I'm not sure I've been that critical of the Treasury as an institution, perhaps more critical of governments past, because I think the Treasury is in a position to deliver if it's given, um, the political leadership to do that.

And I think that's, you know, my experience with the Stern Review, for example, uh, is, is a good example. And you contrast that to the response to the Dasgupta review. Um, there is, if there were to be a treasury related problem in the UK and, you know, and one doesn't have to dig too deep to kind of unearth this, it is pretty clear that we have invested less, uh, you know, public investment has lagged public investment in our competitors for several decades now. Um, and that has had very clear and demonstrable impacts on productivity and productivity growth.

And that does seem to be a bit of a UK problem relative to our competitors. And I think nature and indeed climate to some extent fall in within that. Although to the extent that we've had some innovative approaches, um, to sustainability on that front, perhaps less so than, you know, standard infrastructural investment and investment in public services and the public realm. Um, so there is something that needs to be done to allow the UK to take a more long term vision and take action to reduce consumption in favor of saving and investment, because you can't have both consumption and investment with without running into macroeconomic problems.

And that's been the challenge, uh, the economic challenge, the macroeconomic challenge in this country for some time. And clearly, almost by default, the Treasury has to have had some role in that can't just be a series of multi-decade coincidences.
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None Portrait Speaker 4
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Yeah for sure. So I think I agree with the idea that with the notion that the UK is seen as a very good example of how to implement and think about environmental policy, the work that my colleagues at Exeter University are doing with Defa, for instance, is absolutely at the frontier and or the envy of some other countries. I often get invited overseas to talk about what's going on in the UK with regard to BNG and biodiversity and this and that. The thing that I think is sort of missed, this is going to sound a little bit self-serving, right?But like the thing I think is missing, the reason I get invited over to Holland and Norway and France and so on to talk about this with with their governments is because they have very, very clear processes of appraisal and policy development, which involve the broader community, including academics.

In Holland, for instance, they have a process, a seven year rolling process on the cost benefit analysis. They have a planning bureau with full of, well, you know, they're very highly qualified academics who do this review and their, their policies and, and appraisals are updated to the latest, you know, to the frontier. Every so often, the Treasury discount rate review that I'm doing at the moment, which, by the way, is going wonderfully. And I've had a really good experience with the Treasury on this particular issue, but that that guidance has been there for 23 years.

You know, I was doing my PhD. I was part of that initial, um, the 2003 Green Book change that has changed. This is like the equivalent of the interest rate for cost benefit analysis. And it hasn't changed for 23 years. So I would say that perhaps one of the kind of missing institutions here is this kind of is a kind of direct process of renewal and appraisal of these, these, um, particular, uh, procedures and rules and such like that we've been talking about here periodically.

I think that, that that's missing.
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None Portrait Speaker 6
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Hello.
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None Portrait Speaker 9
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Yes, exactly.
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None Portrait Speaker 2
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Okay.
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None Portrait Speaker 9
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Well, I think it's a really good question to start from and actually, to build on the previous panel, I think I'd probably separate out the Treasury into the political and the structural sort of institutional lens. Um, I'd say that Treasury has done quite a bit of good recently. I think the reforms, the Green Book, the promise to look into reviewing the discount rate for climate and nature investment projects, and also the commitment to raise the capitalisation of public finance institutions like GB energy and also the National Wealth Fund are all really positive steps.

However, I think not enough is being done both in terms of the mobilization of public investment, but also in terms of the other tools at Treasury's disposal, like regulatory reforms and political incentives as well. So maybe if I take those in reverse order, I think that Treasury, as we all know, is a really vital department, not just for climate, but for a number of other issues. They set the tone of the direction of travel, of government policy. And frankly, without, to quote Alok Sharma, the Cop president for Glasgow, without cash, nothing gets done.

So Treasury is really vital in that respect. I think there's always going to be a tension with Treasury and other departments about where limited public resources can be spent, but what I think needs to be stronger from the leadership and Treasury is the recognition that climate and nature policy is not a siloed area. It is. It is economic policy. It is resilience policy. It is security policy. And actually, to quote the now having left defence ministers, um, I think particularly on security, which is obviously a key area for the UK at the moment to scale up investment in security isn't just bombs and tanks.

Security is warm homes, access to affordable energy, healthy people, sustainable food systems and agriculture, and a bunch of other sort of ancillary sort of mechanisms in the UK that enable the UK to be resilient and self-sufficient. So I think that political leadership could be stronger, um, not just bashing the Treasury, though. I think that that's a broader political issue in the UK that I think we can do better on. I think when it comes to, um, sort of the actual institutional way of assessing climate, obviously you probably heard from Dmitri and the other professor.

I would say that the way that climate and nature and resilience are assessed isn't sufficient within Treasury reforms to the discount rate do need to be looked at quite swiftly, just given the crises we face, we are facing at the moment, and a good evidence point of that, as I'm sure you guys have been exposed to before, is we weren't prepared for the two oil and gas fossil fuel crises that have just happened. The first one cost us £78 billion. This one has currently racked up 55 billion.

So again, these avoided costs are quite these costs are quite significant. And Treasury can be better in terms of anticipating these risks and making sure that they're investing properly to avoid them in future, such as energy security. And in the third piece I think is on um, sort of rounds back to. Political consensus, I think Treasury has done a good job in some ways, but particularly on the way it applies its taxation policies, its fiscal rules, policies to the climate question and energy security question.

I think there are some immediate steps that can happen. So, for example, removing levies from bills I think could really help speed up electrification could help address some of the distributional issues in terms of when it comes to gas reliant households and electricity reliant households, and also could address some of the industrial competitiveness challenges that we're facing at the moment within the UK.
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None Portrait Speaker 10
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So I think that Treasury do see the importance of these issues in the longer term. And they have taken steps that are in the right direction. But in all the cases there's. Three I'd like to just name. I think they haven't gone far enough, and there's a lot more they could be doing. So the first one is building it, building climate and nature considerations into decision making in government departments and the Treasury itself. So they um, in 2021, there was a publication of how they are asking government departments to think about net zero in their own considerations when they put bids into the spending review.

Um, and they were building the capabilities of the departments to do that. Um, and they published a sort of update progress update. We haven't seen anything since then. That was a long time ago. Hopefully since then a lot of capacity has been built and departments are much better able to assess these things. If that's the case, good. We don't have transparency of that. That's not being published. So we can't actually assess how much of that is being taken into account in spending decisions.

We've also called for a long time for a net zero test of public spending, so that all of the spending decisions in a specific budget moment or spending review can be added up to see whether that's bringing you into line with your net zero commitments or away from it, to give overall accountability for the direction of travel. So that's one area so much more could probably be done in that space and more transparency. The second one is really driving the private sector. So the Treasury um announced.

That, you know, back at Cop 26 that we would be the first net zero aligned financial centre in the world, which was a big commitment, very exciting. They also talked about transition planning for corporates and financial sector and mandating that that still hasn't been done. This new government also committed to do that, but that still hasn't been done, although there is a consultation out now about that that would drive the transition across the private sector, and that would force an encourage the private sector to do a lot more to deliver this transition, taking the pressure off the public budget.
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None Portrait Speaker 10
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It's definitely a dampener. Um, obviously a lot of the impetus to invest in it was about the expectation that policy would support and incentivise that. So where other, um, parties are saying they would not support that going forward, that creates a reduction in the expected rate of return in the longer term for, for private investment. Having said that, we know that financial institutions and many corporates are still very much on the journey. They almost see that this is inevitable. Climate change isn't going away.

Other other jurisdictions have done things at EU notably. Obviously, that's also back moved back a bit in recent times, but other governments around the world are enacting regulations and policies which are taking us inexorably in the direction of needing to be net zero aligned. And so they are still many corporates and financial sector working hard behind the scenes without necessarily saying much about it, to improve their capabilities to do that. And we've done surveys of that and have evidence of that. I think lots of organisations have.

So it's very strongly evidence that there is a lot of ongoing support for that transition from from the private sector. But no doubt that political uncertainty is unclear. And maybe just on my third one, it was around the Bank of England, and the Treasury has set the Bank of England, the financial regulators, in a mandate letter, to think about climate change and nature risks in their programming, and consider it central to their core objectives. Bank of England has done quite well on climate, actually, compared to many other central banks, although not all, but on nature.

It's lagging far behind, seemingly. And there's. Despite having another mandate letter saying the same thing or similar. They have not yet done anything visibly on nature, so it feels like Treasury could be driving or should need needs to drive that more because the financial sector, global financial centre that we are could have a huge impact globally on driving that transition through the capital flows that stem from the UK.
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None Portrait Speaker 11
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Yeah. So I mean, we have to sort of this is about the treasury. So we have to sort of separate the Treasury as an institution from our guests government policy. But it's the Treasury that sort of does this stuff. So they're in the firing line as an environmental organisation. We're pretty happy with what's been happening recently in the Spending Review, we got an enormous uptick in capital spending, including for public transport infrastructure, clean power. Um, in the last budget, um, there was um action on fuel duty, which unfortunately was counteracted then by um imposing taxes on EVs.

