Delaying Net Zero Action Until 2030s Will Double Fiscal Cost, OBR Warns – business live | Business
The fiscal cost of achieving net zero by 2050 will be double if the UK government delays taking action until 2030, rather than acting quickly now, according to UK budget watchdog .
The Office for Budget Responsibility’s Fiscal Risk Report shows that taking early action to decarbonize the economy has a lower net impact on UK finances than Covid-19 or the 2008 financial crisis.
But delaying until the start of the next decade will end up adding twice as much to the national debt as acting fast.
And failing to act has a catastrophic impact on public finances (and, more importantly, the planet), with debt reaching 289% of GDP by the end of the century, up from around 100% today.
The UK Climate Change Committee (CCC) puts the cumulative investment cost for the entire economy by 2050, plus the operating costs of the emissions cuts, at £ 1.4bn at 2019 prices, the report says.
The government has not said how much of that cost it expects to bear – but the OBR assumes it covers a quarter of it. Combined with the savings from more energy efficient buildings and vehicles, the net cost to the government is £ 344 billion in real terms. Spread over three decades, this represents on average only 0.4% of GDP in additional public spending each year.
Speaking at today’s press conference, OBR chairman Richard Hughes explained that the watchdog has crafted an “early action” scenario, in which the UK is stepping up carbon taxes and also stimulates investment in green technologies from the mid-2020s.
In this scenario, the transition to net zero by 2050 adds approximately 20% of GDP to public debt over the next 30 years, slightly less than what the pandemic is expected to add in just two years, says Hughes.
Most of the cost comes from the loss of the fuel tax, followed by government support for investments in zero-carbon technology – which are only partially offset by heavier carbon taxes.
The report says:
Carbon tax revenue. Our [early action] scenario assumes that all emissions are taxed, and more heavily, from 2026-2027 (which could be achieved by extending the UK ETS [emissions trading system] or impose a uniform carbon tax in its place).
But, this is only a scenario for reaching net zero, and arguably “fairly optimistic,” admits Hughes, in which governments around the world are taking decisive action this decade to put their emissions on a sharply declining trajectory. .
The OBR therefore modeled alternative scenarios – varying the timing of the transition, the impact on productivity and fiscal policy choices.
Scenario saves government money – if the investment costs are financed within the framework of the existing expenditure plans (which means a very tight cut on other public services), and the loss of the fuel tax is replaced by another tax on the automobile, such as a road user charge.
But in the ‘late action’ scenario, decisive action to reduce emissions globally and in the UK is delayed until the 2030s. Then the UK has to deal with a more precipitous and longer transition. costly towards net-zero – and misses five years of carbon tax revenue.
In this scenario, the debt in 2050-2051 is 23% of GDP higher than in the early action scenario, with a lower GDP of around 3% and direct public expenditure increases by about half.
The price of this delay is a doubling of the total fiscal cost of the transition.
Hughes also points out that in some sectors of the economy, such as transportation, decarbonization pays off as improvements in battery technology reduce the lifetime cost of electric cars below the cost of gasoline cars.
But other areas have significant net costs, such as replacing household gas boilers with green alternatives, which society would have to bear.
The net cost to government depends on the evolution of income – net zero provides threats and opportunities. Revenue collected from gasoline taxes is threatened – which will almost certainly disappear once fossil-fueled cars are banned by 2030.
But, this can be partially offset by a carbon tax (although revenues here would decline as the economy goes to net zero).
Here are other key graphics from the report:
And here’s a reaction: