Fund faster climate action from progressive general taxation complemented by environmental taxes to change behaviours

Chapter 4.2.2 Funding climate action

Fund faster climate action from progressive general taxation complemented by environmental taxes to change behaviours

While public finances at UK and Scotland levels are under intense pressure, it is clear that significant new investment is needed to deliver faster and fairer climate action. Failing to invest in climate action is not an option, and will cost considerably more in the longer-term. Private finance will be critical, but significantly increased public finance is paramount.

International

UK Govt

Scottish Govt

Local Authorities

Emissions reduction

Behaviour change

The Scottish Fiscal Commission (SFC) says it is ‘time for frank conversation on the cost of climate measures’ and warns that climate change is “one of the major risks facing our public finances.” Of course, some investment in climate action produces savings, for instance in traffic congestion, flooding costs and household energy bills.

Funding for measures to address the climate emergency should come from progressive forms of general taxation alongside responsible public borrowing. Complementary specific environmental taxes should then be used to bring about behaviour change which reduces emissions. This approach also aligns with the principle that those who cause pollution should bear the financial responsibility for any damage or remedial action required. While the Scottish Government accepts this ‘polluter pays’ principle, more must be done to ensure it is operationalised.

Work like the 2006 Stern Review on the economics of climate change showed that it is the environment that underpins the economy and acting today on climate change is much cheaper than waiting to act when the situation is much worse. The review found that spending 1% of GDP a year could avert the worst of the climate crisis, whereas waiting to act could mean spending 20% of GDP in future to cope with the damage from climate change and reduce emissions. In 2008, Stern recalculated the necessary spend to be 2% of GDP.

For comparison, Scotland’s GDP in 2019, the last pre-COVID-19 year, was nearly £170bn, so if Stern’s 2% number is applied to Scotland, we should be spending £3.4bn a year on tackling climate change. Common Weal’s detailed Green New Deal plans in Our Common Home are costed at £5bn a year. The government’s official advisors, the Climate Change Committee, say we should be spending £5-6bn on low-carbon infrastructure every year from 2030.

The 2024-5 Scottish Budget has a total of £4.7bn ‘in capital and resource for activities that will have a positive impact on delivery of our climate change goals,’ including £2.5bn on public transport. This sounds impressive but is demonstrably insufficient given we have missed a series of annual emission reduction targets, and the Climate Change Committee says we are off track to meet our future targets.

The climate threat is so significant that both the Scottish Government and the UK Parliament formally recognised that there is a ‘climate emergency’ in 2019. Dealing with an ‘emergency’ should be a national priority. It should mean doing lots of things differently. Dealing with the climate emergency is also an enabler in delivering on other national priorities, including reducing the burden on the NHS caused by temperature extremes, making our transport system fairer, eradicating fuel poverty and driving the Just Transition for oil-dependent communities and workers.

Since it is a national priority, funding for action to reduce emissions and to fund our international climate obligations should continue to mostly come from general taxation – a relatively stable and predictable source of finance.

Where specific environmental taxes, levies, charges or other measures are applied, this should be predominantly because they are patently climate just and will help bring about the desired behaviour change to reduce emissions. Crucially, to be climate and socially just, such an approach should ensure those on low-incomes are protected. A phased approach should be adopted, with a primary focus on the climate-damaging behaviours of the better off. Any revenue generated from environmental taxes should be viewed as an added benefit and used to support policies which incentivise and enable more positive behaviours. For example, any revenues generated by a tax on private jets or frequent flyers should be invested within public and active modes of transport.

This twin approach of utilising generational taxation alongside targeted measures to shift behaviours is the case for other national priorities. For instance, the NHS is funded almost entirely from general taxation. Where there are health-related fiscal measures, like the duty on cigarettes, the sugar tax or the minimum price for a unit of alcohol, the primary purpose is to change behaviours away from behaviours which are bad for health. The Office for Budget Responsibility estimates tobacco duties raised nearly £11bn for the government in 2022 but none of this is specifically reserved for the NHS, despite smoking imposing a £2.5bn cost on the service. The minimum price for alcohol does not provide an income stream to the government, instead it is expected to boost income to the drinks industry. However, this measure is seen as a means of encouraging a reduction in alcohol consumption, thereby boosting public health and reducing the knock-on impact upon the NHS.

As a parallel national priority, we should also align our approach to tax policy with the goal of cutting emissions. Firstly, we should significantly increase funding for climate action primarily through the use of general taxation. We should complement this approach with relevant taxes, levies, and charges to help drive behaviour to cut emissions.

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