Environmental Audit Committee
Oral evidence: HM Treasury and the economics of climate and nature, HC 23
Wednesday 17 June 2026
Ordered by the House of Commons to be published on 17 June 2026.
Members present: Mr Toby Perkins (Chair); Julia Buckley; Jonathan Davies; Sarah Gibson; Alison Griffiths; Chris Hinchliff; Sojan Joseph; Manuela Perteghella; Adrian Ramsay; Martin Rhodes; Dr Roz Savage; John Whitby.
Questions 1 - 28
Witnesses
I: Professor Ben Groom, Dragon Capital Chair of Biodiversity Economics, University of Exeter, Visiting Professor, Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science (LSE); Dimitri Zenghelis, Fellow at University of Cambridge Institute for Sustainability Leadership, Associate at Bennett Institute for Public Policy, Partner at Independent Economics, and Senior Visiting Fellow at Grantham Research Institute, London School of Economics
Written evidence from witnesses:
Witnesses: Professor Ben Groom and Dimitri Zenghelis.
Q1 Chair: Welcome, everybody, to the first session in the Environmental Audit Committee’s new look into the Department of His Majesty’s Treasury and the economics of climate and nature. The Environmental Audit Committee periodically looks at the performance of one Government Department or another. This is possibly the first time that we have assessed the role of the Treasury in the economics of climate and nature. We have two excellent panels today to help us with beginning this inquiry.
I will start by inviting our panellists to introduce themselves and their organisations. Particularly, Professor Groom, we are dying to know what a Dragon Capital chair is, so if you could touch upon the roles that you hold, then we will get into the session.
Professor Groom: My name is Ben Groom. I am the Dragon Capital chair of biodiversity economics. This is a philanthropically funded chair at Exeter University. I am part of the LEEP centre—land, environment, economics and policy—in the department of economics there. The Dragon Capital bit is the philanthropist Dominic Scriven OBE, who runs the asset management company but has an interest in biodiversity and funded a chair. It is a wonderful independent research position.
Dimitri Zenghelis: Hello, everyone. I am Dimitri Zenghelis. I am a partner at a small economic consultancy called Independent Economics. I am also active at the University of Cambridge as an associate at the Bennett Institute, where I started a small project looking at comprehensive wealth. I am also a fellow at the Cambridge Institute for Sustainability Leadership and a visiting fellow at the London School of Economics, where I continue to work with Nick Stern and others at the Grantham Research Institute. I also worked for the Treasury for some 13 or so years on standard economics, running the Treasury model and providing insights to the Chancellor and the Prime Minister on macroeconomic developments, but also later on the Stern review, The Economics of Climate Change.
Q2 Chair: When we think about the role of the Treasury, for many people, the Treasury seems to be shorthand for the Government, but we are looking specifically at the policies of the Treasury. Mr Zenghelis, what role does the Treasury play in determining whether the UK’s climate and environmental objectives are delivered in practice? How dominant a thought place or area is it for the Treasury?
Dimitri Zenghelis: The Treasury’s core responsibilities are sustainable growth and prosperity, robust public finances and the delivery of world-class public services. If you were to work backwards from that, you will find that a prerequisite for delivering public services is that you have stability in the public finances, and stable and plentiful public finances rely on underlying economic growth. Growth clearly is going to be at the core of the Treasury’s objectives. To the extent that nature and climate are relevant to those objectives, the primary mechanism is their impact on economic growth.
Q3 Chair: Yes, absolutely. From your perspective, Professor Groom, to what extent do you think Treasury decisions on spending, taxation, fiscal policy and appraisal frameworks influence whether climate and nature objectives are achieved across Government and the wider economy?
Professor Groom: They do to a huge extent. The issue with nature writ large is that it does not appear on our balance sheets or in our day-to-day transactions. The Treasury has an important role of co-ordinating this market economy to make sure that marketed transactions include those kinds of costs and externalities of nature loss.
It has different roles from the perspective of expenditure, including setting the overall budget envelope, allocating that between different Departments and prioritising in that allocation to make sure that the Government’s objectives and their international commitments on the environment are met, and following up on its main remit, which is to improve the wellbeing of society, as well as managing GDP. That is just to say that GDP is one thing and wellbeing is another. When it comes to managing the welfare of the UK, those are different. The Treasury has both of those roles in its remit.
Q4 Chair: Mr Zenghelis, thinking about the extent to which the need for growth dominates thinking at the Treasury, we have heard under this Government, and no doubt under previous ones, the suggestion that nature is a blocker to growth and we should reduce those nature protections in order to facilitate growth. To what extent do you think this is a cultural viewpoint within the Treasury generally? When they think about sustainable growth, do they see nature as a conduit to that or a way of preventing that?
Dimitri Zenghelis: The first thing to be said is that the Treasury is a broad institution with a lot of people who have differing views. There is not quite such a thing, despite the cliché, as Treasury brain. I would probably add that those who are expert in economics and in particular fields will often brush up against a conventional sense that every claim is made as part of some attempt to rent seek government spending.
Of course, a key role for the Treasury is that you cannot say yes to all the competing claims. Otherwise you would have to hike taxes up to some unprecedented level or borrow to the hilt. The Treasury does say no and there is some degree of pride at saying no. However, the Treasury will take its lead from its political masters. If there is an understanding within the Treasury and leadership from the top, as we saw, for example, with the Stern review, the Treasury will take action and respond to its analysis. The Stern review led to the formation of the Climate Change Act, the rolling climate change budgets, the setting up of the Committee on Climate Change and so on. If there is leadership and articulated analytical understanding, the Treasury will act.
