Environmental Audit Committee
Oral evidence: HM Treasury and the economics of climate and nature, HC 23
Wednesday 15 July 2026
Ordered by the House of Commons to be published on 15 July 2026.
Members present: Mr Toby Perkins (Chair); Olivia Blake; Julia Buckley; Jonathan Davies; Barry Gardiner; Alison Griffiths; Chris Hinchliff; Sojan Joseph; Manuela Perteghella; Martin Rhodes; Sammy Wilson.
Questions 54 - 87
Witnesses
I: Ben Howarth, Assistant Director and Head of Sustainability and Climate, The Association of British Insurers; Toby Radcliffe, Policy Officer, Aldersgate Group; and Tom Josephs, Member of the Budget Responsibility Committee, Office for Budget Responsibility.
Written evidence from witnesses:
- Aldersgate Group (TCN0082)
- The ABI (TCN0101)
Examination of witnesses
Witnesses: Ben Howarth, Toby Radcliffe and Tom Josephs.
Q54 Chair: Welcome, everybody, to the latest meeting of the Environmental Audit Committee and the second of our panel sessions into the policies of the Treasury and their impact on the environment. I am very pleased to say that we have three excellent panels to help us in our evidence gathering today. I am going to start by asking our panellists to introduce themselves and their roles within their organisations, and then we will make a start. I will start with you, Mr Radcliffe.
Toby Radcliffe: Hi, everyone. I am Toby Radcliffe. I am a Policy Officer at the Aldersgate Group. The Aldersgate Group is a membership organisation. Our members include some of the largest businesses in the UK and leading NGOs. We develop policy recommendations and we also advocate the business case for decarbonising the UK economy and investing in adaptation and the environment.
Tom Josephs: Thank you very much for the invitation to appear in front of the Committee. I am Tom Josephs. I am on the committee at the Office for Budget Responsibility. I oversee our work on fiscal analysis and fiscal forecasting and, in particular, I have overseen work we have done on the long-term risks to the public finances from climate change.
Ben Howarth: Hi, everyone. I am Ben Howarth. I am Assistant Director and Head of Sustainability and Climate at the ABI, which is the Association of British Insurers. We represent the UK’s insurance sector and long-term savings sector.
Q55 Chair: Thank you very much. Mr Josephs, has the OBR made any assessment of the potential boost to the UK economy of England winning the World cup on Sunday?
Tom Josephs: I am afraid we have not done that one yet.
Q56 Chair: No. Okay. Well, let’s move on. I will start with Mr Josephs. The OBR has predicted that GDP could be 8% lower by the early 2070s due to climate change, with climate damage increasing public sector debt by 56% of GDP. Do you feel that the Treasury is identifying and managing those risks?
Tom Josephs: Thank you very much. I will start by talking a bit about that analysis because you have highlighted a particular set of numbers there, but there is clearly a huge amount of uncertainty around that analysis. We do quite a range of risk analysis to complement our estimates that you just put out there. I think that is important in terms of the response to your question on the Treasury response.
We produce an annual report on fiscal risks and sustainability where we look at longer-term pressures on the public finances, and that is where we have done the analysis of the risks from climate change. We have done two parts to that analysis so far. One is looking at the potential risks to the public finances from the damage caused by climate change: higher temperatures, more extreme weather events, impacts on the economy, productivity, labour supply, and just the cost to the Government of having to deal with those events. We have also done some analysis on the cost to the Government of the transition to net zero in terms of the policy action that the Government will need to take to support that transition.
As you say, we have an estimate based on work that is done by the NGFS, which is the Network for Greening the Financial System. They are a group of central banks and economic institutions that have done a lot of analysis of this issue. Using their estimates, we have an estimate that in a scenario where global temperatures rise by 3°C over this century, there would potentially be a hit to the level of GDP of about 8% in 50 years’ time, which is the time horizon over which we do these forecasts. The impact of that on borrowing and Government debt is around 60% of GDP higher.
I stress that that is obviously a very uncertain estimate. There are a huge amount of uncertainties around the trajectory for global temperature, what that means for global weather patterns, what that means for UK weather patterns, what that means for UK GDP, and then what that means for UK public finances. There is a whole chain of uncertainties underpinning those numbers. We look at the risks in the report.
On the upside, that might be too pessimistic a view if you think that action to address climate change is going to happen more quickly, or if you think the economy might be more resilient and able to adapt more quickly, or if you think that new technologies are going to come along that will enable economies to adjust more quickly. On the downside, however, that could be too optimistic if you think that countries are going to backtrack on their existing commitments on net zero or that the economic analysis is not really able at the moment to deal with the risk of very big climatic events that could have much more serious impacts on weather patterns. This analysis also does not really look at the risk of cross-border spill-overs, so worse effects in the rest of the world having an impact on the UK economy through trade and other flows.
As I say, there is a lot of uncertainty and that is important when thinking about the appropriate policy response. We try to stress that when thinking about policy responses, the Government should look at those risks as seriously as they look at the central estimates that we do. We are not a body that assesses the efficiency of Government policy on climate change in terms of its impact on climate change. That is not the remit that was given to us. Our remit is very strictly just to look at public finances. We have looked at—
Q57 Chair: Before you move on, on those predictions that you make, the multitude of different things that could change in the next 50 years as a result of different degrees of climate change are so extraordinarily huge. You rightly say that this is an estimate, but it could be more or it could be less. What credibility is there really to the predictions at all? This is not a criticism of the professionalism of you or any of your people, but it is one thing to make predictions about the Budget for the next five years based on a Budget you already have, but over 50 years with a multitude of different Governments that you cannot yet know, how much credibility should we give to those forecasts, do you think?
