Budget 2020: Key climate and energy announcements

Rishi Sunak, the UK’s new chancellor, has delivered his first budget and the first for the UK since October 2018. It is also the first budget since the UK committed to reaching net-zero emissions by 2050.

Sunak’s budget speech was dominated by the response to the coronavirus outbreak. Nevertheless, it devoted significantly more time to climate measures than recent chancellors. (The most recent 2018 budget speech made no references to climate change at all.)

The Treasury’s budget “red book” (pdf), which provides more detail than the chancellor’s speech, uses the phrase “net-zero” 17 times, with a further 31 mentions of “climate”, comparable to the government’s current buzz-phrase of “levelling up” (19 mentions).

In one example, the red book says: “[T]he transition to a net-zero economy by 2050 will require radical changes in every sector.” It also calls cutting carbon a “major government priority”.

The government’s official adviser, the Committee on Climate Change, reacted to the budget calling it “a small step in the right direction”. But it added that much now rested on the National Infrastructure Strategy, delayed until later in the spring, as well as a spending review in July and a Treasury review on net-zero due before the UK hosts the next UN climate summit in Glasgow in November.

Sunak said the Treasury’s much-anticipated review of how the UK can manage the economic costs and opportunities of net-zero will “set out the government’s strategic choices ahead of COP26 later this year”.

Below, Carbon Brief summarises all the key climate and energy announcements from today’s budget:

Fuel duty

Sunak’s budget confirmed that fuel duty will remain frozen for a tenth year. The tax, levied on sales of petrol and diesel, has remained at a rate of 58 pence per litre, plus VAT, since 2011.

However, Sunak also moved to restrict the use of “red diesel”, where fuel duty is effectively just 11p per litre, at a cost to the Treasury of some £2.4bn per year in lost revenue. Red diesel makes up 15% of diesel sales, with the chancellor saying in his budget speech that this amounted to a “tax relief on nearly 14 million tonnes of CO2 every year”.

Approved users of red diesel include farm vehicles, construction machinery, heating oil, freight trains, backup electricity generators and boats. From April 2022, approved uses will be limited – but farms, domestic oil heating, fishing boats and trains will continue to benefit, with others potentially being added to this list subject to consultation.

The budget costings suggest roughly two-thirds of current red diesel usage would cease to be eligible but does not offer a detailed breakdown of demand from existing exempt users.

In the run up to budget day, there was widespread lobbying and speculation on the potential for a rise in fuel duty overall. On budget day itself, however, the Sun reported “victory” for its campaign to keep fuel duty frozen, saying this has cost the Treasury “an estimated £50bn in total”.

In his budget speech, Sunak put the cost of the freeze even higher, at £110bn. (Fuel-duty receipts are currently worth £28bn a year.) Sunak said he was “mindful of the fiscal cost and environmental impacts” of a continued freeze, but, nevertheless, pledged to extend it for “another year”.

Instead of rising with inflation, this rate has been frozen since 2011, as the chart below shows. As a result, motorists have enjoyed a significant tax cut in real terms – at a cost to the exchequer of £11bn this year and rising – even as public transport fares have climbed ahead of inflation.

The actual rate of fuel duty, in pence per litre not adjusted for inflation, between 2008 and today (thick red line). Planned increases, cancelled at successive budget statements over the period, are shown in shades of blue. Note the truncated y-axis. Source: Institute for Fiscal Studies and Department for Business, Energy and Industrial Strategy. Chart by Carbon Brief using Highcharts.

Carbon Brief analysis published this week shows that the UK’s CO2 emissions are up to 5% higher than they would have been if fuel duty had increased as planned, rather than remaining frozen.

The amount of CO2 released by road transport has risen by 3% over the past decade and the transport sector overall is now the single-largest contributor to UK carbon emissions.

Separate research from the campaign group Greener Journeys suggests the fuel-duty freeze has also “led to 5% more traffic, 250m fewer bus journeys and 75m fewer rail journeys”.

Flood spending

In news trailed in the media over the weekend, Sunak said government spending on flood defences would “double” over the next six years to £5.2bn. This would help protect “people and over 300,000 properties”, he said.