At the moment, we are seeing that conflict in things such as the Dasgupta review, other reviews in Government, including recently the national security assessment on biodiversity and nature, the Committee on Climate Change’s advice on adaptation in the UK, and other pieces of advice that show that responding and adapting to climate change are critical to enhancing the country’s resilience in terms of growth. There are domestic impacts such as floods, droughts and extreme heat, but also international impacts such as food chains, energy resilience, and migration and conflict, so people knocking at our borders because of climate-induced hardship. Finally, there is the response in terms of our economy, as to whether we lead in the transition to climate change by becoming competitive in those goods and services the world wants to buy, which are related to renewables, electrification and digitisation.
Q5 Chair: What you say there about the Treasury responding to its political masters is interesting. I think that many people, looking at this Government, would say that, on energy policy, the Secretary of State has been tremendously successful in getting the Treasury to loosen the coffers. When it comes to nature policy there is much less of a sign or evidence that there has been a real commitment. Your understanding would be that the message coming down the track is that energy policy is a key priority for the Government and nature less so.
Dimitri Zenghelis: If the case is made, and made convincingly, at the analytical level, so that means within the Treasury but also by a diverse range of views from academia and elsewhere, and at a leadership level, so that politicians—the Prime Minister and the Chancellor—are convinced that this is an area central to UK growth and resilience, I think that the Treasury will act. Those prerequisites need to be met.
If they are not, the more limited approach to taking decisions in the Treasury, so some of the models that are inappropriate for this kind of structural change, will tend to be applied inappropriately in making decisions. The decisions will tend to be ill informed and then you have to revisit them five or 10 years down the line, when the consequences become clear.
Q6 Chair: Professor Groom, we have heard in many evidence sessions previously that the cost of inaction may well be, or almost certainly is, more expensive than the cost of action on matters such as climate change and its associated costs. Do you think Treasury models appropriately take into account the cost of inaction, so the cost of doing nothing, the changing impact on our climate, and floods and all the other consequences that come from that? How well equipped are Treasury models to assess the cost of inaction and the cost associated with climate change if we are not successfully reducing the amount we expect the temperature to rise?
Professor Groom: We have been talking here about trade-offs between different things that society thinks is valuable. Nature is one of those things that, typically, people value. There are lots of different examples of how valuable it is and the contribution it makes to people’s day-to-day lives. Thinking through the contribution, land use and agriculture is one of the key nature-based assets. You can think about watersheds, resilience and resistance to flooding, which is going to increase with climate change. That is dependent upon how we manage these catchment areas. The recreational side is a huge part of both GDP and individual welfare.
The question is how we make these trade-offs between that and, say, health or education. The Green Book methodology at the moment is the way in which those trade-offs can be assessed. The difficulty with nature here, and the thing that is missing, is the fact that, as I was saying, many of the benefits that we get from nature are sort of invisible. They are subject to free-rider problems. They do not appear in market transactions. We need this very strong and involved valuation process in order to understand the values that nature provides.
We have systems. The Natural Capital Committee was in place up until 2020. That is now under the Office for National Statistics. It is valuing the asset base of nature. It is something like £1.6 trillion at the moment, and it is a very limited cross-section of what nature assets we have. These are ways in which the Treasury methodology is trying to make these trade-offs.
I do not think that it is perfect on nature, to be honest with you, for instance on biodiversity, which is the focus of the Dasgupta review. One of the main outcomes of that was to recommend pricing of biodiversity in government decisions. That is not happening at the moment. While we at Exeter have been working with the biodiversity working group at the Treasury on trying to establish biodiversity prices for making these day-to-day trade-offs, that has not happened yet. Movement is ongoing.
Q7 Chair: What would your assessment in pure economic terms be, Mr Zenghelis, forgetting for a moment the wider social goods to nature, of how good Treasury models are at assessing the economic value of, for example, nature and reducing the increase in the temperature that we are likely to face in this country?
Dimitri Zenghelis: I would be inclined to split that question into two. First, how willing and able is the Treasury to take on these issues in an analytical way? Corresponding to that, what would be the appropriate modelling approach and methodologies to adopt?
The first question goes back to the answer I gave a moment ago. The Dasgupta review was a very thorough review performed by Treasury insiders, steered and supported by Partha Dasgupta. Had the Treasury wanted to act on that, it could have done, just as it did on the Stern review. There was strong political leadership to make the Stern review and its recommendations a reality. There does not seem to have been the same leadership behind or the same desire to do the same with the Dasgupta review. I do not think that that in any way undermines the quality and the value of the review itself.
Were the review to be taken seriously and more effort made to fully assess the impacts of biodiversity loss, depletion of natural capital and climate impacts, you would have to use an array of models. You would not focus on a single model. The statistician George Box famously said that all models are wrong but some are helpful. You can have structural change in the process whereby the impacts of not investing in nature, or indeed the impacts of not investing in the goods and services that allow you to transition your economy, are just so large.
There was a great report from the LSE that showed that the UK is incredibly competitive in goods and services relevant to climate and nature adaptation, from pharmaceuticals and life sciences to the Meteorological Office in Exeter, with its role in forecasting both climate and weather, the service sector, insurance, consultancy and finance. The UK has a strong comparative advantage in acting on these things and in some sectors of the transition to low-carbon energy and low-carbon production. The alternative is to wait and see what happens and then import the stuff from China and elsewhere. These are central issues to the Treasury’s assessment of growth and competitiveness.