Tom Josephs: You are right, of course, that any projections over that time period are very uncertain. That said, we use what I think is the most credible external estimate done by the real experts out there on the potential economic impacts of climate change. It is an international group of economic experts who have done a huge amount of research into this, and they draw on all the literature that is out there and all the studies that have been done in order to produce these estimates. They also—and we do as well—produce multiple different scenarios to look at the impact of changing some of the key assumptions that are particularly uncertain.
I guess an important point on that is that even when you vary some of those key assumptions, you still tend to get a scenario that creates a lot of risk and pressure on the public finances and the economy. We would always say that the uncertainty around these projections should not be used as an excuse not to take action.
Q58 Chair: Absolutely. When the Treasury makes preventive investment in flood defences, for example, or when the Government put in place measures on renewable energy recently, how does the OBR reflect the extent to which those investments might reduce future liabilities and costs?
Tom Josephs: On that question, that is a piece of analysis that we have not yet done but we are planning to do next year. The question there is, as you say, to what degree could investment in infrastructure that increases the resilience of the economy in the face of some of these risks from climate change, or helps the economy adapt to them, mitigate some of these costs or risks that I am talking about. We have not been able to do that analysis yet, essentially because we did not feel we had a robust enough set of data on what the Government are currently investing in that infrastructure and what might be necessary over the future.
The Climate Change Committee has now done that analysis, and therefore we will be using that next year as the basis for the analysis that you were just describing. In particular, I think what we will be able to do, to hopefully complement what the Climate Change Committee has done, is try to look at scenarios in which we make some assumptions on the benefits of that investment in reducing some of these risks that I have talked about, and therefore hopefully help the Government to be a bit better informed when they are coming to make some of the political choices and trade-offs that are necessary when thinking about that investment.
Q59 Chair: I should say that as you were speaking the crowds were flooding in, so keep going. Whatever you are doing is obviously being heard across the estate.
On that, from the Government’s perspective, all different Departments are asking the Treasury for more money for their pet projects. One of those, of course, will be DEFRA asking for, in the example I just raised, additional money for flood defences. When it spends that money, in the fiscal forecasts that it gets from yourselves, if there is no requisite benefit it must make it more difficult for it to persuade the Treasury that it will be able to get approval for that. How important do you think it is that you are able, to some degree, to positively reflect investments in nature or climate change initiatives?
Tom Josephs: That is what we aim to do, but I would stress we do that over a long-term time horizon, which is appropriate because these are investments that you would expect to have that pay-off over a relatively long time horizon. I don’t think you would ever expect these investments to have a very immediate big return on investment. That is why we look at it in the long term. In terms of immediate budget choices for the Government, that is a political decision and trade-off that the Government have to make in all their investment decisions. Hopefully, the analysis that we do can supports that.
Q60 Chair: Are you confident that the OBR has within it the expertise to make those detailed assessments about the fiscal costs of climate change?
Tom Josephs: I think to date we have done what is actually seen as leading-edge analysis among independent fiscal bodies around the world on the two sources of risk to the public finances from climate change that I mentioned: damage and the cost of the transition to net zero. We chair the OECD group of independent fiscal bodies on climate change analysis. One of our staff members has helped the OECD build a model to assess this risk and cost that is used by other countries around the world. I think we are at the forefront of this analysis in terms of what is done within independent fiscal bodies.
We are not climate experts. We are fiscal experts and economic experts. In doing this analysis, we draw on the analysis of climate that is done by the experts. We are able to use that analysis and add value through our fiscal expertise. I should say that we are not resourced and we are not set up and it is not our remit, essentially, to do cost-benefit analysis of every single individual Government programme. That is definitely outside our scope. We look at it from very much a macro perspective.
Q61 Julia Buckley: Just on that, Mr Josephs, you are very clear that it is not your remit to analyse climate change. That is not your specialism. You are looking at the fiscal costs of that. I am just wondering if you agree with the report that was produced by the Institute and Faculty of Actuaries, where it called for the Government to commission the Government Actuary’s Department to complete a planetary solvency risk assessment so it could bring that bit to bear.
Tom Josephs: I am afraid I have not looked at that recommendation, so I do not think I am really in a position to say whether I agree with it, sorry.
Julia Buckley: Perhaps you could write back to the Committee once you have had a chance to read that.
Tom Josephs: I am very happy to do that, yes.
Julia Buckley: Thank you.
Q62 Sammy Wilson: The OBR estimated that the cost of achieving net zero over the next 30 years would be £1.4 trillion. The Chancellor—then, Chancellor Philip Hammond—when the targets were set reckoned that from Treasury’s figures it would be about £50 billion per year and the Department for Business estimated it would cost £70 billion per year. Given those costs, what is your assessment of the impact of the policy of net zero and the cost of pursuing that policy on economic growth in the United Kingdom?
Tom Josephs: In our latest estimates, which we produced in 2025, we identified two main sources of cost to the Government: fiscal costs, the largest being the loss of revenues related to emissions, the biggest of those by far being fuel duty. That is a loss of around 1% of GDP over the 50-year period—actually, sorry, it is about 1.5% of GDP. We also identified the cost of the investment that the Government would need to make, so public spending through various different mechanisms to support the transition and, in particular, to support the switchover to heat pumps in buildings and investment in transport, infrastructure and energy. Overall, our latest estimate is that that would increase debt by about 20% of GDP by 2050. Those are our latest estimates that we have published.
Sorry, what was the second part of your question?
Sammy Wilson: It was the impact that those fiscal requirements to deliver on net zero would have on economic growth.
Tom Josephs: Oh, on economic growth; we do not have an estimate of the impact that we think this will have on economic growth. We talk to a lot of experts on this issue, and I think it is fair to say there is a very wide range of views on the impact of the transition to net zero on productivity. You will get some economists who would argue that there will be quite a big cost in terms of economic growth and the transition, essentially due to shifting industry on to a higher cost source of energy more quickly than they otherwise would do, and because potentially you are scrapping assets in infrastructure earlier than you would otherwise do in order to make the transition. That would have costs for the economy.
