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 29 - 53
Witnesses
II: Dr Steve Coulter, Head of Economy, Green Alliance; Karen Ellis, Chief Economist, World Wide Fund for Nature (WWF); Heather McKay, Programme Lead, Finance and Resilience, E3G.
Written evidence from witnesses:
Examination of witnesses
Witnesses: Dr Steve Coulter, Karen Ellis and Heather McKay.
Q29 Chair: Welcome back, everyone, to the second of our panel events here, looking at the role of the Treasury in the economics of climate and nature. I am delighted to say that we have a panel here to help us look at the role of the Treasury in these matters. Could I ask you to introduce yourselves? Just explain what your role is and the organisation that you are representing.
Heather McKay: It is lovely to see you all. My name is Heather McKay and I lead the UK finance and resilience work at E3G, which is a climate policy think-tank. For my sins, my background is in commodities and I have now shifted over to the think-tank space. My team very much looks at how the UK is successful at home in mobilising investment for the net zero transition, and where the UK can both lead and learn internationally in terms of different approaches to mobilisation. It is great to be here.
Karen Ellis: I am Karen Ellis. I am chief economist at WWF-UK. In terms of my background, I started my career at the Treasury and, since then, I worked over the years in international development at the Department for International Development, as it was then, before moving to WWF.
Chair: You used to be in the Treasury but you are okay now.
Karen Ellis: Yes, exactly.
Dr Coulter: I am Steve Coulter. I am head of economy at Green Alliance. We are a Westminster-based think-tank working on climate policy. As the job title suggests, I handle the economy. I previously worked for a couple of other think-tanks, including the Tony Blair Institute. Before that, I was an academic teaching political economy at the LSE and, before that, I was a business journalist for the BBC. I have never worked for the Treasury, but, in my current job, I deal with them a lot, and they are excellent people.
Q30 Chair: That is excellent. Thank you very much. We will start with you, Ms McKay, if we may. To what extent do you think Treasury policies are supporting or working against the delivery of the Government’s climate and environmental objectives?
Heather McKay: It is a really good question to start from. To build on the previous panel, I would probably separate the Treasury into the political and the structural institutional lens. The Treasury has done quite a bit of good recently. The reforms to 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 such as GB Energy and the National Wealth Fund are all really positive steps.
However, not enough is being done in terms of the mobilisation of public investment or the other tools at Treasury’s disposal such as regulatory reforms and political incentives. If I take those in reverse order, Treasury, as we all know, is a really vital Department, not just for climate but for a number of other issues. It sets the tone of the direction of travel of government policy and, frankly, to quote Alok Sharma, the COP president for Glasgow, without cash, nothing gets done, so Treasury is really vital in that respect.
There is always going to be a tension between Treasury and other Departments about where limited public resources can be spent, but what needs to be stronger from the leadership in Treasury is the recognition that climate and nature policy is not a siloed area. It is economic policy. It is resilience policy. It is security policy.
Particularly on security, which is a key area for the UK at the moment in which to scale up investment, to quote the—now having left—Defence Ministers, security is not just bombs and tanks. Security is warm homes, access to affordable energy, healthy people, sustainable food systems and agriculture, and a bunch of other ancillary mechanisms in the UK that enable it to be resilient and self-sufficient. That political leadership could be stronger, rather than just bashing the Treasury, although that is a broader political issue in the UK that we can do better at.
When it comes to the institutional way of assessing climate, as you probably heard from Dimitri and the other professor, the way that climate and nature and resilience are assessed is not sufficient within Treasury. Reforms to the discount rate do need to be looked at quite swiftly, just given the crises we are facing at the moment.
A good evidence point for that, as I am sure you guys have been exposed to before, is that we were not 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. Again, these costs are quite significant, and Treasury can be better in anticipating the risks and investing properly to avoid them in future, such as in energy security.
The third piece rounds back to political consensus. Treasury has done a good job in some ways, but particularly in terms of the way it applies its taxation and fiscal rules policies to the climate and energy security questions. There are some immediate steps that can happen. For example, removing levies from bills could really help speed up electrification and address some of the distributional issues when it comes to gas and electricity-reliant households. It could also address some of the industrial competitiveness challenges that we are facing at the moment within the UK.
Q31 Chair: There is a lot to go at there. If I could come to you, Ms Ellis, we heard there that the Treasury sees climate and the environment through the growth lens. We have seen that, when it comes to, for example, energy policy, Government are willing to put their money where their mouth is and to see that as part of their economic policy. More generally, where there is maybe not as direct a link between industry and climate policy—particularly nature policy—has the Treasury been as good at understanding the economic consequences of policy, or does it see it very directly, as in through the lens of wanting to spend money that leads to money, if you like?
Karen Ellis: I think that Treasury does see the importance of these issues in the longer term and has taken steps that are in the right direction, but, in all the cases—and there are three that I would like to just name—it has not gone far enough and there is a lot more that it could be doing.