In terms of the modelling question specifically, if you are looking at changes that are non-marginal, so you are not trying to assess whether you should build a roundabout by a ring road, and you assume the state of the world stays the same, these decisions are strategic, large-scale, uncertain and path dependent. That means that the actual impact of this decision and the choices you make is a function of all the decisions that are made between now and some point in the future.
To do that, you cannot use a model that simply looks backward and assumes that the economy stays as it is. A lot of the public finances, because they look short term, do exactly that. They assume the economy is as it is. What happens if you change taxes or spending against this unchanged background? The name of the game here is to not assume the economy stays as it is, but to take some actions that make profound differences to the structure of that economy.
There is no single model that can tell you that, because you are in the world of risk and uncertainty, and risk and opportunity. You need the insights from an array of models, all with different strengths and weaknesses. There is a programme within Government, 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 into choices and investments that may look okay in the short run, but that, in the medium to long term, you start to regret and that become very expensive to retrofit and replace.
Q8 Adrian Ramsay: Thanks for coming along to the Committee. I have a few questions, which will build on what the Chair has already asked you. Professor Groom, do you think that the Treasury should view climate and nature loss primarily as environmental issues or look at them as economic and fiscal risks in terms of how it makes decisions?
Professor Groom: These are definitely economic and fiscal issues. On the welfare side, we depend tremendously on nature for recreational activities, but it is part of the productive asset base of this country. That is what the Natural Capital Committee would tell you in its building up of these natural capital estimates. It is definitely economic.
It is also a fiscal issue. The difficulty with nature is, as I said before, that there are little incremental changes that happen over time. We lose nature, do not notice that we are losing value and then suddenly it is likely that we regret the path we have taken or whatever. Nature provides rather surprising values that you never really anticipated.
I am thinking about a study in the US, for instance, where there was a disease that knocked out bats. Bats eat a lot of insects. That hit agriculture, so agricultural land prices went down by something like 10%. It hit GDP in agriculture because of this loss of an apex species. There are lots of examples of surprising things that we would not have anticipated, which also affected, in that case, the ability for those municipalities that were affected by that to borrow money. It ended up costing them in terms of fiscal revenues.
It is clear that nature has all these values. There are some that we do not know about, so we need to build in buffers in order to think that through. It is both, for sure.
Q9 Adrian Ramsay: It is really helpful to hear that tangible example. Building on that, Mr Zenghelis, should ecosystems be treated as a form of national infrastructure that provides food and water, security, flood resilience etc and is seen as a significant service for public good?
Dimitri Zenghelis: The answer is a resounding yes. It will not surprise you, but that was the conclusion of the Dasgupta review as well. These are assets. Part of the problem here is that we have a system that focuses on the flow of economic goods and services, which is GDP. GDP is the measure of any quarter or year’s flow of income, output or expenditure. It does not look at the underlying assets, so the stock or capital that generates that flow.
We know what that is. It is physical produced capital: the infrastructure, the machines and the buildings. It is our human capital: the skills and training of the workforce. It is our intangible capital: the ideas and the institutions. These are all critical to a country’s resilience and productivity growth prospects. Also within that is natural capital. 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 is going down.
These assets are complements. They are not substitutes, so you cannot replace an ecosystem with a motorway flyover. Because they are complements, you go at the pace of the slowest. 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 are in hospital, they will not go out and interact productively in the economy. This is a critical part of our asset and infrastructure base, and it suffers, to some extent, from the same issues of underinvestment that have been at the heart of the UK’s slow productivity growth.
I recently wrote a paper with Tera Allas, 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. It is 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. Growth and fiscal stability will be—let me put it the other way around. Natural capital and climate, and our responses to those issues, are critical to issues of growth, productivity and, ultimately, fiscal stability as well.
Q10 Adrian Ramsay: That is an emphatic answer in terms of what ought to be the case. I am interested in whether you think that that is the case in terms of how the Treasury looks at these things. You have already mentioned the Joint Intelligence Committee national security assessment report. We have also had a report from DEFRA civil servants that I highlighted in the House last week around the impact of biodiversity and ecosystem collapse on our critical systems. Does the Treasury in its current outlook treat the loss of ecosystems as a systemic risk in the way that it would other major risks to economic resilience?
Dimitri Zenghelis: The answer is no, but I would also argue that it probably underplays the importance of investment, and it does so perforce. Here we brush up against politics. If you want to invest more in productive assets, including natural capital, climate resilience and repurposing your energy system to be electrified, digital and low carbon, you need to commit some resources to that, mostly private resources, 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. At the national level, it would require more saving to set aside for investment in order to supply that investment, which is another way of saying less consumption at the national level. Otherwise you are going to have current account deficits, problems with inflation and the Bank responding with higher interest rates. There are big political and macro issues that are pressing down from the top on how the Treasury responds to these issues and, as part of the mechanism, you will get inappropriate assessments and inappropriate modelling.
It comes back to the point I made at the beginning. 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 commissions.
Professor Groom: Let me tell you what the Treasury does in relation to some of these things. My colleague Mark Freeman at York and I are currently undertaking the review of the discount rate for the Treasury Green Book. The Green Book is the guidance on cost-benefit analysis, which is a way in which Government trade off different policy proposals, regulatory change and infrastructure projects.
How is climate and nature treated in that context? With climate change, we have a very solid policy at the moment on pricing carbon. You have a target for net zero and an abatement cost price, which tells you, for any project that increases or decreases carbon efficiency or costs, how you price that into and trade it off against other types of expenditures in Government. That is a really solid system for pricing carbon. You have a target and an associated price.
