Ensuring a just transition

29 Oct 21

Paying for measures to reach net zero requires revenue-raising mechanisms which do not hit the poorest hardest

HOW WE PAY for net zero is crucial in making it happen.

The UK is entering a new phase on its journey to carbon neutrality.

We are moving from a period of setting targets, to one in which delivery becomes paramount.

This will bring to the fore questions about how to pay for the transition, and how to distribute both the costs and the benefits of decarbonisation.

The second half of the journey is likely to be much more disruptive than the first.

It will impact on the daily lives of millions of households in a way that measures to cut carbon from our electricity system have not.

It also poses new questions on funding: to what extent should the state pay to improve private property?

How should the costs of new products and services be spread when the transition will take place at different speeds for different people and different parts of the country?

On an aggregate level, the total cost of net zero should be manageable, having been forecast at around £300bn over 30 years – a figure that will inevitably fall as technology continues to develop.

However, this headline number hides crucial distributional and timing challenges.

Without support, the upfront costs associated with decarbonising homes and transport will be too much for many households, clearly requiring the public sector to step in. For many others, though, the transition is very affordable – just look at the recent surge in private sales of electric cars.

Figuring out where the dividing line between those who can pay and those who will need support is a challenge that will define climate policy until net zero is reached.

For example, the UK’s fiscal watchdog – the Office for Budget Responsibility – assumes that the state will pick up around a quarter of the overall tab for the transition. Its projections vary, though, from a minimum of covering just the cost of public sector buildings and vehicles, to a much greater share of net zero infrastructure, such as extensive electric car charging networks and the cost of insulating millions of private homes.

However much of the funding falls on the shoulders of government, it is essential that the costs of decarbonising do not land on the backs of those least able to bear the load.

‘Net zero will change the shape of our tax base, eroding long-standing sources of revenue such as fuel and excise duty’

The financial load must be fairly spread

Greening electricity generation, for example, has been funded largely through levies on energy bills.

While improvements in efficiency along the way have stopped bills increasing, they could be lower still if this spending was instead funded through general taxation.

With energy costs consuming three times as much of household budgets for the lowest income families compared with the richest, ministers should be looking to avoid recouping further costs via regressive means.

Unfortunately, initial signs are not good.

Multibillion-pound nuclear and hydrogen projects are also set to be funded through customer bills, a move that risks worsening inequality at a time when the lowest income families are finding life is getting increasingly difficult.

Funding projects such as these through general taxation would be much fairer.

Another vital consideration is ensuring that the benefits of net zero are shared fairly.

Warmer homes and cleaner air are a natural by-product of decarbonising our buildings and cars but risk being concentrated among the better off.

Over the past decade, the energy efficiency of higher income households has improved quicker than for lower income households (despite government support targeted at the fuel poor).

The higher ticket price of electric vehicles mean they are increasingly owned by wealthier people in wealthier areas.

As it stands, these trends will continue without state intervention, reducing chances of an equitable transition.

There is also a mismatch between the timing of investment costs and payback costs that will need navigating.

The Climate Change Committee’s (CCC) projections see an annual net investment of £27bn per year over the 2020s and £15.9bn over the 2030s, before an annual net payback of £11.2bn in the 2040s.

How is a household with limited means expected to invest now, if the payback will not arrive until a number of decades down the road?

Dealing with the challenge cannot be left to the private sector alone.

Households with electric vehicles and high mileage lifestyles are on track to pocket the lion’s share of the payback, at the expense of the lowest income families, nearly half of whom do not even own a car.

The public purse will need to step in to bridge this gap, ensuring that savings are shared fairly rather than concentrated in multi-car families.

A strategy that faces up to these tricky issues can also help poverty alleviation, improved health and more satisfying livelihoods.

Without actions to make this a reality, though, it is unlikely to happen.

It is all in the implementation

Net zero will also change the shape of our tax base, eroding long-standing sources of revenue such as fuel and vehicle excise duty.

Allowing this to happen unchecked could lead to a £13bn per year hole in tax take by the end of this parliament, accelerating rapidly as electric vehicles come to dominate.

Road pricing is the obvious solution but it comes with difficulties in implementation.

Still, policymakers should be facing up to these challenges now. The potential cost and pain associated with these transitions will only get worse if they are delayed by politically-motivated prevarication.

Carbon taxation could also see its day in the sun, providing that it does not impact finances of the less well off and can be delivered in a way that drives private investment – a long-time flaw in the concept.

Either way, our tax base will change, with dramatic effects on how public finances are raised and therefore how they can be spent.

The next phase of decarbonisation raises a number of questions that have been avoided until now.

It is only by facing up to the challenge that lies ahead that we can make sure the move to net zero works for everyone

Image credit | Paddy-Mills

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