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Net zero review: what can it tell us about the Budget?

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The Treasury's Net Zero Review Final Report, published alongside the government's Net Zero Strategy: Build Back Greener and Heat and buildings strategy on 19 October 2021 just over one week before the Autumn Budget on 27 October 2021, seems to tell us more about what is unlikely to be included in the Budget than about measures we should expect. 

It seems unlikely that the Budget will announce significant additional funds for Net Zero projects over and above the funds already committed. It states that, if 'there is to be additional public spending, the government may need to consider changes to existing taxes and new sources of revenue' and that further 'measures to support decarbonisation through public investment would need to be traded-off against other capital investment projects or funded through additional taxes'. Given that the government has only just announced a significant tax rise in the form of the health and social care levy, it seems unlikely that a chancellor who wants tax cuts and to put public finances back on a sustainable footing (see his speech at the Conservative Party Conference) would want to put his name to further tax rises and spending commitments. 

We are also unlikely to see the introduction of tax breaks for the purchase of electric vehicles or heat pumps or the retrofitting of homes. The Net Zero Review concludes that universal grants or untargeted changes to the tax and welfare system would disproportionately benefit higher income households which generate the highest emissions and, thus, be ineffective at addressing adverse distributional impacts of moving to net zero. Moreover, permanent changes to the tax and welfare system could mean ongoing costs for what should be one-off transitional expenses. Consequently, such measures would not be a good use of taxpayer money: "it will be more effective to focus taxpayer support on specific groups and their abatement costs, rather than consider untargeted spending, or changes to the tax and welfare system". 

The Net Zero Review (and the Net Zero Strategy) include a commitment to consider the expansion of the UK emissions trading scheme (ETS) to additional sectors and to align UK ETS cap with a net zero consistent trajectory by January 2024. In the context of the decarbonisation of domestic buildings, the Net Zero Review and the Heat and buildings strategy further mention that the Government will look at "options to expand carbon pricing and remove costs from electricity bills". Considering, however, that the UK ETS falls within the purview of the Department for Business, Energy & Industrial Strategy (BEIS), it seems unlikely that policy changes or consultations in respect of the UK ETS would be announced as part of the Budget (the UK ETS free allocation review: call for evidence was issued by BEIS on 17 March 2021, i.e. neither alongside the Budget on 3 March nor on Tax Day, 23 March). 

Neither should we expect any proposals for a carbon border adjustment mechanism (CBAM) to feature in the Budget. The Net Zero Review makes clear that the government's "starting point is to work with other countries to agree and implement ambitious emissions mitigation goals." The result would be a level playing field across the globe which would render it unnecessary to introduce a CBAM to prevent carbon leakage to countries with less stringent regulations or more generous carbon pricing. 

Another item that is unlikely to feature in this Budget, but will have to be addressed in the future, is a structural change to the tax system to reflect and mitigate the anticipated loss of public revenues due to a decline in fuel duty etc. resulting from the shift away from the use of fossil fuels, in particular in road transport. 

Looking at all the measures that are unlikely to feature, the number of other measures that have already been announced - in terms of net zero spending commitments as well as a major tax change in the form of the health and social care levy - one might be left to wonder what can be included in the Budget (other than the government's proposal as to how to maintain a competitive level of bank taxation despite the planned increase in corporation tax rates). Perhaps that is why rumours have emerged that there will be a split between the Budget and a Tax Day (as per the example in March) to defer some policy announcements until after COP26. 

Tanja Velling, Slaughter and May

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