Sunak also announced that he was making £120m “available immediately” to repair “all damages [and] all defences damaged in the winter floods”, as well as £200m of funding to “support those areas that have been repeatedly flooded”. This will be made available “directly to local communities” in order “to build their flood resilience”, said Sunak.

(The UK has recently experienced record rainfall, with parts of the country experiencing severe flooding. The evidence to date suggests such events are becoming more frequent, consistent with what would be expected in a warming climate.)

The budget “red book” (pdf) notes that “the twin pressures of climate change and population growth mean that further action is needed” on flooding:

“The government will double the amount it invests in the flood and coastal defence programme in England to £5.2bn over six years, better protecting a further 336,000 homes and non-residential properties. According to Environment Agency modelling, this will reduce national flood risk by up to 11% by 2027.”

The current investment programme for flood defences (2015-21) still has more than a year to run and it is difficult to double-check government spending figures part-way through.

Carbon Brief analysis published in 2017 found that £4.4bn had been earmarked for flood defences in England, of which £2.5bn was to be spent during the six years to 2020-21. This broadly corresponds to the £2.6bn figure quoted by the Environment Agency – the body responsible for flood defences in England and the source of Carbon Brief’s figures in 2017.

(Interestingly, in his speech, Sunak mentioned that the £5.2bn would protect over 300,000 properties – this is the same figure quoted by the agency for the 2015-21 investment programme.)

However, since Carbon Brief published its analysis, the agency has changed the way it reports flood-defence spending data. The agency no longer publishes data on the costs of completed schemes – instead only providing figures on the number of “homes better protected” by each project.

For the remainder of the current investment programme, agency data indicates that UK government funding for flood defences in England amounts to £457m in 2019-20, with “indicative” figures suggesting spending of £421m in 2020-21.

Meanwhile, national infrastructure spending figures published by the Treasury suggest that £621m is being spent on flood-defence schemes in England in 2019-20 and £652m in 2020-21. These figures also include “funding from other sources”, which could mean contributions from local councils and drainage boards, private companies and individuals.

Giving a hint of what was coming in the budget, BBC News reported on new Treasury infrastructure spending figures last month, noting that “nearly £5bn was earmarked to be spent on flood defences in England over the next six years”, covering 1,300 projects. This “makes up just 1.5% of the total £317bn set to be spent on all infrastructure across England”, the outlet said.

In its draft long-term flooding strategy, launched last year, the Environment Agency estimated that “we need an average annual investment of at least £1bn in flooding and coastal change infrastructure over the next 50 years”. This in addition to shifting away from “the concept of protection to resilience“, the strategy says.

These measures reflect the “increasing and accelerating” flooding threats from climate change, said Environment Agency chair Emma Howard Boyd, adding that “we can’t win a war against water by building away climate change with infinitely high flood defences”.

Therefore, the commitment to £5.2bn over six years in the budget gets close to, but falls short of, the draft Environment Agency recommendation. (The finalised strategy is due “in spring 2020”.)

The full budget documents do note that the doubling “exceeds the level of investment recommended by the National Infrastructure Commission”. Indeed, the commission’s first-ever “National Infrastructure Assessment”, published in 2018, set out flood-defence spending of £600m per year (for 2020-25) and £700m per year (for 2025-2030).

However, this proposal was given within the confines of a “fiscal remit” – a “long-term funding guideline for public capital expenditure” provided by the UK government – and, therefore, was required to balance spending on flooding with many other infrastructure projects.

In fact, the commission also recommended (pdf) that the “government should set out a strategy to deliver a nationwide standard of resilience to flooding with an annual likelihood of 0.5% by 2050 where this is feasible”.

In addition, a “higher standard of 0.1% should be provided for densely populated areas where the costs per household are lower”. This, the assessment suggests, would cost around £1.1bn in annual flood-defence capital spending (between 2020 and 2050) under a scenario of a 2C warmer world.

In a response to the budget, commission chair Sir John Armitt said they “welcome the additional funding for boosting flood protection”, but he added that the commission has “repeatedly argued for this to be complemented by the introduction of a national flood resilience standard”.

