Policy paper

Environmental impacts: analysis to accompany Autumn Budget and Spending Review 2021

Published 5 December 2022

This was published under the 2022 to 2024 Sunak Conservative government

Summary

1) This document provides further detail on the methodology HM Treasury and departments used for assessing environmental impacts in departmental spending bids at the Autumn Budget and Spending Review 2021 (SR21). As departments are ultimately responsible for assessing the environmental impacts of their programmes, a key objective of the SR21 requirements was to encourage departments to consider climate and environmental impacts more systematically, and to build departmental capacity and capability to undertake these assessments. The document also summarises the ratings which departments reported to HM Treasury of the impact of programmes funded at SR21 on climate change mitigation. The limitations of these data are set out. HM Treasury will continue to work with departments to improve guidance on and implementation of assessment of environmental impacts in future Spending Reviews, to strengthen future data quality.

2) Public spending is only one lever to deliver the Government’s environmental objectives. For example, the Net Zero Strategy (2021) sets out the Government’s wider approach to meeting its 2050 net zero target including the role of regulation and private finance. Nonetheless, HM Treasury recognises that it is important to consider environmental impacts in fiscal decision making, to ensure that public spending is supporting the Government’s objectives and to support departments in building capability and capacity to thoroughly assess impacts.

Methodology for Assessing Environmental Impacts at SR21

3) HM Treasury’s Green Book sets out that all policies, programmes, and projects must be developed and assessed against how well they deliver on the Government’s environmental objectives, as well as other policy priorities.[1] In December 2020 HM Treasury published supplementary guidance to the Green Book which supports analysts and policymakers to account for the effects of climate change. Departments use this in conjunction with supplementary guidance issued by the Department for Business, Energy, and Industrial Strategy (BEIS) to assess the impact of greenhouse gases using carbon values.[2] Departments must also consider material impacts on climate resilience and natural capital where relevant, in line with supplementary guidance from the Department for Environment, Food & Rural Affairs (DEFRA).[3] As set out in the Green Book, responsibility for assessing the environmental impacts of projects and programmes lies primarily with departments.

4) At SR21, HM Treasury required departments to provide qualitative commentary against the delivery of the 25 Year Environment Plan. HM Treasury also required Departments to allocate “net zero impact ratings” to all capital (Capital Departmental Expenditure Limit, CDEL) and high impact resource (Resource Departmental Expenditure Limit, RDEL ) spending bids.[4] Departments appraised the estimated emissions of the highest impact capital programmes in line with Green Book supplementary guidance on the valuation of energy use and greenhouse gas emissions.[5] HM Treasury and BEIS provided departments with guidance and workshops to support them in completing their assessments. Decisions made at SR21 were informed by the impacts of major spending bids, and proposals were considered and assessed within the context of the broader suite of policies set out in the Net Zero Strategy.

5) Estimating emissions savings and net zero pathway impacts of programmes, particularly programmes that are not directly net zero related, is complex and building capability to produce robust data for all programmes will take time. Ultimately responsibility for assessing environmental impacts of their policies and programmes rests with departments. A key objective of setting reporting requirements at SR21 was to support departments in building capability and capacity to do this. Since SR21, HM Treasury has established new processes to improve the quality and coverage of emissions impact data from Departments. SR21 settlement letters included requirements for departments to update information on the net zero ratings of the funding they were allocated at SR21, based on evolving understanding of impacts and any changes to programme scope or scale since bids were submitted. HM Treasury has worked with departments to improve the consistency of reporting and accuracy of net zero impact ratings, and will continue to refine the methodology and requirements for departments to assess these impacts at future Spending Reviews to continue to build capacity and capability.

Net Zero Impact Ratings

6) As set out above, departments were required to provide net zero impact ratings for relevant bids and update these in 2022 following final SR21 settlements. Ratings were provided for the majority of CDEL bids.[6] Only RDEL that met the criteria for assessment required a rating.[7] The ratings therefore do not cover all of government spend. The breakdown of this spending and the allocated net zero impact ratings are shown in Table 1.