The first one is building climate and nature considerations into decision making in government Departments and the Treasury itself. In 2021, there was a publication of how it is asking Government Departments to think about net zero in their own considerations when they put bids into the spending review. It was building the capabilities of Departments to do that and published a progress update. We have not seen anything since then. That was a long time ago. Since then, hopefully a lot of capacity has been built and that Departments are much better able to assess these things. If that is the case, good, but we do not have transparency of that. That has not been published, so we cannot assess how much of that is being taken into account in spending decisions.
We have also called for a long time for a net zero test of public spending, so that all the spending decisions in a specific Budget moment or spending review can be added up to see whether that is bringing you into line with, or away from, your net zero commitments, to give overall accountability for the direction of travel. That is one area. Much more could be done in that space, and with more transparency.
The second one is really driving the private sector. The Treasury announced, back at COP 26, that we would be the first net zero-aligned financial centre in the world, which was a big commitment and very exciting. It also talked about mandating transition planning for corporates and the financial sector. That still has not been done. This new Government also committed to do that, but that still has not been done, although there is consultation out now about that. That would drive the transition across the private sector and encourage the private sector to do a lot more to deliver this transition, taking the pressure off the public budget.
Q32 Chair: Just on that point, at the time of COP 26, we did have broad political consensus across parties. Net zero was a destination that everyone was committed to and there were different ways of getting there. That consensus is now broken. We now have, clearly, differences of opinion in politics about whether net zero is even a destination worth attempting to attain. What impact does that have on the private sector’s enthusiasm for investing in things?
Karen Ellis: It is definitely a dampener. A lot of the impetus to invest in it was about the expectation that policy would support and incentivise that. Where other parties are saying that they would not support that going forward, that creates a reduction in the expected rate of return in the longer term 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, and that climate change is not going away. Other jurisdictions have done things—notably, the EU, although that has also moved back a bit in recent times. Other Governments around the world are enacting regulations and policies that are taking us inexorably in the direction of needing to be net zero-aligned.
Many corporates and the financial sector are working hard behind the scenes without necessarily saying much about it to improve their capabilities to do that. We have done surveys and have evidence that lots of organisations have, so it is very strongly evidenced that there is a lot of ongoing support for that transition from the private sector, but no doubt that political uncertainty is unhelpful.
My third one was around the Bank of England. In a mandate letter, the Treasury has set the Bank of England and the financial regulators to think about climate change and nature risks in their programming and to consider it central to their core objectives. The Bank of England has done quite well on climate compared to many other central banks, although not all.
On nature, it is lagging far behind, seemingly. Despite having another mandate letter saying the same thing, or similar, it has not yet done anything visibly on nature, so it feels like Treasury needs to drive that more, because the financial sector, given that we are a global financial centre, could have a huge impact globally on driving that transition through the capital flows that stem from the UK.
Q33 Chair: Dr Coulter, thinking about recent Budgets and spending reviews, what would you see as the most significant Treasury decisions that have had either a positive or a negative influence on climate and environmental delivery?
Dr Coulter: This is about the Treasury, so we have to separate the Treasury as an institution from government policy, but it is the Treasury that does this stuff, so it is in the firing line. As an environmental organisation, we are pretty happy with what has been happening recently. In the spending review, we got an enormous uptick in capital spending, including for public transport, infrastructure and clean power.
In the last Budget, there was action on fuel duty, which, unfortunately, was counteracted then by imposing taxes on EVs, but you cannot have everything. There was the warm homes plan, with £13 billion to insulate people’s houses and keep them warm but also reduce their energy bills. This is all very good.
One thing we particularly liked about this Government was that they talked a lot about planning for the long term. We saw in the previous session a lot of issues with the UK’s short-termism. When the Government came in, there were welcome signs that they were trying to think for the long term. They have begun to put their money where their mouth is with the industrial strategy and 10-year infrastructure plan, which is all very good, but what do we hear now? We now hear that the capital spending, which was supposed to be sacrosanct, is being sacrificed, to an extent, to pay for the defence investment plan.
There are very good arguments for doing that, but it does really shoot the credibility of the Government that, when we say we are going to do something and we put in the institutions, the policies and the pledges to allow people to hold us to account, this is, within a few months to a year, torn up and they do something completely different.
Again, to reiterate, it is the private sector that is going to do most investment in clean energy, and also in nature. The private sector requires certainty. It requires insulation against political risk. Government promised that they would get away from short-termism and zig-zagging on various policies. They talked a good game, but I am a little worried about where they are going.
Q34 Chair: So far, we have not seen those changes. The EV tax is quite an interesting and illustrative issue in terms of government policy, because they have, effectively, announced a fiscal policy. Has that raised any money at all yet? At this stage, we do not know what it is going to be. There is a consultation around it, and yet, apparently, it is having an impact on the number of EV sales, so it is potentially causing a negative impact—albeit that may have been loosened as a result of the increase in fuel prices after the Iran conflict—without raising any money for Government at this stage. What does that tell us about the way that those messages can have impacts, even before they have created financial or fiscal benefits for the Government?