For nature, we do not have any of that whatsoever. In transport, for instance, the value of time is a key determinant of the benefits of transport projects. The value of time saved increases at the rate of income growth, because, as people get richer, their time is worth more and so the price goes into the cost-benefit analysis. That does not happen for ecosystem services in the appraisal. There is no such correction, but you would expect the same thing to happen. As we get richer, particularly as the environment gets more scarce, our valuations go up. That is not built into the Green Book framework.
There are definitely some things to do. I can tell you about one of our recommendations on the discount rate review. The others I cannot tell you about yet. We are asking the Treasury to follow the results of the environmental discounting review that we did after the Dasgupta review in 2021, which is to say, “Let’s take this pricing issue very seriously in the analysis of projects”.
Q11 Chris Hinchliff: Mr Zenghelis, a moment ago you said that growth is at the core of the Treasury’s objectives. Is that compatible with the reality of environmental limits? We have heard a bit about political leadership already today. It seems to me that we are very rarely able to say, “No, that is enough” in the context of growth. There is always more airport expansion and more data centres in a world where we are already suffering from water bankruptcy. Certainly I think my constituents find the logic of ever-increasing consumption, going on exponentially and infinitely, rather difficult to follow.
Dimitri Zenghelis: There is a cliché that says, “You want to save the planet. Actually, the planet will be fine without us. We are the biggest problem for the planet.” What we really care about is us. 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.
The issue here in terms of protecting nature and preventing environmental degradation is about enhancing the things we care about. Some of those will be material prosperity, but there will be lots of other things. This is why we wanted to focus on wealth, so assets and capital, because capital and assets are what generate a source of wellbeing. Note that it is wellbeing, not just GDP. GDP may be part of that, but it is not the only part of that.
We care about nature intrinsically, but the biggest threats are the impact of nature on very core elements of our ability to interact socially and economically, so our ability to go out and be productive without facing heat stress, without facing flooding of our properties, factories and infrastructure, and without watersheds that are not stable that encourage floods and droughts within a changing climate. There is our ability to export goods and services. Had we acted earlier and more strategically on electric vehicles, we might not be having to import them all from China. These are all core economic decisions.
The notion that there is a trade-off or a horse race between the environment and growth is a fundamentally flawed one. That does not mean that there are not elements of consumption that you might want to do less of in order to protect nature. The reason you want to protect nature is that, if you undermine nature and natural capital today, you will have less consumption in the future, conventionally measured, as well as less nature to appreciate. If you care only about growth—I am not saying you should care only about growth, but even if you did—investing in protecting natural capital and the climate transition should be core among your objectives.
Finally, as to the infinite consumption, most of our growth now does not come from material inputs. We use fewer and fewer material inputs, surprisingly enough. We have done in this country since the 1980s. Even in America that is the case. Increasingly now it is about to become the case in fast-growing parts such as India and China. Growth comes from ideas and innovation. You get more out of the resources you have.
Driving innovation through things such as electrification and renewables allows you to get much more through abundant resources at much lower cost. That is good for the environment, because you are not digging, mining and burning, but it is also good for productivity, because that is what productivity is. It is getting more out of your resources. You have not just a safer, quieter and more environmentally secure economy, but 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.
Professor Groom: I agree completely with Dimitri on that particular issue. You have asked a very fundamental question about how we measure performance in the economy. My vision would be that, when the Chancellor comes to give her speech at the Budget, she would be talking about GDP. Yes, this is important for goods and services and people’s day-to-day wellbeing, employment etc, but there is a whole bunch of other different aspects that we should be considering. Inequality is one of those things as well.
On the other hand, we should be thinking also about this metric of wealth that we have. Is this going up or down? If it is going down, that is a very bad sign, not for GDP today necessarily, but for GDP in 10 years’ time. There should be an array of different performance metrics that culturally—meaning the culture of the Government—we should be measuring our economic performance by. It is not just about GDP.
Dimitri Zenghelis: For the record, I wholeheartedly agree with that.
Q12 Chris Hinchliff: I am going to move on to a couple of other points briefly. I think that, if one of our other colleagues was here, he would probably have raised a point. You mentioned consumption of resources in this country. Quite often the argument is made politically that that is because we are offshoring a lot of our resource consumption and then we enjoy the end product here. We are in a globalised economy now. It is still the case that every single year we burn more carbon and use more fossil fuels. The notion that we are on this transition and actually displacing and reducing resource use net across the planet is not borne out. We are overall collectively consuming more, and we are enjoying the end product of that. How would you respond to that?
Dimitri Zenghelis: These are very good points. We are offshoring in levels terms, although our offshored emissions and natural resource consumption are also falling, but from a higher base, and they have not been falling for as long. We are seeing that, as China and India start to change their productive bases and produce the goods and services that we import with a much lower carbon footprint—those countries are leading the way now in decarbonisation—that effect is more limited than would otherwise have been the case.
Yes, there is some offshoring, but it is really important to recognise that the fact that we have not decoupled growth from resource use should not surprise us, because we have not bothered to try. If you do not apply policies to incentivise that change, then go figure. People will absolutely go and pillage nature for what it is worth to make a profit. Were you to try to do that, you would tend to get quite resourceful innovation 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 or not, we should have shifted to renewables and electrification years ago. We did not because we did not 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 was appropriate for the 18th, 19th and 20th century and is not appropriate now.
Chris Hinchliff: Professor Groom, I am aware of time, so I am going to move on to the next question.
Professor Groom: I had a really nice answer for you though.
