The Treasury has released ‘Net Zero Review’ which warns that businesses and households will face new taxes and levies for Britain to achieve net-zero decarbonisation. The loss of petrol/diesel tax revenues would have a singularly significant impact on government finances.

The report admits that ‘significant uncertainties’ remain in the taxation structure and technology mixes that will enable Net Zero but that the fiscal costs of transition could be substantial. They would still be smaller than the cost of failing to control climate change.

Targetted taxes are one route to raising revenue and recent carbon consumption patterns currently suggest:

  • On average, higher-income households consume three times more carbon than lower-income households.
  • Lower-income households spend a higher share of their income on high carbon goods.
  • There remains a substantial variation within income groups.

It goes on to say that:

  • Any temporary revenues from expanded carbon pricing are unlikely to be sufficient to offset the structural decline in tax revenues but will be important in supporting the transition.
  • If there is to be additional public spending, the government may need to consider changes to existing taxes and new sources of revenue throughout the transition in order to deliver net-zero sustainably.
  • Seeking to pass the costs onto future taxpayers through borrowing would deviate from the polluter pays principle.

Universal grants or changes to the tax and welfare system will not be effective solutions in managing adverse distributional impacts and untargeted policies are likely to lead to taxpayers providing greater support to the wealthiest and most polluting households.

Fuel Duty and Vehicle Excise Duty

One of the major pressures will be the loss of tax revenues as the economy shifts away from the use of fossil fuels and to Electric vehicles, primarily revenues from Fuel Duty and Vehicle Excise Duty (VED). For 2019-20 this amounted to £37 billion, equivalent to 1.7% of GDP.

Even with economy-wide carbon pricing generating additional revenues, these would be equivalent to around 0.5% of GDP initially and a temporary increase in total receipts of around 1.3%. This would not be enough to offset the decline in Fuel Duty and VED during the transition.

Other fiscal pressures

The Treasury also warns that decarbonisation will not be the only pressure on the economy moving towards 2050. Over the period up to 2050, the Office of Budget Responsibility (OBR) anticipates that demographic factors and other trends will increase the costs of providing health, social care and state pensions. These existing structural pressures would increase borrowing in 2050-51 by 5.5% of GDP, relative to 2025-26. 

The lost tax revenues, if not replaced, would further increase the structural pressure on borrowing in 2050-51 to 7.0% of GDP.

Carbon pricing

The report says that although the UK has had a strong track record on carbon pricing, it still has progress to make in terms of the breadth of greenhouse gas emissions that these schemes cover. While the government does not see carbon pricing as a sole solution towards net zero, using IMF figures receipts could be equivalent to around a third of the annual abatement costs in 2030.

A range of policy levers available to Support decarbonisation include:

  • Carbon pricing levers or other tax levers that increase the cost of emissions and so incentivise action to reduce emissions and increase investment in lower-carbon technologies.
  • Regulations that compel action to decarbonise.
  • Taxpayer support that incentivises or directly funds decarbonisation.

The Treasury warns that one consequence of wider carbon charging may be that some industries may relocate from the UK, however, it speculates this would have a limited impact on business and employment tax revenues. Those sectors responsible for 63% of industrial emissions pay just 14% of PAYE and Corporation Tax receipts.

Useful guides on this topic

Enhanced Capital Allowances: Energy saving plant
What are Enhanced Capital Allowances (ECAs)? What is energy-saving plant and machinery? What allowances are available?

Just how are our taxes raised and spent?
How does the UK raise its taxes? How does the UK spend its tax revenue? Which taxes raise the most revenue?

Going Eco: Ten steps to a climate-friendly business
What can you do and, what tax incentives are currently on offer, to assist you in running a more climate-friendly business?

Electric Vehicles: Update
With the increased recent focus on Climate change and the government’s plan to ban petrol and diesel cars by 2030, we provide an update of the tax issues businesses and their employees should consider when acquiring or providing an electric vehicle.

External links

Net Zero Review Final Report

Chancellor sets new standards for environmental reporting to weed out greenwashing and support transition to a greener financial system

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