Dr Coulter: That is a very good example. The OBR estimates that it will reduce demand for EVs by 440,000 cars by 2031. That is an awful lot of cars, so there is a massive dent in the EV industry, just when consumers are really getting on board with the idea of the EV transition. That is very unwelcome. It is interesting that it is already hitting demand.
There are sound reasons for doing this. We always knew that, at some point, you would need to impose excise duty on EVs. The feeling of the car industry was that now is just too early. There is never a good time to do this, but at least let the market get established before you start to do this. We were several years away from doing that, although we were getting there.
Q35 Chair: Some 25% of new vehicles last year were electric. That is pretty established, is it not?
Dr Coulter: I think they would like it to be a lot higher than that.
Chair: I am sure that they would.
Dr Coulter: How long is a piece of string? When you have new technologies, things such as range anxiety, and this feeling that it is a middle-class thing and not something for people who are budget-conscious, the market is, therefore, fragile, and anything that tampers with this is probably a mistake.
Q36 Chair: I absolutely hear all of those fears that you allude to there, but most of them are not based on fact. There is factual evidence that EVs are cheaper now than owning a fuel car. In the last couple of months, it is cheaper even to have a new EV than a fuel car. Should Government not be in the business of promoting what is true rather than having policy based on people’s understanding of things that are not true?
Dr Coulter: There was an expectation that this excise duty would have to be imposed at some point. There is a debate about when exactly that should happen. With a market share of only a quarter, there were very good arguments for saying this is too early. You have already cited some anecdotal evidence that it is hitting sales, and we cannot really afford this. Transport accounts for an enormous proportion of greenhouse gases in this country, so you need to be very sensitive in what you do.
Q37 Jonathan Davies: We know that climate change and the loss of nature is already costing the economy in different ways, whether through pollinators, affecting food security, or flooding and what that means for the insurance industry, or more hot weather and what that means for people’s health. There is a discourse in the country about whether we could get to net zero more quickly if we were to relax some of the things that we are doing at the moment.
Dr Coulter, I was interested in the fact that you had worked for the Tony Blair Institute. We had an intervention from Sir Tony Blair recently about that. I just wonder whether you have any thoughts on how the Government should respond to those suggestions that they should perhaps row back a little bit from what they are doing so that they can, in theory, create more short-term economic growth to, therefore, invest that in stuff that gets us to net zero and nature-based solutions.
Dr Coulter: I knew I would regret mentioning that I had worked for TBI. I did not realise it would happen so quickly. We look very carefully at what TBI said, and we do not disagree with most of it. Tony Blair likes to make political points. You have to read between the lines in what he says. Often, the press statements that accompany his institute’s research are not necessarily always the same as what is said in that research. It very much emphasises the politics.
He feels that the Government are adrift on all sorts of things, including net zero. He feels that investment in the grid is probably not enough of a priority, and there is this problem of renewable energy having to be taken off the grid because the grid simply cannot afford to carry it. He has raised some perfectly good issues around that.
His basic message is not that net zero is not important. It is not that these targets are not really vital. It is not that the green transition is not already happening and not being incredibly successful. He is not disagreeing with the Government’s own estimation that clean power is the economic opportunity of the 21st century. He is not really disagreeing with that. It is a technical issue with how you sequence investing in the grid versus how you invest in clean power generation in the first place.
There are various ways of getting to our destination. There is room for difference about the mechanisms you use for getting there. We consider him to be onside, basically, but as a man who enjoys making ripples and reminding people that he won three general elections and his opinion still matters.
Q38 Jonathan Davies: I am not too far away from where you are on that. If you see him, do let him know.
In terms of measures that we can take to insulate the economy from the challenges of climate change, we heard a bit from our first panel about how we are perhaps not very good at the moment at making those cost-benefit analyses of decisions that we may take, because either we just do not fully understand them or they are quite long-term.
Ms Ellis, how good is our cost-benefit analysis of nature-based solutions and efforts that we are taking to mitigate climate change? How well is that embedded into the Treasury’s approach?
Karen Ellis: I do not think it is embedded well at all. Particularly on the nature side, though, the cost of inaction is not understood at all by literally anyone anywhere in the world, so it is not that Treasury is particularly behind. Although the problem has been going on for a long time, this is a new area of analysis.
There are now academic studies, with more and more of them coming out, that use scenario analysis to quantify the economic costs and risks of future scenarios for how nature loss and climate change potentially interact. Not all of them but a lot of them are generating very big numbers, but there is a wide range of results from these models and these academic articles, which makes it hard for Treasury to factor into its own modelling, in a simple way, the benefits of investing in resilience, because the costs of inaction are not well quantified yet.
In my opinion and from my understanding of what Treasury does, this is totally missing from its analysis. We have talked to OBR about it as well, and it has been open that it has not even started to think about the nature-related ones. It does not know how to do it, so it is well behind even the climate ones, I would say, and not being factored in at all. That is a real worry because it means that we are blind to the future costs and the impacts on the public finances. This is very core to its mandate. It needs to build that analytical capability and invest more in the modelling needed. I know that previous panellists talked about the need to draw in different models, to build that analytical capability and then to factor that into decision making.