But you can't have everything. There was the warm homes plan, £13 billion to insulate people's houses, keep them warm, but also reduce their energy bills. And so this is all very good. Um, one thing we particularly liked about this government was that it did talk it, it talked a lot about planning for the long term. We saw in the previous session a lot of issues with the UK short termism. So I think when the government came in, there were welcome signs that it was actually trying to think for the long term.

It began to put its money where its mouth is with the with the industrial strategy, ten year infrastructure plan. All very good. And now what do we hear now?We hear the capital spending, which was supposed to be sacrosanct, is being sacrificed to an extent to pay for the defence investment plan. Very good arguments for doing that. But it does really shoot the credibility of the government that when we say we're going to do something and we put in the, the institutions and the policies and the pledges to allow people to hold us to account within a few months to a year.

This is actually torn up. And they do something completely different. And again, to reiterate, it's the private sector that's going to do most investment in clean energy and also nature, um, private. Sector requires certainty. It requires an insulation against political risk. Government promised that it would get away from short termism getting getting, get away from sort of zigzagging on various policies. Talked a good game, a little worried about where it's going.
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None Portrait Speaker 2
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Yeah.
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None Portrait Speaker 8
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Thank you, chair.
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None Portrait Speaker 11
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I knew I would regret mentioning that I'd worked for TB. I didn't realize it would happen so quickly. Um, look, we we sort of look very carefully at what what TBI said. And actually we don't disagree with, with most of it. Um, I think he's Tony. Tony Blair makes, he likes to make political points. I think you have to read between the lines in what he says. I think often he's the sort of statements, the press statements that accompany his, um, his institute's research is not necessarily always the same as actually what's said in that research.

I think it very much emphasizes the politics. I think he feels that the government is adrift on all sorts of things, including net zero. I think there are some issues. He feels that investment in the grid is probably not enough of a priority. So you do have this problem of of, um, renewable. Energy having to be taken off the grid because the grid simply cannot afford to carry it. I think he's raised some perfectly good issues around that.

I think his his his basic message is not that net zero is not important. It's not that these targets are not really vital. It's not that the green transition is not already happening. And not being incredibly successful. It's not he's not disagreeing with the government's own estimation that clean power is the economic opportunity of the of the of the 21st century. He's not really disagreeing with that. It's a technical issue with how you sequence investing in the grid versus how you invest in the clean power generation in the first place.

So, I mean, there are there are various ways of getting to our destination. There's, there's room for difference between the, the mechanism about the mechanisms used for getting there. But I think really he's considered, I mean, we consider him basically on side. But as a man who enjoys making ripples and reminding people that he won three general elections and his his opinion still matters.
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None Portrait Speaker 10
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So I don't think it's embedded well at all. Um, particularly on the nature side, I would say the cost of inaction is not understood at all at all by literally anyone anywhere in the world though. So I think it's not that Treasury is particularly behind. I think that this is a kind of new, although the problem's been going for a long time, area of analysis. So there are now academic studies, more and more of them coming out that are using scenario analysis to quantify the economic costs and risks of future scenarios of how nature loss and climate change potentially interact.

And they are generating very big numbers. A lot of them, not all, but a lot of them are. But there is a wide range of results from these models and these academic articles, which makes it hard for Treasury to sort of factor in, in a simple way, into its own modelling the benefits of investing in resilience, because the costs of inaction aren't well quantified yet. So this is totally missing, in my opinion, and from my understanding of what Treasury does from their analysis. And we've talked to OBR about it as well, and they have been open that they don't have.

They haven't even started to think about the nature related ones. They don't know how to do it. So it's well behind even the climate ones, I would say, and not being factored in at all. And that's a real worry, obviously, because it means we're kind of blind to the future. Um, costs and impacts on the public finances. So this is very core to their mandate. So taking, building that analytical capability and investing more in the modelling needed.

I know that previous panelists were talking about this as well. The need to draw in different models to build that analytical capability and then to factor that into decision making. That's the other key problem, I think, is that even when we do have information, such as we do have a lot more on climate change, it tends not to be systematically factored into decision making or at least short term objectives. Often trump those longer term investment benefits that, you know, you will get from from those other decisions.