On the other hand, there are people who argue quite strongly that there will be positive benefits to productivity on the basis that these new energy sources will eventually be lower cost than the fossil fuel energy sources that are being replaced, although, again, there is a range of views on that. There is also a view that as a boost to investment there is a knock-on benefit to economic growth and that there are wider benefits to growth from things like a healthier population due to less pollution.
We found that there were not any very robustly quantified estimates of either the upside or downside. As I say, as we are not climate experts ourselves, we therefore decided we would not include an estimate in our projections. We would essentially assume that there was no effect or zero effect on productivity from the transition in our projections. However, we have definitely said it is one thing that we would like to do further work on in the future, and if clearer, quantified evidence comes along, which suggests the effect is one way or the other, we definitely would look to include that.
Q63 Sammy Wilson: Does it not seem odd that the early scrapping of productive machinery to meet net zero requirements, increased energy costs, increased investment by firms in new technologies—all those things—are not going to have a negative impact, at least initially, on economic growth and the productive capacity of the economy?
Tom Josephs: We definitely identify those in our report as downside risks. There are also things that could push growth in the other direction. The evidence is not clear as to which of those is the stronger. I think there is potentially a time horizon issue here. As you say, some of those costs might happen earlier and some of the benefits may come in later. It may be that there is an initial cost and then potentially a longer-term benefit, but again defining the precise time horizon over which that would happen is quite difficult.
Q64 Sammy Wilson: That may be one of the issues that we need to draw out because as politicians, of course, what happens in 2100 is not really going to have too much impact on our votes in 2025 or 2026. Secondly, if all the costs are falling at one particular time, while the benefits might occur later—and I think the Grantham Institute has indicated that by 2050 we should start seeing the benefits outweighing the costs—that is 25 years in which people are going to be exposed to costs in their everyday lives: cost of living, cost of energy, employment prospects, and so on. Has the OBR done any work on that, distinguishing between what might happen? You have certainly predicted what the impact on GDP might be by 2070 or whatever it happens to be, but have you done any impact on what the short-term consequences of the transition to net zero is?
Tom Josephs: We have done a lot of analysis on the economic impact of the transition in the short term. We did not feel that there was clear evidence one way or the other, so we have set out upside and downside risks. On the longer term, the analysis I was talking about earlier in answer to the Chair’s question was about the impact on the economy from the damage caused by climate change itself rather than the transition to net zero. Essentially, more extreme weather and hotter weather leading to lower productivity, lower labour supply and more disruption. That is, again, very uncertain, but we think the direction at least of that is clearly a negative one.
Q65 Sammy Wilson: You are maybe a bit braver than the IPCC, which said that the estimates vary so widely that it would not make any estimates of the aggregate impact, though we think that—
Tom Josephs: We think it is useful to do that. Acknowledging the uncertainty, we think it is useful to set out estimates, set out a range of scenarios using different assumptions, and explain the risks. We think that is helpful analysis for Governments when confronting these decisions, even acknowledging the uncertainty.
Q66 Sammy Wilson: Is it really helpful, though, when you talk about all the risks and uncertainty and they never, ever come out in the press releases or the reports or whatever? It is always the top figure, “GDP is going to be impacted by 8% if we do not take any action.” You know as well as I do that is the figure that goes into the paper without all the qualifications of the risks that you have quite rightly outlined here today.
Ought there to be more of a cautious approach on these things, rather than headline-grabbing figures that are designed—some people, the cynics, would say—to scare the life out of people into following or accepting policies that are unpopular and that impact on their lives, and that at the same time undermine your credibility? I note that Professor Dieter Helm from the University of Oxford made this very point: when we make these predictions and they are not seen to come true, or when people see that the costs are much more, it undermines the case for doing things that we should be doing.
Tom Josephs: This is an occupational hazard as a forecaster, I am afraid, and it is one we confront in all the analyses, forecasts and projections that we do. Our argument would be that it is beneficial to set out this analysis but to be very transparent about the range of scenarios that you are looking at and the uncertainty and the assumptions that underpin your analysis so that if people disagree with those assumptions they can assess what impact making their own assumptions would have on the projections. That contributes to a richer policy discussion.
I completely recognise the risk that you are identifying there and it is certainly something we worry about a lot. We essentially try to do our best in all our communication and reports to stress the uncertainty and the range of possible outcomes.
Chair: I think you also have some questions for Mr Howarth.
Sammy Wilson: Yes, I do. I was just looking to you, Chair, as I was not aware of the time.
Chair: I did not want them to feel left out, so if you could move on to those ones that would be great.
Q67 Sammy Wilson: Okay. We have dealt mostly with the fiscal impact. Mr Radcliffe and Mr Howarth, it is the remit of this Committee to try to see how resilient nature is and how resilient our economy is in terms of not losing valuable natural resources. Do you feel that the Treasury, when it is making the estimate of the costs of its policies of net zero, gives sufficient weight to the nature impacts of doing what it is doing or not doing what some people would like it to do?
Ben Howarth: From our perspective, the Treasury is acknowledging nature impacts. Our perception has always been that in terms of the scale of the three big climate change issues, one being net zero and emissions, one being nature and one being adaptation resilience, the net zero has got far more attention, particularly from the Treasury. It feels like other Government Departments clearly take some of those issues very seriously. I suppose that, if we had a recommendation for the Treasury, it would be to put those three issues on an equal footing and be really clear. It is not that it does not do anything on nature, but our view would be—
Q68 Sammy Wilson: From your point of view, what would you like to see it doing to put nature further up the agenda when it comes to looking at these policies?