The other key problem is that, even when we do have information, such as we do to a much greater extent 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 those other decisions.
Having a way to make sure that they are factored in on a regular basis in a transparent way, where Treasury has to report at annual Budgets, for example, the extent to which it is doing things that build the resilience of the economy for the long term, and having metrics to measure that and modelling approaches to do that, is essential. It is very early days of doing that.
Q39 Jonathan Davies: Are you aware of any frameworks being used elsewhere around the world that we could perhaps look at to build our own?
Karen Ellis: The Network for Greening the Financial System—NGFS—has been doing work on nature-related scenario analysis, which we, and indeed the Bank of England, could be drawing on a lot more. We need to take that kind of approach and think about it in the context of a Ministry of Finance as well. That has been more about central banks thinking about it, but Ministries of Finance have similar challenges.
There is definitely an emerging body of work. I would not say it is best practice yet, but it is beginning to understand better how we can do that. There are some examples of central banks around the world that have made inroads into this as well, and better than us, including the Netherlands and France. There is more that can be done, and we would also recommend that the Treasury and the central bank work together to understand these risks to the economy and start to think about how to address them.
Q40 Jonathan Davies: Do you think that the Treasury understands the costs of delay in adaptation and measures that will provide resilience over a longer period? Do you think it adequately understands the benefits of those things?
Karen Ellis: No, because it does not understand the cost of inaction. It does not understand how this is going to play out and what costs are going to land on the economy and on the public finances.
One of the other recommendations that we make is that it develops a natural capital risk assessment for the UK that looks in more detail at where nature loss is going to impact specific sectors or regions of the economy, and publishes that to give the private sector that information as well, because there is not much clarity about that. There is growing evidence coming out from the national security assessment, for example, but it is still not very granular, and so it does not help with specific decision making about specific investments. There is a lot more that needs to be done to really start to unpick some of those risks at specifically geographical, sectoral and public finance level.
Q41 Jonathan Davies: Are there any particular examples of where early intervention or prevention investment, which was probably seen as ambitious, left-field or even controversial, is really paying those dividends beyond biodiversity net gain and the things that we might already know about?
Karen Ellis: That the UK has done?
Jonathan Davies: That the UK is doing but perhaps not adequately getting credit for at the moment.
Karen Ellis: I do not know if it is similar to the question that was asked earlier. The example that sprang to my mind was offshore wind power as being one that the Government did invest in and put together a package of measures to encourage its development. That has paid off, and now the UK is a leading player in that and exporting those skills and products abroad. That is a good example of where it can pay off.
Heather McKay: The service industries and financial services are a huge growth area for the UK. Would my mum like to hear about it? No, but would a number of international investors and comparators like to hear about the success of the UK’s transition finance market? McKinsey estimated that it is going to be worth about £1 trillion per annum from 2030.
That is a really good example of where early UK leadership, even if there have been some challenges with delivery on certain policies, in terms of the Climate Act signalling, market development, training, early adoption of ESG principles and fairly high-quality regulation, has made the UK the place to come and do transition investment. It is a huge growth industry for the UK as well.
Q42 Jonathan Davies: If we have a situation in the future where there is a Government who are not naturally predisposed to thinking about these things, the best way to embed approaches that prioritise adaptation, resilience and prevention is by ensuring that the direct economic impact, through the financial markets, of rowing back on that would undermine the wider economy. Is that a view that you would share?
Heather McKay: It definitely is a view that I would share and that, across the political spectrum, in private conversations, most folk would share as well. A good example that I will give you is in the context of the US, which has, as we all know, changed in tone, let us say, around the climate question, and particularly the promises to scrap the Biden Administration’s Inflation Reduction Act.
Because of private sector support for the benefits of the IRA, that policy was predominantly kept. Companies were benefiting from it. In 2025, green tech stocks outperformed gold, which is quite extraordinary in the States. Also, politically, it was quite beneficial because, in the red states, a lot of that investment was flowing to manufacturers, companies and wind farms. That is one really good mechanism to help maintain climate consensus.
The other one, which, again, is not purely within the remit of Treasury, is communicating a solid political story around the impacts of capital investment and making sure that those are visible. For example, there are some excellent projects going on in Wales at the moment to put solar on rugby clubs, which has proven to increase awareness of the benefits of solar and household-level uptake. Projects such as that are very beneficial.
Q43 Jonathan Davies: There is the local power plan in England as well, with £1 billion of investment into community energy.
Heather McKay: It is about increasing the visibility. One of the core challenges is that capital spending has increased, and that, although the Treasury and this Government are doing a good job to drive forward the climate mission, the visibility of the tangible impacts of this on the average household and business, and on the industrial sector, is not so clear. That is definitely one challenge that is not only within the Treasury’s remit to solve, but the Treasury will certainly play a large part in that, particularly with offshoot bodies such as the National Wealth Fund and GB Energy.
Q44 John Whitby: How should the Treasury balance its climate and nature objectives against competing fiscal, economic and public spending pressures, if that is not the same question in a slightly different order to the previous ones?