Q13 Chris Hinchliff: Maybe weave it in. Picking up on the point that you made earlier about nature not appearing on balance sheets, I wondered, with GDP growth and that being a core objective, whether you feel that we are appropriately taking into account the dis-benefits of that in the measurements of our economic success. Infamously, you can pollute all of our rivers and then the spending required to clean that up will actually contribute to GDP growth. Do we need to have a measurement of the damage that is being done as well as the overall output?
Professor Groom: Yes, for sure. These accounting anomalies are ridiculous and that needs to be sorted out. The natural capital accounting approach that Dimitri and I have been talking about in the background here is the way to do that. You look at your assets, for instance clean water and the rivers in this country. If nothing else, they are a huge amenity for people but are also important for flood management. Those assets should be accounted for.
You can tell on a macro scale whether things are going badly by the oscillations in the value of the wealth that you get from that. That is the way to do this. You can do that at the macro level, which is what the Treasury is concerned about. This is increasingly being done in other countries at the more local scale as well. You have these checks and balances and you know your liabilities, and that solves a lot of these accounting anomalies.
Q14 Chris Hinchliff: My final question is to either of you, if you are interested to answer. As economists, what assessment do you make of the fact that a lot of what, again politically, gets spoken about in terms of economic policy and economic success is unlocking investment and private capital in delivering big projects? We talk about the quantity of growth and the jobs this is going to produce. On the ground, these quite often run into conflicts of local opposition. People living in those areas care about access to nature, the impact on air pollution and the impact on habitats for wildlife. What does that tell you about what really delivers for wellbeing for people, compared to the way that some of our economic policy works? Do you think our Treasury investment priorities and decision making need to better reflect the public’s preference for genuine wellbeing?
Professor Groom: That is a long question. For sure, these local issues become extremely important and should not be ignored. I cannot help thinking, though, that the way in which policies, particularly with regard to nature, are being implemented lacks an overarching strategic story that people can get behind. At the moment they have this battle between housing developments and biodiversity net gain policies, where any habitat that gets knocked out has to be replaced. Typically, it is replaced by the developer in the locale of that.
That works in the sense that it makes people happy in the locality, but the value of that is all capitalised in houses that people who are relatively wealthy end up owning. It seems not very good in terms of the overall strategic objectives of nature restoration, because it is piecemeal nibbling around the edges of a bigger natural capital question, but also problematic in terms of the winners and losers of this particular process.
The political economy of this is clearly difficult when it comes to land. That is where most of the action is when it comes to nature restoration. It is not easy. I am saying here that the Treasury needs an overarching strategy that it can articulate and people can get behind to avoid that local nimbyism.
Dimitri Zenghelis: A move to wealth accounting will start to account for all of that. To the extent that people value these assets that are not properly scored on the balance sheet, that will start to be corrected. You get 90% of the way there through moving to supplementary wealth accounting. You keep GDP. You do not replace it. GDP is good at what it does, but you need to know its limitations. You move towards assessing the underlying assets that generate GDP and much else besides.
That is tricky. We have not done it because it is tricky, but you have to start somewhere. Even if you start with a number that is not fully robust, it is still less biased than putting in a zero. Start with some estimate of your assets. People can challenge that and then you refine the process and the methodology until you have a proper system. The GDP system, the methodologies, surveys and all the rest of it, did not just drop out as manna from heaven. We had to build them.
We can do the same with wealth accounting, because statistics very often are the lens through which we view the world. 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 build on that methodology, we will care more about it. We will have more incentive to put money into building the methodology. We need to crack that reinforcing feedback, and we need to start somewhere.
Q15 Julia Buckley: It is very interesting for us to hear your expertise and some of the theories about different ways that this could be approached. Leaning into the experience you both have with the current Treasury, our key question is how far you think those approaches are being taken. How much of the long-term risks and opportunities of climate resilience and cost are currently being taken into account in day-to-day decisions of the Treasury?
Professor Groom: Shall I do the Green Book stuff? In the Green Book, for instance, which is the guidance on cost-benefit analysis, there are certain things built in that force the analysts to take into account longer time horizons. For instance, the discount rate in the Green Book tells you how much weight you put on the future, basically. There we have a discount rate that declines with the time horizon that you are looking at. That is one way in which this long-term aspect of decision making is built into the mechanism.
Things such as these increasing prices as well tell you something about what the future state of the world is going to be. That feeds into decision making as well. In terms of the sorts of structural changes that Dimitri has been talking about, that is not something that the cost-benefit analysis framework is really designed to do, so there ends my expertise on that.
Dimitri Zenghelis: I can pick up on exactly that point. Actually, it is in the Green Book. This is the surprising thing. 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 is actually in there. The problem is that it is not applied.
Part of that problem, to cut the Treasury some slack, is that it is not applied because 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. Being told that you should not use that model, but that you should get insights from an array of models, which is the advice that I would give, is not something that your officials want to hear. It means spending more time, taking a more considered view and 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. If there is leadership and resource committed within the Treasury to doing that, that is what we will do.
If you look at the Chinese taking long-term strategic decisions, that is what they have done. They have gone for things that look foolish and expensive, require subsidy and have no market. Then, 10 or 15 years later, they clean up on some of the key elements of the global energy system. That kind of strategic decision making can be done. To some extent the guidance is in the official appraisal literature, but it requires choice and leadership.
Professor Groom: I should add one more thing, which I forgot before. One outcome of the Natural Capital Committee, which used to report to the Chancellor, was to build into the Green Book this natural capital accounting framework. Every decision is supposed to be taking into account the effect of any infrastructure or policy on the value of natural capital. The idea is that you are mainstreaming sustainability into this decision-making process.
It is also true, as Dimitri was talking about there, that the extent to which this guidance is having any marked effect on actual decisions is not clear, but the guidance is there. One thing we are going to be reporting in the discount rate review is to really pay attention to the guidance. A lot of it is there already.
Q16 Julia Buckley: On that, you both referred to risks and opportunities of that being a future model. You gave some examples of what those could be. Are you able to give us any examples? Everything we have heard so far feels as though most of the Green Book is about reducing risk. Where we can highlight the cost of a risk, so a cost to the economy of an environmental risk, that creeps up the agenda. It does not feel like there is very much proactivity around where the opportunity to increase, protect or lean into nature or energy could add to GDP. Can you give us examples of where it has all been about risk, or can you find an example to reassure us that there is something in the opportunity corner?
Dimitri Zenghelis: I gave one example of the opportunity. Unfortunately, it is not a UK one. It is one that applies to China. You take a position and say, “Either you take a decision that later on you will regret, because your natural capital is gone, you have lost big chunks of your productive capacity and you have to start retrofitting and doing things late, when you could have done that working with the investment cycle, replacing old kit for resilient new kit, or you could take a decision to support a certain sector where you think you have a comparative advantage but there is no global market in it yet”. We have some of the best universities and scientific prowess.
Q17 Julia Buckley: I am going to push you again, because we are looking for an actual example. We are moving out of the theory into the real world of our Treasury in this country and where it has applied this to either risk or opportunity. We need to understand. Do you have an example that has come out of the end of the sausage machine?
Dimitri Zenghelis: I can give you many from other countries, and that is part of the problem. We do not think this way and we have not. I say this, but, if anybody has read Simon Sharpe’s book, he was working in whatever the Department of Industry was called back then, around 2015. There was a study taken that showed that burning wood chip would be some order of magnitude cheaper per unit of carbon emitted than supporting the wind industry. I have pressed Simon to articulate the exact decision making that took place on this, but apparently the Minister went for wind anyway.
That was a good decision, because we have a thriving wind industry. It was not, seemingly, a short-term benefit of reducing emissions at lowest cost at the time, but it was precisely a risk-opportunity-based decision that said, “We can see a strategy and a pathway where this decision, which may look foolish in the short run, is a decision that will reap benefits in the medium term”.
Professor Groom: One objective in terms of net zero is to have 30,000 hectares a year of reafforestation for carbon sequestration. If you use the guidance and cost-benefit analysis to look at how you should do that, that gives you very clear spatial guidance that this should not be done in the cheapest places whatsoever, but it should be located where people have access. You mentioned access to nature. That is a key part of the wellbeing aspect of access to nature. You can follow through the methodology of wellbeing and it gives you very clear prescriptions about how you should be implementing policy. That is a key part of what the Treasury should be doing.
Q18 Julia Buckley: These examples are really helpful, not just to us, but to feed back to Ministers where they have examples where they have taken what they consider to be a risk outside of the box, following a new trajectory, but it has landed a positive long-term outcome. The benefits of finding these niche examples and amplifying that message are multiple.
I was really interested in you describing that trade-off between the short term and the long term, because that is what we are all hearing. Short term, there is not any money, the budget is empty and so we have to look at our competing priorities. Can you each give us a quick thought on, particularly in the current squeeze with what is happening on the global stage, how they manage that competing trade-off? Even if it is better in the long run, they still might not be able to afford it today. How do they manage that?
Dimitri Zenghelis: That is critical. The first realisation is that these transitions are going to be funded by the private sector primarily, not the public sector. One way to leverage in a lot of private money for a minimum capital outlay from the public sector is to monetise these things. If you have natural capital and watersheds that are prone to flooding, and people’s houses will then become valueless because they cannot get insurance, try to find a form of contractual arrangements, a bit like infrastructure contracting and property rights, where you start to monetise these assets. It is difficult because there is a diffuse bunch of beneficiaries, but, to be honest, that is the case for most infrastructure. Try to bring in natural capital and turn it into an asset with property rights, and then the private sector is much more likely to move in.
Ultimately, it probably will require some kind of public outlay and some more investment. Then we are back to the age-old UK macro problem of how we raise the funds to push for greater investment in public services. That is a political decision. Very often, it is the top-down politics of this that impacts the microanalysis.
Professor Groom: The assumption behind what you were saying is that the Government do everything, but that is not what happens really. What happens is that the Government set the rules of the game and then private sector can come in and respond to the incentives.
It is really key in this kind of long-term/short-term question that you are asking here that, where incentives are put in place, be it through net zero, biodiversity net gain or meeting international agreements, you hold firm on those commitments so that there are incentives and the uncertainty for the private sector is minimised. They know the rules of the game and say, “Price of carbon is going to increase like this. I know it is going to happen because the Government have said so. This means these interventions are financially viable for me to do now because they are going to pay off according to this price I see in the future”.
The same could be done for nature restoration. In a way, this is what happens with BNG. You have a regulatory requirement to replace any habitat that is lost. That leads to markets for provision of nature elsewhere. The role here, in meeting intergenerational or long-term demands, is for a regulatory framework that holds strong.
Q19 Julia Buckley: There is still a cost to the Treasury. They are sat there today, wondering what to do with Thames Water. They are weighing up how they set the rules of the game. How do they involve the private sector? How much is it going to cost us and what can we afford? There is still a cost to Government, even if they are playing with the private sector.
Professor Groom: Sure, understood.
Q20 Sarah Gibson: Julia’s question feeds into what I was hoping to ask you. It is something that we have all touched on. Do you believe the Treasury’s understanding of climate and nature risks is now adequately reflected in its choice of spending, investment and fiscal decisions? Do you have any evidence that the climate and nature considerations materially influence the way the Treasury makes its spending appraisal and public investment decisions? That leads into the setting the tone that you were discussing.