Ben Howarth: There are two things. One would be that we have a very clear net zero target. The feeling is that there is not a target on adaptation, resilience or nature for businesses to rally around. That is particularly helpful at boardroom and executive level, where you can really map progress. It is possible to do very granular assessments of nature, but it is a complicated issue and there are lots of complicated datasets. If we could have something that the Government are working together on, and it was clear that the Treasury was behind that, business leaders could then assess how they were doing against that target. That would be one—having a consistent framework for targets.
The other is related to that. There are definitely things you can do in this space that have a beneficial impact for all three, so I think the Treasury should be clear that they are the gold standard and the things that it was going to back. I am sure we will come on to things it could do around blended finance and Government guarantees to support projects. If it had a clear assessment, it could say those things are clearly beneficial for all three, and those are the areas that the Treasury really prioritise.
Toby Radcliffe: To expand on what Ben said specifically about nature, I think there are three key steps that the Treasury could be taking. No. 1 is probably to identify the risks that exist. You cannot respond to a risk that you do not understand. From the evidence we have just heard, there is a dizzying range of estimates and forecasts. We need more clear and transparent estimates on nature.
Q69 Sammy Wilson: Do you think that is what Treasury should be doing or should it be DEFRA doing that and feeding that more into Treasury? One of the things we have found is that there seem to be silos rather than a joined-up approach.
Toby Radcliffe: It is a good question. Who should be responsible for doing these forecasts? It is not a question I have the answer to right now, but I think that there is scope for the Treasury to perhaps ask the OBR to do more in forecasting nature risk. Sorry, I am giving you more work, Tom. In the fiscal risks and sustainability report that you mentioned, there are long-term forecasts on climate impacts, but we do not see the same forecasts for the impacts of nature loss. That is potentially a gap that the OBR could help to fill.
After the Treasury understands what risks it faces, it is important that it can be creating the conditions to attract private capital where we need to see it. The Treasury has done some good work here when it comes to climate—for example, contracts for difference and incentivising investment in wind power. That is a big success story. Creating the conditions to attract capital to nature markets is somewhere I think we need to see more progress. Perhaps there is a role for the National Wealth Fund here; we might get on to that a bit later.
The final point is around Treasury consistency. Once it sets some of these policies and incentives for nature ambition, it needs to stick with them and be consistent to create the conditions of confidence for business to invest and get behind that movement.
Q70 Sammy Wilson: This is a question for both Mr Howarth and Mr Radcliffe, though, Mr Josephs, you might want to jump in. In your report, you saw the investment required to reach net zero as being 25% Government, 75% private investment. Is that target being met or is it still mostly Government investment? If not, what incentives need to be given to try to draw in that private investment?
Ben Howarth: ABI members are long-term investors and will be making significant investments in net zero. We have lots of examples. We look at productive assets, but our members set a target a few years ago of putting £100 billion investment into productive assets over the next 10 years. In the first year of that, they managed £10 billion so they are on track. We think we are making significant investments.
Is there potential to do more and perhaps target the things that will have the biggest impact? Yes. We have an investment viability group that we put together. The Treasury is represented on that, as is the Prudential Regulation Authority. Then we draw in people like the National Wealth Fund. We are starting to make good progress. Some of these projects are quite technical and there is a lot of due diligence that needs to go into it.
If you are a pension investor, you have people’s savings that you do not want to lose. We are not going to invest in very high-risk projects. The National Wealth Fund is making a good start. The engagement we have had with the National Wealth Fund has been positive, I would say, but we probably have not seen the volume of actual project investments that we were hoping for in the high-impact stuff. It is starting to happen, but we could go further if the Treasury could just put a bit more into that up-front kick-start to get those things to the point where they are at the scale and risk profile where our members can then come in and back them, to roll them out and drive them forward.
Toby Radcliffe: I would echo that. The National Wealth Fund has been a success. Its recent reporting showed that, for every £1 of public money it is putting into projects, it is attracting more than £2 of private investment. The work that it has done is supporting or creating over 70,000 jobs. That blended approach seems to be working, but I think we need more of it. The Treasury has the power to give more capital to the National Wealth Fund and to adjust its mandate as well to direct it to some of these climate and nature issues that we want to see progress in.
Our business membership is queuing up to find investable propositions that they can make money from but also make progress in tackling climate change and stopping nature loss. There is not enough of a range for them to get into at the moment, because they are looking for Government bodies to act as that cornerstone investor that gives them some stability and some confidence that the project that they might invest in is going to be a success.
Q71 Sammy Wilson: Mr Josephs, have you any comment on the private-public sector investment?
Tom Josephs: In the projections we made, we used the Climate Change Committee’s estimate of the whole economy cost of the transition to net zero. Then we made an assumption that around a third of that would have to be funded by the state, by the public sector. That equates—we felt when we did this report—to around £10 billion a year. In the 2025 spending review the Government made an allocation for this area of spending that we thought was broadly in that range. At the current time, the plans for investment made by the Government in the spending review were broadly in line with the estimates that we derived from the Climate Change Committee.
Q72 Chris Hinchliff: Mr Radcliffe and Mr Howarth, do businesses and the insurance sector see net zero and nature restoration as an economic growth opportunity?
Toby Radcliffe: I think our business members would say yes; it is an opportunity. We clearly see the economy-wide benefits of investment in climate and nature issues. The CBI recently published a report showing that the net zero economy alone—so that is not accounting for nature markets or adaptation—contributes £105 billion of GVA to the economy annually and supports 1.1 million jobs. That is a clear economy-wide benefit that we are seeing.