Heather McKay: As I said at the start, part of it is about reframing. The Treasury has a number of responsibilities to fund, as we all know. However, this siloing of climate and nature into a different space from security and from economic growth and resilience is not what the private sector is doing. It is certainly not what we are doing in our spaces. We see them as very intrinsically linked.
There is a mixture of tools at Treasury’s disposal, but it is about, first, that recognition centrally. Secondly, I understand that there are limitations to the application of the environmental principles to Treasury’s fiscal policy and tax and spend policy. However, revisiting that in time could be quite helpful because, again, the intrinsic links between energy security and economic resilience are so clear. Again, to repeat the quote, both on adaptation and on energy security, recognising the significant costs that will come without action will be quite useful to guide Treasury spending processes.
Finally, as much as it is finance that is required to deliver on these things, it is also the people behind the finance. Just to build on something that Karen said earlier, there were some, let us say, pretty stark outcomes from the National Audit Office’s 2024 look at how these environmental principles are applied, not just within Treasury but across Government. It found that 98% of departmental audit risk and assurance assessments did not do any detailed analysis of the way that climate and nature resilience factored into the spending decisions, and 60% of staff did not really know what to ask or who to ask when it came to how to implement these principles. There is a culture-level issue, a political-level issue, and then a practical-level issue of how Treasury applies these environmental principles to its spending decisions.
Dr Coulter: Just to add to that, which was all absolutely excellent, there is a deeper problem here. There is an environmental need to deal with climate change. There is also an economic opportunity, which is what the Government have fastened on to. That makes net zero sound like an industrial strategy. The Business Department gets industrial strategy, because it has one.
The Treasury has never liked industrial strategy. Industrial strategy is anti-market. It is interfering in the market. It is changing the structure of the economy in a way that is really against Treasury orthodoxy, so there is a fundamental block in the hivemind of the Treasury against the idea of shifting the UK towards an economy based more on clean power and nature.
Because of that, going back to the idea that it simply views spending on climate and nature as a cost, there is no economic benefit from this. You can see this in the discussions on productivity growth. The Treasury and the OBR are very interested in the UK’s productivity problem. They see net zero spending as having no impact on this. They see it as, “You are just ripping old stuff out and replacing it with new stuff. Where is the benefit for growth? What is the impact on productivity?”
That ignores the fact that you are putting new stuff in that is more energy-efficient. You are creating economic activity by doing that. There is a growth and a productivity impact, but Treasury just does not get that. The previous panel was hinting that these can be very important, but Treasury just does not get that. It does not get this whole idea of clean power and nature as an industrial strategy because it does not see the point of industrial strategy.
Karen Ellis: It is also about spending to save. If you invest now in climate and nature resilience-building mechanisms, you are going to save public money later, which will free up space for other spending priorities. Linked to that, we have asked in the past for Treasury to adopt a fiscal resilience rule, to add to its fiscal rules, that takes into account the longer-term impacts that that spending package will have on the resilience of the public finances. It forces it to internalise that longer-term impact because, otherwise, it is unfair on future generations.
That is technically quite difficult to do, and it probably does not have the capability to do that at the moment, but it would be great if it could, because that is really the secret to long-term, sensible decision making. At the moment, there is a tendency within Treasury towards short-termism because it is about growth for this Government, and also about balancing the books and paying down the debt, both of which tend to drive it towards short-termism. You need to offset that with other rules and approaches.
Q45 Chair: What role does the Office for Budget Responsibility play in this? It has become the sage telling us everything that is going to happen and the impact of each of these government policies. We have heard briefings that suggest that the Treasury has been frustrated that the OBR has not given enough credit in future growth to some of the policies that come from Government. If the OBR is going to be the voice that we all need to listen to in terms of what the impact of Treasury policies is, how well equipped is it to make these kinds of decisions?
Karen Ellis: It is not well equipped. It is making progress on climate. We have heard its latest approaches to incorporating climate considerations into its thinking, but it is certainly very partial at the moment, so it is still not really factoring in 50% of the impacts of climate change on future public finances. On nature, it openly admitted that it has done nothing.
Q46 Chair: Does anyone else have anything different to say on the OBR’s role in this?
Dr Coulter: It is good in some ways. The fiscal risks report that it does is excellent. One problem with the OBR is that, again, its people are mostly ex-Treasury. They are excellent people. We deal with them a lot. It recruits from the same university economics graduates as the Treasury does, so they have the same kind of mindset.
On nature and climate, they look at the long-term trajectory of government debt, but not really at the assets side of the equation, which is something that is admitted from the Treasury in the way it handles the public finances. They just look at debt and its long-term trajectory. They do not realise that the assets side of the equation is very important when you are considering the public finances.
Because of that, there is no incentive for the Treasury to grow the assets side, and the OBR does not score it on any efforts it might make to grow the assets side of the balance sheet. That is a fundamental problem with the way that the public finances are evaluated in this country.