Having a way to make sure they're factored in on a regular basis and do that in a transparent way where Treasury has to sort of report on that annual budgets, for example, to what extent are they doing things that are building our resilience, building the resilience of the economy for the long term, having metrics to measure that and modelling approaches to doing that is essential, I think, and very early, early days of doing that.
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None Portrait Speaker 10
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The UK has.
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None Portrait Speaker 13
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Thank you.
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None Portrait Speaker 6
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John Whitby.
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None Portrait Speaker 12
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Kick off. And um, so yeah, as I said at the start, I think part of it is it's reframing. The Treasury is a, is has a number of different responsibilities to fund, right. As we all know. However, I think this, this. Slowing of climate and nature into a different space to security and to economic growth and to economic resilience. It's not what the private sector are doing. It's not what we're doing in our space is certainly we see them as very intrinsically linked.

So I think it's it's a bit of a mixture. There are a mixture of tools at Treasury's disposal, but I think it's about one that recognition centrally. Secondly, it's about making sure that, um, I understand there are caveats. There are limitations to the application of the environmental principles to Treasury sort of fiscal policy tax and spend policy. However, I think revisiting that potentially in time could be quite helpful because again, the intrinsic links between energy security and economic resilience are so clear.

Um, I'd probably also say that, um. Yes, I think that again, to, to repeat the quote, I think that both on adaptation and also on energy security, recognising the sort of significant costs that will come without action would be quite, quite useful to sort of guide um, treasury spending processes. And then finally, as much as it's finance that's required to deliver on these things, it's also the people behind finance. And I think just to build on something Karen said earlier, there were some pretty um.

Let's say, stark outcomes from the national audit authorities to. 24 look into how these environmental principles are actually applied, not just within Treasury, but across government. I think they found that 98% of departmental audit risk and assurance, uh, sort of assessments didn't do any detailed analysis of the way that climate and nature and resilience factored into the spending decisions. And 60% of staff didn't really know what to ask or who to ask when it came to how to implement these principles. So I think there's sort of a cultural level issue.

There's a sort of political level issue, and then there's sort of a practical level issue of how how Treasury actually applies these environmental principles into its spending decisions.
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None Portrait Speaker 3
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Just add to that. I mean, that that's all absolutely excellent. I think there's a deeper problem here is that, um, okay, there's a there's a sort of environmental need to deal with climate change. There's also an economic opportunity, which is what the government has fastened on to. Um, but then that sounds like makes net zero sound like an industrial strategy. And the business department gets industrial strategy, obviously, because they have one. The Treasury has never liked industrial strategy.

It's anti-market. It's, it's, it's interfering in the market. It's changing the structure of the economy in a way that's really against Treasury orthodoxy. So I think there's a fundamental block in the Treasury mind, the hive mind of the Treasury, against the idea of shifting the UK towards an economy more based on on clean power and nature and things like that. And because of that, it's then going back to the idea that it is simply views spending on climate and nature as a cost.

There's no economic benefit for this. And you can see this in the discussions on productivity growth. So the Treasury and the OBR are very interested in the UK's productivity problem. Um they see net zero spending as having no impact on this. They see it as sort of okay, you're just ripping old stuff out and replacing it with new stuff. Where's, where's the benefit for growth?What's the impact on productivity?Ignores the fact that you're putting new stuff in that's more energy efficient.

Um, you're creating economic activity by, by doing that. So there's a growth and there's a productivity impact. Treasury just doesn't get that. Um, the previous panel, I think were hinting that actually these can be very, very important. Treasury just doesn't get that. So it doesn't get this whole idea of clean power and nature as an industrial strategy, because it doesn't see the point of industrial strategy.
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None Portrait Speaker 2
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Is that to me?
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None Portrait Speaker 3
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Yeah, so they've got, in some ways, the fiscal risks report, which they do is excellent. It's very good. Um, one problem with the OBR is, is again they have I mean they're mostly ex treasury. I mean they're excellent people. We deal with them a lot. They're often ex Treasury. So they recruit from the same university economics graduates as the Treasury. So they have the same kind of mindset um on nature and climate.

They um they look at the long term trajectory of government debt, but they don't really look at the asset side of the equation, which is, which is something that sort of emitted from the treasury and the way it handles the public finances as well. They just look at debt and the long term trajectory of debt. They don't realize that, you know, the asset side of the equation is very, very important when you're considering the public finances. And so because of that, they, um, there's no incentive for the Treasury to grow the asset side.