We also see individual business cases and case studies of success where Government or Treasury have backed a policy, and it has given business the opportunity to grow and create local success stories. One of those is that after the contracts for difference policy was agreed, giving investors security and income from wind power, Siemens Gamesa invested £500 million in a blade manufacturing plant in Hull, creating 1,400 jobs, most of those for local people. I think that is a nice example of how Government policy leads to certainty for investors, leading to investment in local communities and benefits for the economy.
Ben Howarth: I think our short answer is yes. However, we are insurers, so I suppose we are in a unique position in seeing opportunity and risk. I would not downplay the risk side and some of the up-front costs that the previous set of questions were referring to. It is important that we manage those as a sector, but overall we see our role as an enabler of this change.
I could give you loads of examples of investments in net zero technology that our members have been doing. I would also emphasise the role that our commercial insurers in particular have done to back projects like HyNet. We have a panel of insurers, QBE, Convex and so on, that are backing those. There are investments that members like L&G are doing in wind farms, and Aviva is doing in all those sectors—I could give you a raft of examples there. There are definitely strong economic growth opportunities, but it is a risk management exercise as well. Our members are investing a lot of time in the climate risk side and making sure that analysis is really tight.
Of course, for them, in many instances those risks are in turn opportunities to de-risk those projects. I suppose if I had one big message here it is to make full use of everything our sector does. Make sure that our investment capacity is utilised to the max, but also that our commercial insurers are there to get these projects so that they are as risk free as possible. That will help to reduce some of those up-front costs, which means that you can make longer-term investments in those projects because you are managing them.
Q73 Chris Hinchliff: Thank you. That tees me up nicely for my second question. Mr Radcliffe, you already started touching on this so do not feel the need to repeat anything you just said. How well do you feel, for both of your organisations, that Treasury’s fiscal policies, market incentives and regulatory framework reflect the environmental and climate risks and opportunities the economy already has in front of it?
Toby Radcliffe: As you say, I already started to touch on this but maybe just to reiterate, we think that there are good frameworks in place and the Treasury has done some good work putting in coherent frameworks and incentives for businesses to invest in decarbonisation and climate issues around energy and renewable energy. However, we think that those coherent frameworks are perhaps lacking or need strengthening when it comes to nature markets and adaptation as well. That is what I would add.
Ben Howarth: I suppose on the regulatory frameworks we are broadly supportive. For our members, one area of proof I would give is that the Government have been consulting on whether or not to make transition plans mandatory. If you look at our members’ websites, you will see a large number of them voluntarily publish those plans, so they see this reporting framework as broadly positive.
The one thing I would emphasise—where I perhaps slightly disagree with Aldersgate Group—is that the volume of work on that reporting is significant. It is a big exercise. We are not calling for it to be rolled back. I think the framework it has is good, but I think it is time now to allow it to bed in.
In practice, the teams that I work with in ABI membership are not reporting functions per se; they are meant to be delivering strategies and delivering on these action plans. It probably is a good time to say that members have set their targets, they have their action plans, and they have the reporting frameworks in place, so perhaps it is time to actually deliver on those plans and assess progress.
In reality, we have probably had a couple of consultations every year in the period that I have been working on climate change, which is about the last five years. That is fine, and I am happy to respond to consultations, but I think we have reached a point now where we need perhaps a bit less focus on reporting and disclosure—not that it is not important—and a bit more focus on giving people the time to deliver.
Toby Radcliffe: Specifically on reporting and disclosure frameworks, I think we are seeing that exact conflict play out right now in the European Union with the omnibus package, where there are reforms to disclosure and reporting regulation going through the European Parliament, because there is that perceived trade-off between reporting and business costs. I think maybe that is one that the UK should be watching.
If that is a success story, there is nothing wrong with streamlining and improving disclosure frameworks in the UK. Just because it adds an additional cost to business is not necessarily an argument not to do it. Businesses have accounting functions. That is an essential thing a business does to understand its risks and opportunities. There are clear risks and opportunities related to climate and nature and those, in our view, should be assessed.
Q74 Chris Hinchliff: Okay. Mr Josephs, the last couple of questions touched quite a lot on GDP and economic growth. When we spoke to economists in a previous session of this inquiry, quite a lot of the conversation ranged over the inadequacies of GDP as a measure of our economic prosperity and success. They spoke to us about the importance of investing in our natural capital—the quality of our natural environment—as an essential part of improving both our productivity and our wellbeing.
I am interested to understand from you whether you think that the Office for Budget Responsibility works in a way that supports the Government to take that approach of thinking not just purely about GDP and whether their spending is going to increase GDP growth, but whether it is going to increase our natural capital. If a Chancellor chose to recruit thousands of people across the country to plant new trees, lay new hedgerows and re-wet our peatlands, would the OBR score that in a sufficiently positive way so that it would not be seen as a massive waste of public money?
Tom Josephs: I think it is important to say that the role, the remit, that was given to us by Parliament was to assess very specifically the sustainability of the public finances, and the way in which we do that over the medium term is essentially defined by the accounting framework and the fiscal rules that the Government themselves set. Therefore, we use that because our role within the framework that the Government have set is to assess whether they are meeting their fiscal rules or not.
As I have been describing, in our role of looking at wider fiscal risks and longer-term fiscal sustainability, we look more widely at potential sources of fiscal risk. As I was describing earlier, we have done a huge amount of work on the potential fiscal risks from climate change, which is very much aimed at looking at some of these wider questions that you are identifying.
We recognise that there is very extensive literature on why GDP has some shortcomings in terms of a measure of wellbeing and living standards, but for what we are focused on, given the remit we have and the public finances, GDP is a pretty good indicator because it is essentially what is driving tax revenues and a lot of public spending.