In countries like New Zealand or Scotland, where they do incorporate an appreciation of the value of the assets side of the equation, and provide an incentive to grow that, which will then counteract the debt, you have a much more sustainable system of public finances that incentivises you to invest. There are not really any incentives to invest in this country at the moment, apart from the idea that, in future, it may help growth and productivity. If it is clean power and net zero, the Treasury is a bit down on that as well.
Q47 John Whitby: Do you think that the Treasury is taking a sufficiently precautionary approach to long-term climate, environmental and economic risks? Do you think that it fully appreciates those risks?
Karen Ellis: It should be, but I do not think that it is. As we have just said, it is not taking into account the long-term, or probably even the short-term, climate and nature risks, because of that lack of capability, which, not only at Treasury but, generally, globally, is not strong, especially on nature.
The precautionary approach is an interesting point. A lot of work has been done by the Institute and Faculty of Actuaries on the way that risk is considered in government decision making, because there is a lot of uncertainty about the models and because the average is sometimes a relatively small number compared to other risks such as war.
It is not responded to adequately because it is not considered big compared to other types of risks, but, because it is a known, growing problem that we can see already happening and is not going away, and some of those scenarios are quite catastrophic to humanity, it should be taking an approach that is more than, “Oh, this is not a very big risk”. It should be a precautionary approach that says, “We really don’t want to get into this situation. What can we do to avoid it?”
Even if it is not that likely, we still need to be doing what we can to avoid that, taking that approach to the way that risks are managed and applying it to the financial sector as well, which perhaps has better approaches to thinking about those risks than the Treasury has.
Heather McKay: Specifically on adaptation, I am sure that all of you caught the CCC’s recent “A Well-Adapted UK” report, which was, let us say, firm about the UK’s progress, or, as it said, “little progress”, on dealing with the adaptation question, particularly from a financing perspective. It has a number of recommendations in there—I will not list them all—for the different tools, which are not just public spending, that you can use to address that issue. The fact that the Treasury has not yet met the success of adaptation reports for the CCC with commensurate action indicates that the answer to your question is no.
More broadly, on the mitigation piece, which Karen and Steve already flagged, there are a number of tools, which, again, are not public spending, that can help incentivise private investment and private sector risk management, such as transition planning on an entity level. This was the first thing I worked on at E3G, and I have been waiting for five years, or my entire E3G career, for that.
It would be helpful to see some recognition from Treasury that we cannot really afford to have another couple of years delay’ on quite significant policy and regulatory tools that can help incentivise the private sector side of the equation, even if the public-investment side is trickier at the moment.
Q48 Sojan Joseph: We just heard that you are generally happy with the Government and the Treasury in some of the decisions they have taken, especially in recent spending reviews. Environment principles are meant to be applied in all government decision making. What are the implications of the environment principle policy statement not applying across all areas of Treasury policy and decision making?
Heather McKay: I have somewhat mentioned it already, but Treasury has, understandably, some sensible exceptions to the application of the environmental policies rule, given other fiscal and spending priorities, so it does not have to have due regard to these principles. Therefore, that means that it can, in turn, be a bit of a tick-box exercise, let us say, rather than being embedded. Greater transparency, as Karen mentioned earlier, around the ways that these principles are embedded within risk assessment processes on a departmental level would be really helpful.
I also just want to emphasise what Karen said earlier about the importance of almost a super precautionary principle being in place for certain risks, because, again, we can see the evidence of it in front of our eyes when it comes to the economic impacts of not proactively transitioning the UK economy away from reliance on foreign fossil fuels. It is a back of the cigarette packet calculation, but £140 billion so far over the last four or five years is money that could be better spent elsewhere. That is a very tangible political example of the impacts of not embedding these environmental principles more proactively within Treasury spending decisions.
Dr Coulter: The carve-out for fiscal policy from the EPPS is a mistake, because that then removes spending decisions from the ambit of that. There was also an issue with transparency, which I know the Committee is interested in. It is very untransparent. We have tried to monitor what is going on, and the application of these principles is very hard. DEFRA and the Office for Environmental Protection have issued reports saying that, to the best of their knowledge, it looks like it is being applied, but very inconsistently. The overall message is that a lot more transparency is needed before we can even begin to address the question of whether this change is doing any good.
Q49 Sojan Joseph: We heard from you that environmental considerations may be considered during the appraisal process, but it was not there at the time of final fiscal decisions. Do you have any specific examples of recent decisions where environmental considerations were taken but were not there in the final decisions?
Dr Coulter: No, I do not.
Heather McKay: One of the core ones is the capitalisation of public investment vehicles within the UK. They are far too small for the investment needs across the economy. There are different ways of doing this. The Government can allocate further money to institutions such as the National Wealth Fund and GB Energy. That is politically and fiscally tricky at this moment in time, but that is one option. I would say that GB Energy, while a laudable effort, is probably far too small to be a state-owned energy company, so I would proactively encourage a review of the capitalisation of public finance institutions within the UK. That is probably the core one that I would say is visible at the moment, but I am sure that both of you have some examples on the nature adaptation side.