And the OBR doesn't score them on any efforts it might do to grow the asset side of the balance sheet. And that's a fundamental problem with the way that the public finances are evaluated in this country. If you think of somewhere like New Zealand or Scotland, where they do incorporate an appreciation of the the value of the asset side of the equation and provide an incentive to grow that which will then counteract the debt. Then actually you have a much more sustainable system of public finances that incentivizes you to invest.

There aren't really any incentives to invest in this country at the moment, apart from the idea that in future it may help growth and productivity. But if it's clean power and net zero, then the Treasury's a bit down on that as well.
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None Portrait Speaker 2
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First, uh, so, I mean, I think they should be. Yes, but I don't think they are. And I think, um, as we've just said, they're not taking into account the long term or even probably the short term climate and nature risks actually, uh, because of that lack of capability, which isn't only at Treasury's generally globally is not strong, especially on nature. Um, the precautionary approach is an interesting point because I think, um, as a lot of work has been done by, I think it's the Institute of Faculty of Actuaries on the, the way that risk is considered in government decision making, because there's a lot of uncertainty about the models and because the average sometimes is relatively small number compared to other risks like war or something.

Um, it's under um, it's like not responded to adequately because it's not considered big compared to other types of risks, but, um, because it's, it's kind of a known growing problem that we can see already happening and isn't going away. And some of those scenarios are quite catastrophic to humanity. It should be taking a more than, more than, oh, this isn't very big kind of risk approach. It should be actually a precautionary approach that says, we really don't want to get into this situation.

What can we do to avoid that?Even if it's not that likely, we still need to be doing what we can to avoid that and taking that whole approach to the way that risks are managed. Um, and applying that to, you know, the financial sector as well, who, you know, have perhaps better approaches to thinking about those risks than the Treasury.
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None Portrait Speaker 13
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Okay.
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None Portrait Speaker 3
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No. I don't.
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None Portrait Speaker 9
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Thank you.
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None Portrait Speaker 6
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Chair Martin Rhodes.
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None Portrait Speaker 3
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Yeah, exactly. I think, I mean, this was discussed extensively in the first panel, and they were absolutely right. I think intrinsically the. Everyone gets climate change. The Treasury especially commissioned the Stern Review, which was was excellent. It was it was a really easy way of, of internalizing Stern's conclusion into their policy making, which is if you don't deal with climate change, a stopping it, but also dealing with the effects of it. There's massive economic consequences.

And so the Treasury was very good at integrating that. They were also very clear metrics around climate. You know, is it 1.523 or whatever. And then the economic damage from that, the difficulty with Dasgupta thinking about nature specifically is, is much more fuzzy, um, very hard to put a nature or put a value on nature, therefore you can't price it. Therefore, it makes it very hard to construct markets in credits to protect nature. Um, even you even lack a single, a simple sort of understandable metric, um, around nature.

We did a long project, green Alliance on turning the Dasgupta review into some actionable policies. And one of the problems we had was unlike sort of climate change, where there's a simple, easily understandable and very scary number, there's no metric you can have for sort of nature destruction. And therefore you can't sort of plot what you can do to, to prevent damage to it. And we actually consulted with all sorts of nature organisations saying, look, it'd be really helpful if we can come up with a metric that we can sort of say, it's gone down this year.

It's ticked up slightly, but the overall trend is really far down. It would be really, really helpful. From a public policy point of view, this would be fantastic. And we just couldn't. Every time we proposed some sort of composite metric, someone said, no, no, that that that ignores this feedback effect and whatever. So, um, that's why it's extremely difficult when the Treasury can't intellectually grasp the full totality of what it needs to do about nature. And it's restricted to things like the EPS, which, by the way, only deals with process, doesn't even deal with outcomes.

You've got that problem as well. Then you have a really hard problem for them intellectually to work out how to do this. And then underlying all of that is this issue of, um, well, this is just a cost and it's very hard to see the benefits. And then if you can't see the benefits in terms of sort of easily understandable number, that nature getting better or more likely worse in this country, it's always worse. Um, then it's very hard to do your cost benefit analysis, which is um, sort of core to what the Treasury does.
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None Portrait Speaker 2
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Let me just add to that. Um, as, as I mentioned earlier, we've been advocating for a net zero test of public spending and have worked with Treasury on it for a number of years actually. And we've done work with them on how to model that. So it is possible, but their argument was that depart departmental sort of um, assessment processes. Those departments don't have the capacity to really do that yet. So they've been working to build the capacity of departments to be able to provide that information.