Infrastructure spending

The chancellor delayed the UK’s national infrastructure strategy, which was due to be published alongside today’s budget. The budget “red book” (pdf) says it will now be published “later in the spring” and will set out “plans for a once-in-a-generation transformation of the UK’s economic infrastructure”.

This long-awaited document will formally respond to the first independent assessment of the country’s investment needs, published in 2018 by the National Infrastructure Commission (NIC). The commission had suggested the UK could move to a low-carbon energy system in 2050 that would have a similar cost to today’s fossil-powered heat, transport and power networks.

One reason for the delay, according to media reports ahead of the budget, is to make sure the strategy incorporates the challenge of reaching net-zero emissions by 2050. The previous Conservative government committed to net-zero in July last year.

Responding to those reports, NIC chair Sir John Armitt said in a statement:

“Naturally we are disappointed…[but] if a short delay leads to a better strategy that more comprehensively addresses our recommendations, it will be worth the wait.”

Elsewhere in the budget, the government launched its “comprehensive spending review” (CSR), which it says will conclude in July. This review will set departmental budgets for day-to-day spending over the three years to 2023-24, as well as on capital investment out to 2024-25.

The red book says:

“The CSR will prioritise improving public services, levelling up economic opportunity across all nations and regions, strengthening the UK’s place in the world and supporting the government’s ambitions to reach net-zero carbon emissions by 2050.”

The budget says public-sector investment will reach £640bn over the next five years, which, according to the chancellor, would be the highest level since 1955 in real terms. Details will be set out in the CSR.

Road spending

Reports that the government intended to delay a road spending plan turned out to be misplaced, as the budget announced what it called the “largest ever investment in England’s motorways and major A roads”.

The second phase of the government’s “road investment strategy” will consist of around £27bn being spent on road building between 2020 and 2025. The first phase began in 2015 and ends this year.

Sunak’s budget speech said the money would pay for “over £27bn of tarmac” and would cover work on “4,000 miles of road”. He did not say if this would be new roads or, for example, additional lanes on existing routes. Since 2000, only 695 miles of major roads have been added in the UK.

The chancellor emphasised that this scheme would benefit people across England, with major investment from the A66 Trans-Pennine to the Lower Thames Crossing. The plan also includes a chunk of funding for local roads and enough money to fill “50 million potholes”.

In the budget “red book” (pdf), the government states that this strategy will be delivered “alongside the government’s plans for decarbonising the transport sector”.

However, environmental campaigners have questioned the logic of such significant investments in new roads, especially given the comparatively small investment in nature (see below).

Crispin Truman, chief executive of CPRE (formerly known as the Campaign to Protect Rural England), said in a statement the “announcement of the £27bn worth of tarmac…will only serve to encourage more people into cars instead of using sustainable and reliable public transport, where significant investment is sorely needed”.

While road-building programmes are often framed as being designed to ease congestion and cope with rising demand, there is ample evidence that providing additional capacity leads to a greater volume of traffic on the roads.

Prior to the budget some news sources were suggesting that this significant funding pledge would be put on hold, following the Court of Appeal’s decision to block Heathrow expansion on the basis of the UK’s climate change commitments. The Times suggested it would be delayed until spring or even early summer.

Following the Heathrow announcement, BBC News reported that the roads programme did not take into account the government’s updated target of hitting net-zero emissions by 2050.

Instead, BBC News said it was based on the old target of cutting emissions by 80% by the middle of the century. As a result, it said the plans were likely to face legal action from environmental groups. (Campaigners are indeed launching legal challenges on this basis.)

Low-carbon heat

Decarbonising the way UK buildings are heated is one of the major challenges on the road to net-zero emissions by 2050. Last year, the Committee on Climate Change (CCC) said there was “still no serious plan for decarbonising UK heating systems”.

The budget red book (pdf) sets out this context, stating:

“The heating of our homes will need to be virtually zero carbon by 2050, replacing natural gas and other fossil fuels with low-carbon alternatives – likely to be primarily a mix of green gas, heat pumps and heat networks.”