7) There are limits to these data which reflect that these are relatively new processes, which HM Treasury is looking to strengthen in future. The objective of the SR21 requirements was not to undertake and publish a full assessment of the environmental impacts of government spending plans, but rather to drive more systematic and consistent assessment of these impacts by departments throughout the appraisal and spending allocation process, and where possible to support departments to build capacity and capability to undertake these assessments. There is more work to do in ensuring the consistent application of guidance across departments and different types of policies and programmes to ensure robust data. For context on the categories reported against:

• Positive: Out of the spending confirmed at SR21 that required a net zero impact rating, around £123 billion (54% of spend eligible for a rating) was assessed as having a positive impact against the Government’s net zero commitments. This includes spend on net zero programmes confirmed at SR21, as well as wider spend that departments expect will reduce emissions against the baseline. This includes £24 billion spend that departments have attributed a directly positive impact rating to, meaning it has an explicit climate change mitigation objective and is expected to decrease emissions versus a pre-SR21 baseline. A further £97 billion has been allocated an indirectly positive rating, meaning it contributes indirectly towards mitigation and decreases emissions against the baseline. Spend with an indirectly positive impact includes policies which enable emission savings elsewhere in the economy, such as R&D spending to commercialise the innovative technologies that will keep us on track to reach our climate commitments. The high value of spend attributed positive net zero impact ratings reflects the methodology and guidance set by HM Treasury, which HM Treasury will continue to refine for future Spending Reviews. For example, we will consider the detail provided to departments on the proper baseline for their assessments and the de minimums thresholds for reporting impacts, and further strengthen guidance around indirect impacts.

• Neutral/negligible: Departments can allocate negligible impact ratings where the carbon impact is estimated to be very low or zero. This category includes spend such as aggregated funds or capital maintenance programmes where the purchase of equipment was not determined to have a significant impact on climate targets.

• Negative: The majority of spend in this category relates to the delivery of building and transport infrastructure, such as housing, schools and roads. This spend remains essential to deliver wider Government priorities and identifying and tracking both positive and negative climate-related expenditure will support HM Treasury to mitigate carbon impacts where possible.

• Unknown: This primarily relates to policies and programmes still in early stages of development where emissions impacts will depend on further policy decisions. An example of this are unallocated research and development funds, where departments have been unable to estimate the impact of the spend on emissions until funding projects are determined.

Table 1: Environmental impacts of spending confirmed at SR21[8]

Category	Description	Share of Eligible Spend (%)	Level of Spend over SR21 (£bn)
Positive (direct)	Measures with an explicit climate change mitigation objective. Decreases emissions against the baseline.	16%	37
Positive (indirect)	Measures without an explicit ‘green’ objective but which contribute indirectly towards climate change mitigation. Decreases emissions against the baseline.	38%	86
Neutral/negligible	Neutral climate impact, including where estimated emissions are accounted for in the baseline.	20%	47
Negative	Increases emissions against the baseline.	16%	36
Unknown	Assessment not possible, often due to uncertain policy decisions or use of asset.	10%	24

[1] HM Treasury, The Green Book (2022)

[2] Department for Business, Energy and Industrial Strategy, ‘Valuation of energy use and greenhouse gas: Supplementary guidance to the HM Treasury Green Book on Appraisal and Evaluation in Central Government’

[3] Department for Environment, Food and Rural Affairs, ‘Accounting for the Effects of Climate Change: Supplementary Green Book Guidance’
Department for Environment, Food and Rural Affairs, ‘Enabling a Natural Capital Approach Guidance’

[4] This assessment was required for RDEL spending that met both the following criteria: i) a value of £25m or greater in any one year and ii) is in a high impact sector. Here ‘high-impact’ sectors refer to transport, buildings (including renovations), power (including electricity production and heating), industry, f-gases, waste, agriculture, land use change, forestry, fuel supply and hydrogen.

[5] This assessment was required for CDEL spending that met both of the following criteria i) a value of £50m or greater in any one year and ii) is in a high impact sector, as defined above.

[6] The requirement was set for all CDEL bids, excluding Overseas Development Assistance as carbon assessments currently measure territorial emissions only; and Ministry of Defence which received a multiyear settlement in SR20 so was not subject to the same reporting requirements as other departments at SR21. Coverage for CDEL bids where ratings were required was high.

[7] See footnote 4 for RDEL criteria

[8] Excludes Overseas Development Assistance as carbon assessments currently measure territorial emissions only; and Ministry of Defence which received a multiyear settlement in SR20 so was not subject to the same reporting requirements as other departments at SR21.