More taxes needed on cars and gas bills to reach net zero, warns Treasury

·4 min read
Net zero graphic
Net zero graphic

New taxes will be needed to make Britain “net zero” in carbon emissions by 2050, the Treasury warned on Tuesday as it opened the door to extra levies on motorists and gas bills.

The £37 billion a year raised in taxes linked to the driving of polluting vehicles will disappear over that time, meaning other “motoring taxes” must help fill the black hole in public finances.

The Government will also have to pay for some of the estimated half a trillion pounds of public investment needed to convert the economy, again possibly through tax.

Other knock-on impacts include an expected rise in prices for goods and services that use a lot of carbon, raising the prospect of more expensive petrol, flights and meat.

The potential changes emerged as the Government published its most comprehensive plan yet for how to hit its flagship climate change goal of becoming “net zero” by 2050.

It included ending the sale of new petrol and diesel cars by 2030, powering the UK with “clean” electricity by 2035 and tripling the number of trees planted every year.

New tax rises would be politically challenging for Mr Johnson, who has already pushed the UK tax burden to its highest point in 70 years, triggering Tory backbench unrest.

The Treasury’s stark analysis of the fiscal consequences of the net zero target also suggests that concern about the financial impact of the target could be higher in Number 11 than Number 10.

The Government argues that the economic cost of inaction on climate change far outweighs the financial impacts of making the UK economy greener over the next three decades.

Mr Johnson on Tuesday stressed that market forces were ultimately critical in delivering the change, arguing that the Government and taxpayers cannot solve the problem alone.

In a rare climate change intervention, the Queen urged political leaders, businesses and civil society to align in the “shared responsibility” of saving the planet.

“I am proud of how the United Kingdom is seeking to secure a sustainable future”, she said. “Yet there is still much more to do.”

The Queen greets guests at a reception for the Global Investment Summit in Windsor Castle - Alastair Grant/AP
The Queen greets guests at a reception for the Global Investment Summit in Windsor Castle - Alastair Grant/AP

Three government documents, totalling more than 700 pages, were published on Tuesday – the Net Zero Strategy, the Heat and Buildings Strategy and the Net Zero Review.

The last of those was a Treasury analysis of what – in broad terms – would need to change and how the economy and households would be affected in order to reach net zero.

Addressing the impact on government finances, the document noted “the biggest impact comes from the erosion of tax revenues from fossil fuel-related activity”.

Last year, £37 billion in tax revenue was raised from Fuel Duty and Vehicle Excise Duty, equivalent of 1.7 per cent of GDP. That will start to disappear as petrol cars are phased out. The analysis said that “motoring taxes will need to keep pace with these changes during the transition” – a hint that road taxes could be needed.

The final bill for the switch to green energy will be "well over" £1 trillion over 30 years, Paul Johnson, the director of the Institute for Fiscal Studies, told BBC Radio 4 on Tuesday.

Elsewhere the document said that, between 2026 and 2037, more than £600 million in investment is estimated to be needed. The Treasury said “most” would come from the private sector but not all.

Addressing the chance of increased public spending to help the economy to decarbonise, the Treasury analysis raised the possibility of new taxes or other revenue-raising measures.

The key line read: “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, and consistently with the Government’s fiscal principles.”

Rishi Sunak, the Chancellor, has repeatedly warned that increases in government spending should not be covered by borrowing, in part due to concerns about rising interest rates. The Treasury also said interest rates could rise if there was a “sustained” increase in green investment.

There were other hints at financial impacts. Levies on electricity bills could be moved to gas bills instead, and mortgages for properties with gas boilers may become less generous.

However, throughout the Treasury analysis there were continued warnings that failure to act to tackle climate change also brings huge financial impacts. One assessment warned there could be a loss of between 3.1 per cent and 8.7 per cent to the UK’s GDP if severe global warming happens by that date.

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