Karen Ellis: Even if the EPPS is being taken into account, it feels like environmental objectives are often overridden by other priorities, calculations or political objectives.
The example that I would give that seems quite striking at the moment is housing development, which is a big growth imperative for this Government and important to the public, but the data shows that one in nine houses are now being built on floodplains. That is going to cause all sorts of problems for those households, for those regions, and for the Government’s public finances going forward.
That feels like a very short-termist approach, where environmental red lights are flashing, but those decisions are still overriding the environmental concerns. I am sure that there are many other examples like that.
Q50 Martin Rhodes: Picking up on something that you just said, Dr Coulter, transparency is something that has gone through what we have been discussing in this panel, as well as in the previous panel. Am I right in thinking that there is a general consensus that there are considerations being made by the Treasury with regard to climate and nature, although possibly weaker on nature than on climate, but that one of the problems is not being able to see how that is working in terms of how it is being assessed?
One of the comments made by you, Ms Ellis, was that there seem to be other considerations, but you cannot see it. Is one of the problems here about transparency, almost as much as it is about the process itself? Dr Coulter, do you want to pick up on your point about transparency, and then I will come to others?
Dr Coulter: This was discussed extensively in the first panel, and they were absolutely right. Intrinsically, everyone gets climate change, especially the Treasury. It commissioned the Stern review, which was excellent. It was a really easy way of internalising Stern’s conclusion into its policymaking, which is that, if you do not deal with climate change—stopping it as well as dealing with the effects of it—there are massive economic consequences. The Treasury was very good at integrating that. There are also very clear metrics around climate—1.5°, 2°, 3° or whatever—and the economic damage from that.
The difficulty with Dasgupta, thinking about nature specifically, is that it is much fuzzier. It is very hard to put a value on nature. Therefore, you cannot price it. Therefore, it makes it very hard to construct markets in credits to protect nature. You even lack a simple understandable metric around nature.
Green Alliance did a long project on turning the Dasgupta review into some actionable policies. A problem that we had was that, unlike climate change, where there is a simple, easily understandable and very scary number, there is no metric that you can have for nature destruction. Therefore, you cannot plot what you can do to prevent damage to it.
We consulted with all sorts of nature organisations, saying, “It would be really helpful if we could come up with a metric so we could say, ‘It has gone down this year’ or, ‘It has ticked up slightly, but the overall trend is really far down’. It would be really helpful from a public policy point of view. This would be fantastic”, and we just could not. Every time we proposed some sort of composite metric, someone said, “No, that ignores this feedback effect”, and whatever.
That is why it is extremely difficult when the Treasury cannot intellectually grasp the full totality of what it needs to do about nature and is restricted to things such as the EPPS, which, by the way, deals only with process, not with outcomes. You have that problem as well. Then you have a really hard problem for it intellectually to work out how to do this.
Underlying all of that is this issue of, “Well, this is just a cost and it is very hard to see the benefits”. If you cannot see the benefits in terms of an easily understandable number around nature getting better or, more likely, worse—in this country, it is always worse—then it is very hard to do your cost-benefit analysis, which is core to what the Treasury does.
Karen Ellis: As I mentioned earlier, we have been advocating for a net zero test of public spending and have worked with Treasury for a number of years on how to model that. It is possible, but the Treasury’s argument was that, in terms of departmental assessment processes, Departments do not have the capacity to do that yet, so it has been working to build the capacity of Departments to be able to provide that information.
In 2021, it published its net zero impact rating system, which was the first step, where at least it shows whether a specific investment is going to be good or bad for delivering net zero. It is still not quantifying or enabling that to be added up to an overall figure.
We would still love to see that happening. Hopefully that is all progressing behind the scenes, but we would love to see that being published as well. It is about accountability. It is about value for money as well. If public spending is going on things taking us away from our net zero goals, that is not good value for money, because we are going to have to pay to clear up that mess later or bear the costs of climate change to the Budget as well. It is about value for money and accountability.
What we would really like to see is that kind of information aggregated up to macroeconomic-level indicators that are reported in the Budget, alongside GDP, as others on the earlier panel also alluded to. We have made recommendations about that.
There are 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 monitors financial flows, and measures of aggregate corporate progress towards the net zero transition using data now available from corporate disclosures.
There is a bunch of things that it could be reporting on in a really transparent way, which would be much better able to assess how well the Government are managing our future threats from climate change and nature loss.
Q51 Martin Rhodes: Is it that these considerations are being fed in, but, for some areas—you are suggesting nature more than climate—it is difficult to quantify and, therefore, when people are making judgements, difficult to then say, “These are the figures, and this is how we have weighed them up and made that cost-benefit analysis”? Is it that, for some of them, it is just more difficult to do in a transparent way where you just have a formula and numbers, and something comes out at the end of it? I know that it is not as simple as that. Is it just that they are not doing it? If they are doing it, why are they not being transparent about it?
Karen Ellis: It is technically more difficult to do, in some cases than others. It is politically difficult to do as well. More transparency is not always welcomed. It is also probably more difficult for Treasury to be so transparent about some of the trade-offs that it is making. It almost likes to be a black box where complex decisions are made and the answer is given to the world, not only on climate and nature but on everything. For all those reasons, it is probably not a comfortable thing for it to do.
