Wins, losses and draws: a climate review of the UK’s Autumn 2024 Budget

Daisy Jameson sets out how the Budget is a positive step for growing the economy in a clean way – and where it could have gone further.

On 30 October 2024, Chancellor Rachel Reeves set out the first Labour budget in the UK for 14 years. It had the potential to be a significant budget for prioritising clean growth and building resilience against climate challenges. Encouragingly, the Chancellor took some bold steps to addressing chronic underinvestment in the economy. But the budget falls a long way short of being ‘green’.

Investment

The UK has one of the lowest levels of public and private investment across all G7 economies, the multiple reasons for which include chronic underinvestment by the public sector and a failure to crowd-in private sector finance. This budget takes steps to address this underinvestment by reforming the Charter of Budget Responsibility to target an alternative measure of debt in the UK’s fiscal rules.

Moving from targeting Public Sector Net Debt (PSND, which nets off liquid financial assets against deposits and currencies and bonds/loans) to Public Sector Net Financial Liabilities (PSNFL, which also include illiquid financial assets, other financial liabilities and funded public sector pension liabilities), will create additional headroom in the fiscal rules. The Chancellor announced £100 billion of additional investment over five years, including some promising climate policy decisions.  This includes £3.9 billion of funding in 2025/26 for carbon capture, usage and storage; £3.4 billion over three years for a Warm Homes Plan for decarbonising heat and household energy efficiency; and £2.4 billion over two years for flood resilience.

Not only does the change to the fiscal rules increase the headroom available for the Chancellor to invest, but it also changes the fiscal treatment of the UK’s policy banks, something we recommended earlier this year. These organisations include the new National Wealth Fund, the British Business Bank and UK Export Finance. Unlike central government, they make investments by financing private sector assets through loans and equity stakes, gaining a financial asset, or issuing guarantees to businesses and investors, taking on a contingent liability and receiving a fee to compensate for the risk taken.

Under PSND, policy banks’ spending was recognised as a liability on the Government’s balance sheet, but the financial asset accrued through this investment did not. Moving to PSNFL does recognise the assets generated by a policy bank’s investments, which should allow these organisations to increase their activities without them scoring negatively against the Chancellor’s fiscal rules.

In the climate context this is important because the policy banks have an excellent track record in investing in the low-carbon infrastructure and technologies critical for the transition to a clean economy.

Tax

Tax policy is a critical lever that the Government has at its disposal to encourage behaviour change required for emissions reductions and to raise revenue for necessary investment. Positively, the Chancellor decided to increase the rate of Air Passenger Duty on all flights, with a substantial 50% increase in the rate for private jets. This welcome change is expected to raise about £2.5 billion by 2029/30 and should reduce demand for what is the most emissions-intensive form of transport. On the other hand, the Chancellor has chosen to maintain the freeze on fuel duty rates for another year and the 5p cut per litre: tax cuts that will cost £3 billion in 2025/26 alone. The cost of motoring is already substantially below the true societal cost, and below that of taking alternative lower-emission forms of public or active transport. Increasing fuel duty, at a minimum in line with inflation, would act to reduce congestion and emissions and may encourage increased uptake of electric vehicles. This move also signals a failure of the Government to enact long-term reforms to motoring taxes to address the erosion of fuel duty as a revenue source as the UK transitions to electric vehicles.

Day-to-day spending

The budget makes a welcome increase in overall funding for the Department for Environment, Food and Rural Affairs (Defra). However, the funding available to the department for its day-to-day operations is expected to fall over the next two years. This is alarming given it is the department responsible for climate change adaptation and environmental protection, both areas that have been under-prioritised by previous governments.

Maintaining a cap on bus fares is a positive step, although increasing it to £3 will increase the cost of a vital public transport option that discourages car use.

A renewed prioritisation of climate is needed in the Spring Spending Review

This was a budget of mixed outcomes for tackling the UK’s emissions footprint and the impacts it will feel from climate change in the coming years. There are some positive steps in opening investment for clean growth, but the budget’s day-to-day tax and spending decisions do not reflect the need for bold, holistic action on climate.

CETEx will now focus on monitoring decisions made in the comprehensive Spending Review in the Spring and we encourage the Chancellor to prioritise progress on climate adaptation and clean growth. We also ask that the impact of all decisions on emissions and climate resilience is fully assessed and published alongside the review.

The author would like to thank Sini Matikainen, Esin Serin and Georgina Kyriacou for their helpful review of this commentary.