A number of measures in the budget respond to this need. It states that the government will extend the Renewable Heat Incentive (RHI) for an extra year, until 31 March 2022.

The RHI is a subsidy provided to producers of renewable heat, supporting biomass boilers, heat pumps and solar thermal by paying a tariff per unit of heat energy supplied.

It was due to close in March 2021. The government has not previously been forthcoming in announcing strategies to promote low-carbon heating after it expires.

In addition, the government said it will consult on a new “low-carbon heat support scheme” to replace the RHI from April 2022. It said this would give grants to “help households and small businesses invest in heat pumps and biomass boilers, backed by £100m of new exchequer funding”. (The RHI costs £1bn per year, according to the Office for Budget Responsibility.)

The budget “confirms” £96m for the final year, in 2021-22, of a scheme that supports district-heat networks. It says:

“After this, the government will invest a further £270m in a new green heat networks scheme, enabling new and existing heat networks to be low carbon and connect to waste heat that would otherwise be released into the atmosphere.”

Separately, a new “green gas levy” will be applied to consumer gas bills, subject to consultation. This will support the production of “biomethane”, for use in the gas grid, from food waste and other biomass. According to Emily Gosden, the Times’ energy editor, the Treasury expects the levy to initially cost £1 per household per year, rising to £5 by 2025.

On energy efficiency, the budget says the government “is committed to reducing emissions from homes and to helping keep household energy costs low now and in the future”. It says the “future homes standard” for newbuild properties will be published “in due course”.

However, there is no mention of the £9.2bn in support for energy efficiency in existing homes, schools and hospitals pledged in the Conservative election manifesto. Carbon Brief understands this money could be allocated as part of the upcoming national infrastructure strategy.

Electric vehicles

In the run-up to the budget announcement, motoring groups called on the government to announce measures that could stimulate the market for electric cars.

The budget included a suite of measures the government says will help to do just that, including £500m over the next five years for charging infrastructure. This money, it said, will ensure “drivers are never more than 30 miles from a rapid charging station”.

The government is currently consulting on a move to bring forward the ban on selling new petrol, diesel and hybrid cars from 2040 to 2035 or earlier, as part of its plans to achieve net-zero emissions by 2050.

Receive our free Daily Briefing for a digest of the past 24 hours of climate and energy media coverage, or our Weekly Briefing for a round-up of our content from the past seven days. Just enter your email below:

Daily + Weeklydaily briefweekly brief

This decision has been welcomed by campaigners, but there are concerns about the prevalence of electric vehicles in the UK. In February, electric cars made up just 3.2% of new sales, a relatively small proportion, albeit a threefold increase on the same month last year.

Both the higher price of electric cars and the lack of charging points throughout much of the country are thought to be discouraging many people from making the switch.

A survey by the RAC found 41% of drivers said they would be more attracted to electric vehicles if additional funds were announced in the budget.

The budget announced a “rapid charging fund” to “help businesses with the costs of connecting high-powered charge points to the electricity grid, where those costs would prevent private sector investment”. There will also be a new review into the nation’s electric vehicle charging infrastructure.

The chancellor also stated that the government is “considering the long-term future of consumer incentives to support the transition to zero emission vehicles” and announced an extension of the plug-in car grant to 2022-23 with an additional £403m of funding. There will also be extensions to plug-in grants for vans, taxis and motorbikes.

Sunak’s speech says: “We’re introducing a comprehensive package of tax and spend reforms to make it cheaper to buy zero or low emissions cars.”

Dr Ajay Gambhir, a senior research fellow at the Grantham Institute, noted that while these incentives were welcome, the government cut the plug-in grant just 18 months ago in a move that saw sales drop:

“A return to the previous level of £4,500 per vehicle, or, even better, an even greater level of support, would have been far more effective in jump-starting the electric vehicle market in the UK. In that sense, other countries like Norway continue to do much better than us.”

The Treasury also published a call for evidence on vehicle excise duty (VED) to seek views on how it could support a reduction in road-transport emissions:

“VED rate should send a strong signal to individuals and businesses about which cars to buy as we transition to zero-emission vehicles, rewarding those who purchase zero emission and alternatively fuelled cars with no, or lower tax.”