Um, and so they did in 2021, publish this net zero impact rating system. That was the sort of first step where at least it shows whether or not a specific investment is going to be good or bad for delivering net zero. It doesn't quantify, though, so it's still not quantifying or enabling that to be added up to an overall figure. So we still love to see that happening. Hopefully that's all progressing behind the scenes, but obviously we would love to see that being published as well to.

It's a it's about accountability. It's about value for money as well. If public spending is going on, things taking us away from our net zero goals, that's not a good value for money because we're going to have to pay to clear up that mess later or to, you know, bear the costs of climate change to the budget as well. So it's about value for money and accountability. What we'd really like to see is that kind of information aggregated up to macroeconomic level, uh, indicators that are reported in the budget alongside GDP as others on the earlier panel also alluded to.

And we've made recommendations about that, various measures that could be looked at, measures of natural capital stocks or value to the UK economy, environmentally adjusted productivity measures for the UK, expenditure on environmentally harmful subsidies, a net zero investment tracker that actually monitors financial flows, measures of aggregate corporate progress towards the net zero transition, using data now available from corporate disclosures. So there's a bunch of things they could be reporting on in a really, you know, transparent way that would be much better able to assess how well the government is managing our future threats from climate change and nature loss trying.
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None Portrait Speaker 12
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Just. Yes. Just to add on to the list, I agree entirely with Karen. And I think also to add on to the list of potential policy measures, something that has been working on for quite a while with WWF. Um, is something called a net zero investment plan. It's now sort of morphed into the work of the net Zero Council and the Transition Finance Council on sector investment roadmaps. So, um, just to demystify that effectively, having a plan that also much like companies have to do, has an investment plan to back it up.

So basically government sets out the direction of travel, how many EVs need to be developed and charging pods in the middle of nowhere in Scotland and the Highlands need to be put in place. And what that will cost and what the expectations are from the public purse and from the private sector, and what package needs to be in place to get that to go there. And then some mechanism of accountability if you go on or off track. So again, quite. Quite a pragmatic, quite sensible policy proposal that has won a great deal of support across the private sector.

Thus it being taken forward through these various councils. I'd say just to Karen's point, the reticence, I'd say that um we face in trying to move this policy forward over the last number of years, I think has is a proof point of what Karen was just saying, that there is a level of political discomfort and also maybe institutional discomfort in Treasury in being that transparent. Um, but it certainly is something that we would see as having worked in other jurisdictions. So country platforms are a big thing at the moment.

Um, Europe is driving this forward through the NEP process. Um, a number of countries across Asia, like China and Japan are pushing these processes through. I think it's time that the UK actually catch up with that and provide particularly institutional investors with the transparency on the long term direction of travel that they need to invest. Banks are coming in relatively fine at the moment, but it's the institutions that are the key gap for delivery.
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None Portrait Speaker 16
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Thank you.
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None Portrait Speaker 6
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Thank you. Manuel. A.
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None Portrait Speaker 17
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Anyone else wants to add?
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None Portrait Speaker 17
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Okay.
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None Portrait Speaker 9
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Thank you.
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None Portrait Speaker 2
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I mean, I think one thing we've been involved in and are very positive about is the environmental improvement plan and the new nature positive pathways process that we are doing with Defra, with Treasury's backing, which is actually setting out what the private sector needs to do, different sectors of the economy need to do to align with nature goals that Defra has agreed in the environmental improvement plan. So I think that itself can make quite a lot of progress because at the moment we've you've had these targets set, but no plan for how to align the economy with it, which is why they've never really worked in the past, you know.

And without that economic alignment and Treasury backing it, you're never going to be able to achieve those goals. So I think that will make a big difference. And hopefully incentivise investment by the private sector in that transition. In the same way as we've seen happening for net zero, once that direction of travel is clear, lots of opportunities being identified through that process. Already, people are asking for examples of innovations and like market opportunities. So things like precision agriculture so that you can be more efficient in your use of inputs and fertilizers, recycling technology for renewables.

You know, there's a lot of different things that technologies that will create growth and innovation, technological development, uh, that could be, you know, exciting outcomes from, from clarity about that nature positive transition. So I think almost that kind of practical thing is perhaps even more useful than quantifying natural capital. It's like more immediate, more practical. And for decision making by the private sector as well as government.
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This debate has concluded
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