Billion pound gap as government spends less on cutting UK emissions than it raises in carbon tax

The government is spending a billion pounds less on cutting domestic emissions than it is expected to raise through carbon taxes over the next 12 months, contradicting its own principle that “the polluter pays”, according to analysis.

The UK emissions trading scheme – which charges certain businesses for emitting greenhouse gases – is expected to raise £6.5bn this year, more than six times the £1bn it raised in 2021-2022, according to a study of carbon credit auction prices by the New Economics Foundation and Oxfam.

But despite the significant projected windfall, the government has only allocated £5.5bn to cutting carbon emissions domestically this year.

Alex Chapman, a senior researcher from NEF who conducted the analysis, says the gap is at odds with the 2021 Environment Act which commits the government to the notion that “the polluter pays”.

“We’re set to raise over £20bn over the next four years from our most polluting businesses but we’re not putting it to good use,” he said.

“This government has the opportunity to reinvest this money to cut our dangerous carbon emissions and repair some of the damage caused by the climate crisis,” he added.

Caroline Lucas, the Green MP for Brighton Pavilion, said the analysis showed that the government “isn’t even capable of following its own legislation”.

“Instead of polluters paying for their climate-wrecking emissions, the public is being forced to pay up instead,” she told The Independent.

“Ministers must urgently plug the gap in climate spending if their own Environment Act is worth the paper it’s written on.”

The UK government is spending the £5.5bn on a range of policies to cut emissions ranging from transport to energy efficiency, hydrogen, and offshore wind.

But the emissions trading scheme is not designed to pay for all of our climate action, and the Climate Change Committee has said that next year over £12bn of capital investment is needed to help decarbonise the buildings and surface transport sectors alone.

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The scheme applies to energy-intensive industries, such as the power generation sector and aviation.

The industries are allocated a certain number of credits for free, but have to buy the majority through the scheme, in which the number of credits is capped.

The aim is to control the volume of emissions that can be emitted by the regulated sectors to ensure the UK meets its target of reaching net zero greenhouse gas emissions by 2050.

The reduction in the number of credits available – as well as a drop in free credits – has pushed up the price of the credit in recent years.

Over the past two years the average price of a tonne of carbon in the scheme has trebled from around £28 to around £80, according to NEF.

And yet this dramatic increase is not being reflected in this year’s core net zero budget to cut emissions from transport, buildings and the energy sector among others.

“Once again the Conservative government has shown they are not committed to climate action,” said Liberal Democrats climate change spokesperson, Wera Hobhouse.

Mike Childs, head of policy at Friends of the Earth, said the analysis underscored “just how significantly the government is still underinvesting in the vital measures that will cut the UK’s carbon emissions.”

“With the energy crisis biting and millions of people shivering in their homes, there couldn’t be a more pressing need for the government to prioritise investment in a street-by-street insulation programme, starting with the most in-need neighbourhoods,” he said.

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Other European countries are better at reinvesting revenue from their emissions trading schemes into climate action, according to the analysis. Germany, France, Portugal and Greece all invest between 90 and 100 per cent of emissions trading scheme revenues into reducing greenhouse gas emissions, it said.

The analysis comes as a new report by the Institute for Public Policy Research (IPPR) published on Friday found that increased investment to reach net zero is an “economic, environmental and political necessity” that could boost GDP by 2 per cent by 2030 and 3 per cent by 2050.

The government has repeatedly said it remains committed to reaching net zero by 2050, and that between 1990 and 2019 the economy grew by 76 per cent while the UK cut emissions by some 44 per cent, decarbonising faster than any other G7 nation.

Last month, Chancellor Jeremy Hunt announced an extra £6bn to improve energy efficiency from 2025 to cut demand for expensive energy.

But the foundation recommends that the government invests an additional £8.75bn this parliament to insulate draughty homes, plus an extra £3.6bn to kick-start an emergency basic insulation programme this winter.

It also calls on the government to contribute to loss and damage funding to compensate vulnerable countries for damage caused by climate-fuelled extreme weather and slow onsets like rising sea levels.

The Independent approached the Department for Business, Energy and Industrial Strategy for comment.