UK May Have to Raise Taxes to Pay for Net-Zero Pledges: Treasury

By Alexander Zhang
Alexander Zhang
Alexander Zhang
October 20, 2021 Updated: October 20, 2021

The British government may have to consider raising taxes to pay for the cost of its pledge to reach “net zero” greenhouse gas emissions by 2050, according to a Treasury report published on Tuesday.

In June 2019, the UK government passed legislation committing itself to achieve net-zero by 2050, in order to deliver on the commitments under the Paris Agreement in 2016.

The UK’s National Audit Office warned last December that the net-zero commitment is a “colossal challenge” that could cost hundreds of billions of pounds.

In a review (pdf) into the future of the UK’s net-zero plans, the Treasury said hitting the target would put pressure on public spending, and suggested that tax increases may be unavoidable.

“There will be demands on public spending, but the biggest impact comes from the erosion of tax revenues from fossil fuel-related activity,” the report said.

The government collected £37 billion ($51 billion) from fuel duty and vehicle excise duty (VED) in the financial year ending March 2020, about 1.7 percent of the UK’s GDP.

This could not be plugged purely through a carbon tax, which will itself slowly dwindle as emissions are reduced before the net-zero target in 2050.

“Without action to offset these pressures the public finances will be put in an unsustainable position,” the review said. “Therefore, delivering net zero sustainably and consistently with the government’s fiscal strategy requires expanding carbon pricing and ensuring motoring taxes keep pace with these changes during the transition.”

Future governments “may need to consider changes to existing taxes and new sources of revenue” rather than relying on increased borrowing, the Treasury said.

“Seeking to pass the costs on to future taxpayers through borrowing would not be consistent with intergenerational fairness nor fiscal sustainability,” said the review. “This could also push up the economic cost of the transition.”

The Treasury also warned that policies to support the adoption of electric vehicles “may disproportionately benefit higher-income groups, and the costs of any policies that affect the remaining drivers may fall disproportionately on low-income groups.”

Talking to Sky News on Wednesday, Business Secretary Kwasi Kwarteng admitted that making the transition to net zero can be “very costly” for consumers.

“It’s a fine line you have to tread between making the transition and essentially forcing people and imposing costs on people to make the transition, and what we want to do is to keep people with us on the transition, on the journey,” he said.

Kwarteng said that the cost of transitioning to net zero will be driven down by private investment.

PA contributed to this report.