Dimitri Zenghelis: Responding to that question requires expressing what the counterfactual would be, as in “compared to what?” We have been knocking the Treasury to some extent and looking for examples of decisions that were made that have yielded an opportunity. Professor Groom has also noted that policy consistency and credibility is massively important when it comes to leveraging private sector funds and reducing risk premium.
Let me give you an example that covers all those in a way that has been beneficial. It is the setting up of the Climate Change Act. We now have a series of rolling budgets that are presented to Parliament, approved by Governments and independently monitored by the Committee on Climate Change. That has ultimately meant that there is a policy framework that is long-term and consistent, which the Treasury has had to ascribe to and respond to. 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.
In that respect, we are doing better. If you go outside the Westminster or UK bubble, countries abroad will compliment our ability to have achieved that. We are seen as climate and nature leaders, for all the problems that we face. There are examples there, but they require leadership, strategic decisions and a framework that is long-term credible. The Climate Change Act is a positive example of such a framework.
Q21 Sarah Gibson: Other than the Climate Change Act, which is one of the few things that go beyond the cycle of changes of Parliament, which is quite impressive, is there anything more on a day-to-day basis that you notice where the Treasury’s policies and spending are now clearly moving in that direction of supporting our natural capital and climate change decisions?
Professor Groom: In terms of the cost-benefit guidance, we are edging towards getting a price for biodiversity into the Green Book. This is taking some time, but we are doing this in collaboration with DEFRA, which is very interested in this, partly because it allows it to understand very clearly the costs of restoration targets. That is one way in which things are moving.
Once you get things into the Green Book, that mainstreams it across all Departments when they have to make decisions, even down to local government. It uses the Green Book as well. There are things happening in that respect. I am an academic and you are asking me about the day-to-day of government officials. I would not like to say more than that.
Dimitri Zenghelis: From my experience of working in the Treasury, it goes back to the point I made before. The analysis, methodology and guidance is there. It is in the Green Book. We have the Dasgupta review. We have other Treasury-commissioned reports that tell us a way forward. What is required is political will, ultimately.
It would be a mistake to think of this as some mechanistic approach, where the Treasury comes in with a clean slate, fires up the right tools, pulls a handle and gets the answer. It is a much more iterative approach. It is about senior civil servants wanting to appear in the meetings with special advisers, because that is how they advance their careers. You do not do that by constantly saying no to what your Ministers want you to do. Ultimately, that is one of the key driving mechanisms of how the Treasury will assess a problem.
Q22 Dr Savage: I am going to ask a question that I hope pulls on several of the threads that we have somewhat explored already and brings them together. Mr Zenghelis, you have mentioned incentives. Thinking about the Treasury systems and models and the way that they operate with more long-term decisions, it was interesting that you mentioned China and how it is able to plan for the long term, because it does not have this inconvenient thing called democracy, but we do.
The challenge there is that you have short-term incentives, particularly in these very challenging times. A Government can seem to be in survival mode. They are hanging on and trying to optimise for the short term rather than the long term. My question is whether those Treasury systems and models can counteract that short-term thinking and short-term electoral cycles, and provide sufficient incentive for long-term planning that may not have a short-term political payoff.
Dimitri Zenghelis: It is a really good and interesting question. On their own, the mechanisms cannot do that unless there is a sense that there is a common political understanding as to why these things are in their interest. You are absolutely right. The piffling inconvenience of democracy makes it harder for us and other western democracies to make strategic decisions relative to the Chinese, and yet we invest in, for example, education.
Education does not yield much of a return within an electoral cycle. The returns to education come five, 10 or 20 years hence, when you have productive and civically engaged workers, but the public understand that. The public understand that you could cut taxes by reducing education spending to zero, but that is not going to be the world you want to live in in five or 20 years’ time. It is not going to have much impact for the next five years, perhaps. We make long-term decisions where the case has been articulated clearly and where it is commonly understood.
That takes us back into the political realm. The Treasury has the tools to reinforce that and deliver on that. As a civil service institution, I do not think it would be expected, nor should be expected, to lead on doing that. It can only provide the analysis or commission it. We have seen that. There is the Green Book and the Dasgupta review. It is up to politicians to decide how to act.
Q23 Dr Savage: Education is an interesting analogy, because education has the advantage that we have been doing it for centuries, whereas looking out for nature is something that is relatively modern. We did not use to need to worry about it, so it has a bit of a disadvantage.
Dimitri Zenghelis: Exactly, it is hard work. That is why narratives matter.
Professor Groom: It is very interesting. I have not heard that example before. I really enjoyed that education example. Where did that come from? To begin with, education was a very niche thing. The reason why we have that brought across the board now is that a rights-based approach was taken and it was felt that everyone has the right to have a decent education.
We are not necessarily quite there with nature, although many people think that, in 100 years’ time, we will look back at how we treat animals now and say, “That was absolutely appalling”. With nature, the benefits are not as immediate or direct as the social cohesion that we get from education or the joy of conversing about stuff we know about. They are a bit more nebulous when it comes to nature, so that process is lagging behind.
Q24 Dr Savage: I want to push again on the systems and models that are used in the Treasury and whether those support that longer-term thinking.
Professor Groom: I agree with Dimitri on this. As far as I am concerned, this is an infrastructure within the Treasury that helps deliver the strategic vision of the Government. It does that in the best way it can, but it does not necessarily tell you what that strategic vision is. Certainly the Green Book does not do that.