Heather McKay: I agree entirely with Karen. I would add to the list of potential policy measures something that E3G has been working on for quite a while with the WEF, which is called a net zero investment plan. It has now morphed into the work of the Net Zero Council and the Transition Finance Council on sector investment roadmaps. Just to demystify that, it is about having a plan that, much like companies have to do, has an investment plan to back it up.
Basically, Government set the direction of travel, so how many EVs need to be developed, how many charging pods need to be put in place in the middle of nowhere in Scotland and the highlands, what that will cost, what the expectations are from the public purse and from the private sector, what package needs to be in place to get that to go there, and then some mechanism of accountability if you go off track. Again, it is quite a pragmatic, sensible policy proposal that has won a great deal of support across the private sector, thus it being taken forward through these various councils.
The reticence that we have faced in trying to move this policy forward over the last number of years is a proof point that, as Karen was just saying, there is a level of political discomfort and also maybe institutional discomfort in Treasury in being that transparent. It certainly is something that we would see as having worked in other jurisdictions. Country platforms are a big thing at the moment. Europe is driving this forward through the NECP process. A number of countries across Asia, such China and Japan, are pushing these processes through.
It is time that the UK caught up with that and provided 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 is the institutionals that are the key gap for delivery.
Q52 Manuela Perteghella: In the panel’s view, to what extent has the revised 2026 Green Book strengthened or is influencing not just the embedding but the translation of the environmental principles and consideration on public spending decisions, or is it too early to assess this?
Heather McKay: It is a really positive move. There are nods on the panel. We all welcome it. From my own perspective, however, to zone in on that discount rate piece and the time value of money, the way that Treasury usually does things works when the costs are quantifiable and known, but is not so great when they are unknown, as has been very well articulated by my fellow panellists. What I would probably recommend is that the Treasury advance its commitment to reviewing the discount rate for these more nascent areas. That is probably one of the core barriers to translating the environmental principles into action and investment from the Treasury.
Dr Coulter: I agree with all that. I do not want to be greedy. We got one thing that we wanted, and now we need another. What we need next is a green taxonomy. This is where the Treasury promised a taxonomy to help investors appraise investment projects in the green economy, which would be extremely useful, because, if you do not know what you are investing in, it is quite hard to justify that. It also opens up the possibility of greenwashing.
It is an extremely good idea, and the City and investors are really behind it. Treasury has talked about it, but it has not done it. There were plans a year or two ago to do it, and they were dropped without explanation. Without being greedy, but having got the changes to the Green Book, we would now like a green taxonomy. That would really help and also be very good for financial services.
Karen Ellis: The experience is that the capability of all Departments to implement these guidelines is mixed. So far, we are still on a journey towards being able to fulfil these requirements, and I wonder whether there is enough pressure on them to improve and whether we need more scrutiny and transparency around those pieces of analysis to ensure that they really are being done well and factored into decision making. Overall, I agree that it is a positive move.
Q53 Chair: This Committee did a review into natural capital, and one thing that came out of it was that the new Government were coming to power with the inherited ambitions from the previous Government, but without a lot of data as to the size of the natural capital market in the UK, and they saw that as a key initial priority. Is it possible for us to have any sense as to whether we are making progress on natural capital in advance of being able to quantify the size of the natural capital market right now?
Karen Ellis: One thing that we have 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 setting out what different sectors of the economy need to do to align with nature goals that DEFRA has agreed in the environmental improvement plan. That can make quite a lot of progress, because, at the moment, we have had these targets set but no plan for how to align the economy with it, which is why they have never really worked in the past.
Without that economic alignment and Treasury backing it, you are never going to be able to achieve those goals, so that will make a big difference and, hopefully, incentivise investment by the private sector in that transition in the same way as we have seen happening for net zero, once that direction of travel is clear.
Lots of opportunities have been identified through that process already. People were asking for examples of innovations and market opportunities. There is precision agriculture, so that you can be more efficient in your use of inputs and fertilisers, or recycling technology for renewables. There is a lot of technological development that will create growth and innovation. Those could be exciting outcomes from clarity about that nature-positive transition.
That kind of practical thing is perhaps even more useful than quantifying natural capital. It is more immediate and more practical for decision making by the private sector as well as by Government.
Heather McKay: That is where public finance plays a vital role. I fully commend our excellent colleagues at the National Wealth Fund and at GB Energy as it sets up. More encouragement to them by, for example, lessening the requirement on the triple bottom line that they are currently required to fulfil, particularly in the nature market, could really help. Given that the returns are a bit more speculative and it is, as Karen said, a bit more nascent as a space, public finance can play an absolutely vital role in signalling to the broader market that that is the direction of travel that they would like to see greater investment in from the private sector.
Chair: Thank you very much indeed to our panel. We had an excellent first session looking at this topic. We will bring this session to a close. We have managed to beat the vote, so that was pretty good.