The average amount of CO2 per kilometre for new cars sold in the UK has been rising for several years – and cars collectively contribute more to the UK’s emissions than power stations.

Carbon pricing

The budget increased the Climate Change Levy (CCL) on gas from 2022-23, while freezing the rate for electricity. The levy is paid by businesses to cover their energy use and the budget says rebalancing rates to favour electricity will “encourage businesses to operate in a more environmentally friendly way”. (Sunak’s speech noted that “electricity is now cleaner than gas”.)

There will also be a two-year extension to 31 March 2025 for voluntary “climate change agreements”, which give participating businesses a discount on their CCL bill if they meet targets on energy efficiency and decarbonisation.

The “carbon price support” – a top-up carbon tax paid by power plants via the CCL – will be frozen at £18 per tonne of CO2 for another year during 2021-22. The Treasury estimates this will cost £15m per year, relative to the previously assumed increase in rate.

The red book (pdf) says that after this year’s Brexit transition period, the UK “will continue to apply an ambitious carbon price from 1 January 2021 to support progress towards reaching net zero”. It says the finance bill 2020 will legislate for a UK Emissions Trading System (ETS) to replace the EU ETS, but says the two “could be linked”.

The government will also legislate for an alternative carbon-pricing policy based on a carbon-emissions tax, the red book says, with a consultation on the details in “spring 2020”.

Woodland expansion

There was an expectation that the budget would provide more details about how the government would achieve its ambitious tree-planting targets to help achieve net-zero.

The chancellor did mention tree planting, promising to “protect, restore and expand” woodlands with a £640m “nature for climate fund” for England, which had previously been set out in his party’s manifesto.

According to Sunak, this would mean an additional 30,000 hectares of trees, “a forest larger than Birmingham”, over the next five years. 

This appears to be far off the afforestation targets suggested by the Committee on Climate Change (CCC) and, indeed, the government’s own manifesto, as Prof David Reay from the University of Edinburgh was quick to point out:

“For ‘net-zero’ the UK needs to be planting around 30,000 hectares of new trees every year. Trees take many years before they really start hitting their straps in terms of carbon uptake and storage, so a weak tree-planting target today will mean millions of tree-shaped gaps in UK climate change action tomorrow.”

In the run up to the election, the Conservatives said they would “work with the devolved administrations to triple UK tree-planting rates to 30,000 hectares every year – space for at least 30m more trees”. This target is in line with the CCC’s net-zero guidance, which is based on reaching such levels by 2024. 

Tree planting rates have declined in the UK since the 1980s, but the Committee on Climate Change has recommended a rate of 30,000 hectares per year from 2024 until 2050 in order to meet the nation’s net-zero target. Source: Forestry Commission. Chart by Carbon Brief using Highcharts.

Prof Simon Lewis from University College London (UCL) said the announcement of 30,000 hectares by 2024 in England is far from this pledge “unless Scotland, Wales and Northern Island have plans far exceeding those of the chancellor”.

The red book says that the fund – which will also “restore 35,000 hectares of peatland” – will increase the rate of tree planting in England “by over 600%”.

Last year, 1,420 hectares of trees were planted in England, so a 600% increase would result in 8,520 hectares being planted annually. 

Tree planting in the UK has been in severe decline over the last few decades and the Conservative government has missed its previous commitment to plant 11m trees by 2020, by around 70%.

Ahead of the budget, Friends of the Earth said the £5.2m going towards afforestation in England under the countryside stewardship scheme this financial year would only support 1,260 hectares of new trees. The group argued this was not in line with the government’s ambitions.

In response, the government said there would be other measures to drive tree planting, including the “nature for climate” fund itself. 

In total, the CCC estimates £500m per year will be required to meet its tree-planting targets, as well as £200m for growing trees on farms. While a lot of this is expected to come from private investment, it says public funding will be necessary for certain tree-planting projects.

The budget also references a nature recovery network fund for England, consisting of £25m to “partner with landowners, businesses and local communities” to create new “nature recovery networks” that will include woodlands.

