Green-checking the Treasury’s sustainable development commitments

Paul Davies, partner, Michael Green, counsel and Sophie Lamb, partner, at Latham Watkins LLP, examine the recent report by the Environmental Audit Committee (EAC) concerning its investigation into the role of the Treasury in relation to sustainable development and environmental protection, and assess the practical implications for policy decisions going forward.

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Why is the Treasury’s approach to sustainability important?

The Treasury’s approach to sustainability is important because the Treasury occupies a pivotal position in government which enables it to promote policy coordination and policy coherence on environmental matters between and across government departments. The Treasury, through its control over government spending, taxation policy and regulation, is able to place sustainability at the forefront of policy consideration and balance the sometimes competing objectives of economic growth and environmental concerns. As the EAC’s report highlights, this is not always positive for the environment. For example, the Treasury was responsible for limiting Department for Environment, Food and Rural Affairs’ planned expansion of clean air zones that formed a key part of the UK’s air quality plan. The final Treasury-approved plan on air quality (including the limited clean air zones), was subsequently struck down by the High Court as non-compliant in a challenge issued by ClientEarth. The Treasury also plays an instrumental role in ensuring carbon budgets are met.

What is the background to the EAC report?

In light of the importance of the Treasury in influencing environmental and sustainability policy, the object of the report is to learn lessons from the past and suggest proposals to help the Treasury improve its future performance regarding sustainable development and environmental matters. The timing of the report is intended to coincide with a period which has been marked by substantial political change (notably Brexit and a change in the Prime Minister and senior cabinet ministers).

What did the report conclude about the Treasury’s performance?

The report concluded that the Treasury had not adequately ensured that departments and their policies appropriately address long-term sustainability. It appears that short-term objectives are consistently prioritised, often leading to greater long-term costs. The report found that the Treasury should factor into its decision-making processes, long-term costs and benefits (which serve as a ‘green-check’) and incorporate new evidence on natural capital into its ‘Green Book’ appraisal process and reporting and accounting mechanisms. Concerns were also raised about the lack of transparency over how and why the Treasury has made certain decisions to change or cancel long-established policies to the confusion of investors and business. For example, in preparing the report, evidence was presented that the abolition of the zero carbon homes policy in 2015 surprised key industry stakeholders. The consequences of these ‘shock decisions’ is to undermine investor confidence, by amplifying concerns over policy risk (in particular, energy policy risk).

What key recommendations were made in the report?

The report made a number of recommendations for the Treasury to consider going forward.

Most notably it was considered that the Treasury should:

improve the way it captures and takes account of long-term environmental costs and benefits
outline concrete proposals about how, and by when, it intends to take forward and incorporate new evidence on natural capital into its policy appraisal process
work with the Department for Business, Energy & Industrial Strategy (BEIS) to ensure that a new strategy for carbon capture and storage is devised and published as part of the carbon reduction plan due at the end of 2016—the Treasury should consider the possibility of using proceeds from the proposed sale of the Green Investment Bank to fund this strategy
reinstate the zero carbon standard for new homes
outline concrete actions which demonstrate how it is working with the Office for National Statistics (ONS) and the Natural Capital Committee to integrate natural capital into environmental accounts by 2020, and
take steps to enhance existing accountability arrangements regarding Treasury decisions through the establishment of an Office of Environmental Responsibility

What case studies were referred to in the report?

The report refers to these particular case studies:

cancellation of the carbon capture and storage (CCS) competition
cancellation of the zero carbon homes policy, and
landfill tax and private finance initiative (PFI) credits

Cancellation of the CCS competition

The Treasury’s decision to cancel the £1bn CCS capital funding triggered an announcement from private competition bidders that they would be unable to supply funding without governmental support. CCS refers to a group of technologies which enables carbon to be captured and transported to a storage site, and is currently the only viable option for decarbonising heavy industry. Lord Deben described CCS as ‘absolutely essential’ to enable the UK to cost-effectively meet climate change targets. In addition, the Committee for Climate Change (CCC) recently reported that complying with the 2050 target, without the reduction of emissions through CCS, would demand the decarbonisation of every building and every vehicle by 2050.

Cancellation of the zero carbon homes policy

The announcement by the Treasury to abolish the zero carbon homes policy was also greeted with trepidation, particularly by the construction industry. The decision is considered to inhibit the development of new markets for innovative energy-saving products, and risks wasting the costs of preparation for the implementation of the policy in the first place. There is also a risk that costs will increase in the long-term, due to new homes needing to be retrofitted to improve their energy efficiency.

Landfill tax and PFI credits

The objective of the landfill tax levied by the Treasury was to enable the government to meet its target to divert waste from landfill. To encourage such decisions towards recycling, PFI credits were developed and implemented. The landfill tax is considered to have played a positive and important role, but is not sufficiently ‘nuanced’ to drive continued increases in recycling rates. This was exacerbated by the removal of PFI credits. The Treasury is called upon to outline its future plans for landfill tax and how it intends to incentivise further investment in the future.

Do you expect the report to have practical implications for policy decisions going forward?

It is hoped that the report will incentivise the Treasury to adopt a more co-ordinated, inclusive and unifying approach to policy decisions. The Financial Secretary to the Treasury, Jane Ellison, stated that the Treasury took its environmental impact very seriously, that she would read the EAC’s final report with great interest, and that it would inform her thinking in the future. However, it cannot be ignored that the Treasury is faced with a challenge to balance the competing demands of ensuring its policies remain consistent with sustainable development on the one hand, and the interests of economic growth on the other hand (in particular, short-term growth). As a result, long-term sustainable development is often subordinated to short-term economic gain. The EAC hoped that the government’s commitment to a reinvigorated revised industrial strategy, would also help shift the policy focus towards long-term sustainable development.

Interviewed by Susan Ghaiwal. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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