Q75 Chris Hinchliff: Can I jump in there? I totally accept what you are saying, but if any Government want to be able to justify investment in the natural world, essentially they are reliant on what the OBR says in its scoring of that investment. In order to justify that decision making, do we need to change the OBR’s remit or do we need a Government to put in their own fiscal rules something around natural capital accounting?
Tom Josephs: That would be a choice for the Government. I should say that it is not the case—
Chris Hinchliff: Would either of those work?
Tom Josephs: It is absolutely not the case that we block public investment, or that it is up to us to determine what is appropriate public investment. That is just not the right characterisation of our role, I’m afraid. Our role is very specifically to produce forecasts that assess whether or not the Government are on track to meet fiscal rules. Those fiscal rules are set by the Government; we do not set them. It is the Chancellor’s choice whether she meets those rules or not and it is the Government’s choice as to how she meets those rules, if she decides to meet those rules.
She has £3 trillion-worth of tax and £3 trillion-worth of public spending to use to meet those fiscal rules. For decisions on a particular investment programme, it is down to the Chancellor to decide whether or not it is affordable within her fiscal rules. That is just not something that we have a role in commenting on or blocking.
Q76 Chris Hinchliff: No, that is not quite what I meant. I suppose what I meant is, it is the best possible outcome for a Chancellor to be making an investment decision that they can point to and say, “This is going to have a significant increase in our economic wellbeing and our economic prosperity and therefore this has been a sensible decision for me,” and that is based on your scoring as the OBR.
Tom Josephs: There is no reason why it should be. If the Government think that that is going to be the case, they should say so and they should take the decision on that basis. What we do when we are given public investment plans is at a very macro level because we are macro forecasters.
As I was saying earlier, we are not resourced and we do not have a remit to look at every single line of Government investment programme, of which there are literally tens of thousands. It is not our job to do cost-benefit analysis of those individual lines. That is what the Treasury and Departments are there to do.
We take a macro look at public investment. We did a paper where we assessed the macroeconomic benefits of public investment at the aggregate level based on an extensive survey of the international literature on this. We did include an uplift in economic growth on the basis of the increase in investment overall that the Government did in their first Budget. There was a positive economic benefit from that overall uplift in public investment. We did not look at individual lines within that because we are not able to do that, but we did an aggregate. We take into account the possible positive benefits of public investment.
Q77 Chris Hinchliff: I think we are possibly straying a bit, so I am going to try one last time on the question. If the Government had natural capital accounting as a key part of their economic objectives, would that help you in the way that you work in relation to saying whether an investment is going to have a positive impact on our prosperity if it is based on a natural capital approach?
Tom Josephs: We are not resourced to look at individual capital programmes. That is not our role. That is the role of the Department and the Treasury. We are there as macro forecasters and we take into account, based on extensive economic research, the positive benefits of public investment. Over the longer term, we look at these nature-related risks to the public finances due to climate change. We have chosen climate change because that seems to us to be the most material of these risks and, therefore, the one that we felt most appropriate to focus our resources on.
Q78 Barry Gardiner: Mr Josephs, I often feel sorry for the OBR because you very often get it in the neck from both sides, rather like politicians. We get it in the neck because sometimes we are accused of not taking a long-term vision and at other times we are accused of not sorting out the short-term problems.
It was Lord Stern who said that the discount rate was essentially a moral question, wasn’t it, when he did his review back in 2005. He said that because he said it was wrong to discount the lives and welfare of future generations below the importance of the lives and welfare of the current generation.
In your previous review, your fiscal risks and sustainability report, you had predicted that there were going to be costs—the costs that my colleague Mr Wilson referred to. You said that those costs would be substantial going through to about 2050, but that from 2040 on there would be savings of about £19 billion a year and it would become positive in 2070. As far as I understand it, your recent fiscal risk report is saying that you are pushing that further because you now believe that the costs of climate change to the economy are going to be more economically damaging than you had previously thought. Is that broadly the difference between your 2019 report and your 2025 report?
Tom Josephs: Yes, that is right. I should say that that increase in estimate of the cost is based on the external analysis that I was talking about earlier, done by the experts on potential impacts of climate change on economies. They have increased their estimates of the cost.
Q79 Barry Gardiner: Absolutely. What you have not done, I take it, is factor in any political change. That is not your job, as you have outlined to my colleague Mr Hinchliff. You have not factored in any political decisions to spend even greater amounts now on adaptation or mitigation effects. Obviously, those would have to be not just domestic but global as other countries act in this area, because we cannot act on our own on mitigation.
You have not taken into account how one might mitigate the economic damage of climate change on our infrastructure itself by the political decisions that we might take in terms of increasing our spend—which I am sure Mr Wilson probably would not approve of either—which might then bring that pay-off back down. Am I correct in assuming that you have not second-guessed the politicians in that way?
Tom Josephs: That is right, because we are required to do our analysis on the basis of Government policy as it is now.
Q80 Barry Gardiner: Exactly. It seems to me that Mr Wilson is pushing you in one direction and Mr Hinchliff is pushing you in another direction. I am trying to be the reasonable voice in the middle here by saying that I think you are right that climate change is going to be even more damaging than we thought it was going to be five years ago, and that its cost to our economy is going to be even worse than we thought it was five years ago. Therefore, it is not your job, but the job of politicians to answer Lord Stern’s question and ultimately decide when it must be, and how much we must spend to get to that point of when it must be, that we see the payback against the costs. Would you agree with that?
Tom Josephs: Yes, I would. Although we cannot make projections of alternative Government policy paths, what we can do within our risk analysis is to try to illustrate some of the potential costs and benefits of different paths. For example, in our projections of climate change damage, the central projection that we have used is on the basis of a 3°C rise in temperatures by the end of the century. That is broadly based on a current global policy from the IPCC, but we also have a 2°C projection, which is based on an acceleration of global action on net zero. We show that the costs to the economy are very much lower under that scenario. That illustrates the potential pay-off from more net zero mitigation at a global scale.