Finally, the budget includes a natural environment impact fund, consisting of “up to £10 million to stimulate private investment and market-based mechanisms” to improve the environment.

Carbon capture and storage

The budget firmed up the Conservative manifesto pledge to invest £800m in carbon capture and storage (CCS), with the red book stating that the technology “will be important to decarbonising both power and industry”. It adds: “ [CCS] can provide flexible low-carbon power and decarbonise many industrial processes, whilst also offering the option for negative emissions at scale.”

There are two parts to the budget commitment on CCS. First, as pledged in the manifesto, it promises “at least £800m” for a CCS infrastructure fund that will “support” efforts to “establish CCS in at least two UK sites, one by the mid-2020s, a second by 2030”.

Last year, a parliamentary committee identified five potential CCS clusters and said the government should “target the development of the first CCS projects in at least three clusters by 2025”.

Second, the budget gives a new commitment to support the privately financed construction of “at least one” gas-fired power station fitted with CCS. Support will be via consumer subsidy. The budget does not specify, but this could be modelled on existing “contracts for difference”.

The red book justifies support for gas CCS as follows:

“Costs have fallen so quickly that offshore wind, onshore wind and solar are likely to be the UK’s primary source of electricity in the future. However, the power generated by these renewable sources is dependent on the weather, so the UK also needs reliable low-carbon power from technologies such as nuclear, gas with CCS, and hydrogen.”

The language echoes that in consultations issued last year by the Department for Business, Energy and Industrial Strategy (BEIS). One of these consultations said: “[I]t is clear that a significant capacity of new nuclear power stations and gas-fired power plants with CCUS [carbon capture, utilisation and storage], alongside renewables, will also be required.”

The need for gas CCS has been questioned by the National Infrastructure Commission (NIC), which said the technology was “unlikely to form part of a cost competitive generation mix”.

The NIC has also been hesitant on new nuclear power. Last week it published a report reiterating this position, with a press release saying that new technologies “weaken the case” for committing to a new fleet of reactors. Beyond the passing reference above – and research funds for nuclear fusion – nuclear power is conspicuous by its absence in today’s budget.

Research and innovation 

The chancellor’s announcement included a reference to £900m for research on “nuclear fusion, space and electric vehicles”.

The red book elaborates on this, stating this money will “ensure UK businesses are leading the way in high-potential technologies”, including the commercialisation of nuclear fusion technology.

It also notes that a portion of this funding will go into a broader investment scheme of £1bn to develop UK supply chains for the large-scale production of electric vehicles, which was announced in September last year.

In addition, the government will “at least double” the size of its “energy innovation programme” to accelerate “the design and production of innovative clean energy technologies”, with the exact budget to be decided at the comprehensive spending review.

The existing energy innovation programme has a budget of £505m covering 2015-2021, which is supporting research on “smart systems” (£70m), energy efficiency and heating (£90m), industrial CCS (£100m), nuclear innovation (£180m), renewables (£15m) and energy entrepreneurs (£50m).

Other announcements

  • Air Passenger Duty: ADP rates will increase in line with inflation for 2021-22, which means short-haul rates will remain frozen at £13, while the rate for long-haul economy flights will increase by £2, premium economy, business and first class by £4, and private jets by £13. A consultation on aviation tax reform later this year “will consider the case for changing the APD treatment of domestic flights”.
  • Plastic packaging tax: This new tax, which comes into force from April 2022 to incentivise the use of recycled plastic, will come with “carbon savings of 200,000 tonnes”, according to the chancellor.
  • Distilleries: £10m will be allocated for R&D to help decarbonise UK distilleries, including the whisky sector.
  • Business rates and solar power: The budget announced a fundamental review of business rates, which the Solar Trade Association has welcomed as it says they are the “main barrier to the deployment of large rooftop PV”.
  • An article for PoliticsHome earlier this month asked whether the budget might launch “green bonds”, designed to support investment in climate measures. The article correctly concluded this would not happen, citing issues such as a potential markup on rates.

The post Budget 2020: Key climate and energy announcements appeared first on Carbon Brief.