Dimitri Zenghelis: The short answer to that question is that they mostly do not, but they could. There is an array of models that could be brought in that could be more helpful, but a decision has to be made to deploy them and to commit the resource to deploying them.
Dr Savage: Thank you very much. That was very helpful.
Q25 Chris Hinchliff: I want to pick up on a point that was made recently about the way that the Climate Change Act provided the certainty and the framework to know that the Treasury was going to respond to that, and that in turn led to private sector investment in renewables to mitigate the impacts of climate change. We have legislation and legal obligations relating to nature restoration. I wondered whether either of you would like to comment on why you think that that is not yet achieving the same outcomes. Is there something missing in that framework around nature legislation, or is there a sense that politics or the Treasury does not take those legal obligations as seriously and think, “If we miss them, we will fudge it”?
Professor Groom: It is a very good point. The equivalent of the Climate Change Act is the Environment Act of 2021. There are clear targets placed there. Two things have happened. There has been a renewal in the growth—I guess this is how one could describe it. There have been other crises that exist in this country, one of which is housing. That whole frontier of building houses is politically important right now. This is my opinion. My feeling is that this has led to a cooling off of the biodiversity net gain legislation. There was a time back in 2023 where I thought that the biodiversity net gain legislation was going to be a bit like the Climate Change Act, with the incentives that it was going to provide for reducing carbon emissions and improving efficiency but in the context of nature, so moving towards nature restoration. That seems to have cooled off a bit.
Q26 Chris Hinchliff: Would there be any recommendations that you think this Committee could make to get us back on track to something closer with nature to what we have with climate?
Professor Groom: One thing that is quite interesting is that to lay the responsibility of restoration of nature on the housing market in particular is probably the wrong way to do it. I would be stepping back and thinking more broadly about a more strategic restoration policy, so that we can meet our targets and our international commitments on 30 by 30 protected areas, so 30% of land protected by 2030. On our targets on reducing the extinction risk of indigenous species, I would be reiterating those targets, effectively.
Dimitri Zenghelis: I do not have much to add again, except, not wanting to sound like a stuck record here, that a move towards natural capital accounting will get you into a better place to start ascribing value to investing in assets and providing the contractual arrangements and property rights that leverage in private sector money. That is a long way of saying that, if you cannot measure the asset, you are not going be able to manage it very well.
Q27 Chair: As you rightly said a minute ago, you have been pretty critical of the Treasury, and I think by extension the Government, or Governments, over the last hour and 10 minutes or so, particularly in comparison to the approach taken in other countries. When we in this country go and speak to politicians elsewhere, often the UK is held up as a leader in some of these fields. You referred to the Climate Change Act and Professor Groom to the Environment Act, but also to biodiversity net gain and holding the line so far on the zero emissions mandate. The UK is one of the few countries going to COP with a nationally determined contribution. In many ways, if we were having a similar discussion in Germany or France, they would be saying, “Look what they’re doing in Britain”. In comparison to what we could be doing, there is definitely a lot more we could, but where does Britain’s Treasury stack up against some of our European competitors?
Dimitri Zenghelis: I would not disagree with any of that. I made the point that we have quite a positive reputation on all these fronts internationally. That should not stop us aspiring to do better, but you are absolutely right. There are examples we have talked about that we should be very proud of.
I am not sure that I have been that critical of the Treasury as an institution. I have perhaps been more critical of Governments past, because I think the Treasury is in a position to deliver if it is given the political leadership to do that. That is my experience with the Stern review, for example. That is a good example if you contrast that to the response to the Dasgupta review.
If there were to be a Treasury-related problem in the UK—and one does not have to dig too deep to unearth this—it is pretty clear that we have invested less. Public investment has lagged public investment by our competitors for several decades now. That has had very clear and demonstrable impacts on productivity and productivity growth. That seems to be a bit of a UK problem relative to our competitors. Nature, and indeed climate to some extent, falls within that, although, to the extent that we have had some innovative approaches to sustainability on that front, perhaps less so than standard infrastructural investment and investment in public services and the public realm.
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 favour of saving and investment. You cannot have both consumption and investment without running into macroeconomic problems. That has been the macroeconomic challenge in this country for some time. Clearly, almost by default, the Treasury has to have had some role in that. It cannot just be a series of multi-decade coincidences.
Q28 Chair: Professor Groom, did you want to say anything on those international comparisons?
Professor Groom: I agree 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 DEFRA, for instance, is absolutely at the frontier and is the envy of some other countries. I often get invited overseas to talk about what is going on in the UK with regard to BNG, biodiversity, and this and that.
This is going to sound a little self-serving, but there is a thing I think is missing. The reason I get invited over to Holland, Norway, France and so on to talk about this with their Governments is that they have very clear processes of appraisal and policy development, which involve the broader community, including academics. Holland, for instance, has a seven-year rolling process on the cost-benefit analysis. It has a planning bureau full of very highly qualified academics who do this review, and its policies and appraisals are updated to the frontier every so often.
The Treasury discount rate review that I am doing at the moment is, by the way, going wonderfully. I have had a really good experience with the Treasury on this particular issue, but that guidance has been there for 23 years. I was doing my PhD. I was part of that initial 2003 Green Book change. This is the equivalent of the interest rate for cost-benefit analysis and it has not changed for 23 years. One of the missing institutions here is a direct process of renewal and appraisal of these particular procedures, rules and suchlike that we have been talking about here periodically. That is missing.
Chair: Professor Groom and Mr Zenghelis, thank you very much indeed for that excellent first session. We will bring this panel to a close. Thank you very much for being with us.