Next year we are also going to do an analysis of adaptation spending, so spending on building up the resilience of the economy to deal with some of that potential damage from climate change. We hope to be able to use that again to show some of the potential trade-offs for politicians of the costs and benefits of that spending.
Q81 Barry Gardiner: Thank you. You are an economist and you speak in that language. I am a politician and, therefore, nobody takes any notice of what I say. I just want to try to get this into English for anybody who might be bored enough to turn their television on in the afternoon and watch these proceedings. As I understand your economist speak, what you are telling us is that we could spend a hell of a lot more at the moment on adaptation, and we could spend globally a hell of a lot more on mitigation and, were we to do so, the ultimate cost of climate change would be reduced and would actually repay the investment we have made sooner than if we do not accelerate those costs. Is that a fair English-speak summary?
Tom Josephs: We have not actually done the analysis on adaptation yet. We are planning to do that next year.
Barry Gardiner: You do mention it in your 2025 report.
Tom Josephs: We are going to do it next year. We have not done the analysis that would give the potential answer that you have just given there. I cannot pre-empt that analysis. On mitigation, our analysis shows much lower costs to the economy from lower temperature rise under a scenario—
Q82 Barry Gardiner: Sorry, I must correct you because in your July 2025 statement you do actually talk about investment in adaptation to improve resilience. The fiscal costs of the transition to net zero, the economic damage caused by climate change and investment in adaptation to improve resilience are the factors that you identify through which climate change will affect the public finances, and the damage ultimately that is done to the economy from it.
Tom Josephs: Yes. What I am saying is we are going to do that analysis next year, but we have not actually produced any numbers yet on what the potential costs or benefits of that investment would be.
Barry Gardiner: Thank you very much. I must apologise to you, and to you, Chair, because I am going to have to leave. I am very grateful for your witness evidence today.
Q83 Manuela Perteghella: Are Treasury policies helping or hindering the UK’s transition to a sustainable, low carbon economy and, indeed, the delivery of its net zero ambitions, particularly in supporting different sectors and businesses to decarbonise?
Toby Radcliffe: It is probable that the Treasury is both helping and hindering in different places. There has been lots of important and positive work that the Treasury has done encouraging the right business conditions to invest in things like preventing climate change and decarbonisation. I have already mentioned a couple of times the contracts for difference. That is a positive story. Two success stories I would say are Treasury supporting the ZEV mandate by introducing the EV grant, as well as another good one that has promoted higher EV sales and given auto manufacturers the confidence needed to put more investment into electric vehicles.
However, there are some contradictions within the incentives that the Treasury provides. I think a big one is on electricity prices. We know that in the UK electricity prices are really high and that has a negative impact on economic growth. It makes manufacturing more difficult and UK competitiveness harder. A large component of electricity prices is policy levies, essentially taxes, put on electricity bills. That is disincentivising the economy moving to the low carbon fuel that we need to be able to decarbonise properly and meet our ultimate net zero targets. I think that is an instance of a misalignment, if you will.
The Treasury has it within its power to do something to help this. I would say it could move some of those policy costs off electricity bills on to general taxation. We think that would unlock a real wave of investment into low carbon technologies.
Ben Howarth: I broadly agree with that. Particularly for the insurance and long-term savings sector, where we would see the Treasury as our lead Department, a key role it could play is to make sure that where it is a cross-Government effort—and inevitably on some of these areas it is going to be DEFRA or DESNZ or the local government department that will play the lead—the value of our members and what we can offer is fully understood in policymaking.
I might give one particular example, which is the importance of maintenance and a whole lifecycle approach to investment decisions, so looking at the complete cost of a project until it is decommissioned, and ensuring that the cost of maintaining it to a good standard, which is key to adaptation and resilience, is properly costed in and that those things are taken into account in investment decisions. The Treasury could make sure that happens, and that is something our members can definitely help with.
I might just give an example to illustrate that. At the big end, if you look at big renewable energy projects, as they go towards the end of their lifecycle that is where they may potentially produce some additional risk if they do not work properly. You can see that with solar panels—if they are at the very end of their life, they are potentially a fire risk—and with some of the nature-based solutions as well. They are broadly very positive but, to give an example, if you install a green wall and you do not look after it, that is potentially an increased fire risk. It is making sure that when Government Departments are making these decisions, the value of our sector and what we can offer, and our expertise and risk management is realised. Obviously, it is for the whole of Government, but Treasury could play a real lead.
Q84 Manuela Perteghella: Thank you. Tom, do you want to add anything?
Tom Josephs: Specifically on that question, I cannot answer that. We are very specifically in our legislation not allowed to comment on whether we think the Government’s policies are effective or not, only to look at the fiscal impact.
Q85 Manuela Perteghella: Thank you. Now I want to focus on jobs and skills and especially the green workforce. From a business perspective, which is probably another question for Toby and Ben, what are the biggest barriers to developing and supporting a green workforce?
Toby Radcliff: For businesses to invest in green skills, it is like any other investment. They need to have a clear signal that they will get a return on that investment, and a clear business case for making it. With a lot of the businesses we work with, there is no lack of willingness to invest in skills, but they believe that there is a lack of policy clarity to make that happen. A good example of this is the electrification of heating in buildings.
In the warm homes plan, there is a target of having 450,000 heat pumps installed by 2030. Last year, we had 70,000 installed and we have 10,000 qualified installers in England, so we clearly need more workforce in this space if we are going to meet our targets. They need to get trained quickly if we are to meet that 2030 target. However, the policy certainty to make it clear to businesses that piling money into training a new workforce is worthwhile is not there.
We do not know whether or when there might be a gas-boiler phaseout. We do not know whether hydrogen might be promoted as an alternative to heat pumps. We do not know whether the funding for the boiler upgrade scheme will be continued beyond 2030. There are all these uncertainties that mean these companies involved in heat pump installation are wondering why they would make a massive investment now when that could go wrong.
Another thing that I would point out is that this is a really powerful disincentive to individuals to retrain. If an individual has to go through an apprenticeship for four or five years, potentially taking a pay cut to do so, but they are not sure whether they are going to walk into a job at the end of it, that disincentivises training as well. In summary, creating the long-term clear market signals can help.
Ben Howarth: I could give the good side. I oversee our DEI and talent work at the ABI as well. I know that our members see their role and their contribution on sustainability and climate change as a real part of their pitch to new people coming into the industry, and one of the reasons you would want to work in insurance and long-term savings. Certainly from our sector, we see it as an employment opportunity and a key part of people’s roles over the decades to come.
I would go back to my point around maintenance and skills. That is a key area where there is a potential risk that we do not have the skills that we need. We are seeing that already in the vehicle side of the insurance industry. The skills needed to repair highly sophisticated and complicated electric vehicles are starting to come through but not at the scale and pace that we need.
The risk there is that either a lot of that work ends up being done by the original manufacturers overseas and things are being sent off, so that you lose some of the carbon emissions benefits from those technologies by having to ship them overseas every time they need to be repaired, or they are not being repaired and they are being replaced, which is not necessarily a good thing. Therefore, on that general side of keeping things in good condition, we need a workforce that is able to maintain the scale and pace of change that we see as a result of the net zero transition. That creates a challenge there.
For the reasons that Toby has outlined, it is important that we start to invest in those skills now. Hopefully, some of those repair and maintenance skills are things that you could apply across multiple technologies. If you are thinking and planning this, it is about making sure that we have people who are able to repair and maintain multiple things so that they do not become too specialised.
The other side is that for a lot of the technology that is coming through—particularly sophisticated sensors and things like that—being able to interpret and analyse that is a good skills opportunity. That will also help those technologies last for longer and help identify where they are going wrong quicker so that the damage is not so bad. Again, that is a skill that we will need—being able to interpret that data and act on it quickly. There is lots of opportunity, but there is an urgent need to think about maintenance and repair skills.
Q86 Manuela Perteghella: You talked about giving certainty to the market and to employers to invest. Are there any other Treasury policies that will help employers address these challenges to equip workers with the skills needed for the transition? Are there any others that you can think of or that you would like to see Treasury pursuing?
Toby Radcliff: Yes, an interesting one is the apprenticeship levy, which the Treasury backed. That covers the cost of training in apprenticeships so that it is easier for businesses to cover the cost of training an apprentice. That is positive, we think. Especially for SMEs that is beneficial, helping them to invest in training the next generation of workers. We have seen, though, since that apprenticeship levy was introduced, that there has not been an increase in annual starts in apprenticeships. That is where the policy certainty comes in.
However, having that assistance to pay for training is beneficial for the SMEs, at least the ones that we talk with. Maybe there could be opportunities to extend and grow the grant money that is available for apprenticeships, but in more targeted industries. Rather than just having it across the board—because we know that we want to have more maintenance and engineer skills, more heat pump installers and more grid technicians—we could target the support the Treasury provides at target industries.
Manuela Perteghella: Do you want to add anything, Ben?
Ben Howarth: I do not have a huge amount to add; that has covered it.
Q87 Manuela Perteghella: Lastly, how is the Treasury ensuring that the economic benefits and opportunities arising from the green transition are shared fairly across regions and communities throughout England so that communities are not left behind, as has happened with previous energy transitions? Tom, you cannot answer this either.
Tom Josephs: That is not a question for us.
Toby Radcliff: From our perspective, the green transition is already a regional success story. Green industries are active in hubs across various regions and are bringing economic benefits to areas outside of the capital and the south-east. That is a good story.
When we look at the Treasury’s role in promoting that regional distribution, you can look to the mandate that the National Wealth Fund has. It has an obligation to target the investment that it makes in the regions of the UK. Because the Treasury has control of the capitalisation and mandate of the National Wealth Fund, it could tinker with that even further to direct funding into areas where it thinks funding is needed, and work more closely with metro mayors or local economic plans to promote local growth.
Manuela Perteghella: Thank you. Anything to add, Ben?
Ben Howarth: In the ABI, we have run a number of regional visits for our members on the investment side of our membership to go to various regions and see the investment opportunities. They have been really positive, so we are moving in the right direction.
If there is one specific thing that the Treasury could really focus on—obviously, the actual projects will reflect local needs and will be quite different depending on the region—it is the way that the financial opportunities are structured. The more standardised that could be, the better.
Frankly, one of the big up-front costs for our members is the due diligence and the work on structuring a deal. If they have to repeat that every single time, it will be a disincentive for them to do it. There might be some attractive opportunities that they are still interested in, but if you could be looking at deals that are structured in roughly the same way across the UK, you can start to roll that out and then you can start to see the scaled investment, so the Treasury could assist the regions. Some are doing it well, but we have perceived a knowledge gap in different regions in the UK and local authorities.
If the Treasury could focus on making sure that there are as consistent structures as possible for the way deals are structured, our members will suddenly find that the due diligence and the regulatory permissions that they need become easier and you can start to see things happening quicker; it is about speeding up those investments. In some cases, if it is a complicated deal and it is not a massive deal, our members might just look at it and say that the up-front work is more than they are willing to do for that opportunity. Standardisation would help, and clearly the Treasury can assist there.
Chair: Thank you very much. Mr Radcliffe, Mr Josephs and Mr Howarth, thank you very much indeed for an excellent first panel session. We will have a quick break between the first panel and the second.