Introduction
It is well known that the Scottish, UK and other governments have set targets for reducing emissions and reaching net zero, by 2045 in Scotland’s case. However, what is less well understood is how existing and future policy commitments will deliver these planned reductions.
In their 2022 Scotland Report, the Climate Change Committee stated that:
“A quantified plan is urgently needed. The Scottish Government urgently needs to provide a quantified plan for how its polices will combine to achieve the emissions reduction required to meet the challenging 2030 target. The plan must detail how each of Scotland’s ambitious milestones will be achieved.”
The next draft Climate Change Plan was expected to provide further detail on how policy commitments would deliver the interim 2030 and final 2045 targets. However, in November the Scottish Government wrote to the Net Zero, Energy and Transport Committee to confirm that the Draft Climate Change Plan, originally expected to be laid in the Scottish Parliament before the end of 2023, would be delayed.
Separately from the Climate Change Plan, the Scottish Government has been working to implement the recommendations from the Joint Budget Review Group (JBR) which aims to increase the understanding of the impact of spending decisions on emissions in Scotland. In October the Deputy First Minister and Cabinet Secretary for Transport, Net Zero and Just Transition wrote to the Net Zero, Energy and Transport Committee and the Finance and Public Administration Committee to provide an update on progress, and to confirm plans to introduce an ‘enhanced taxonomy’ in the 2024-25 Budget. This blog will give an overview of the JBR recommendations.
Background to the Joint Budget Review
In October 2018, the Environment, Climate Change and Land Reform Committee recommended a collaborative review focused on understanding the impact of Scotland’s Budget on greenhouse gas emissions. During Stage 2 of the Climate Change (Emissions Reduction Targets) (Scotland) Bill, the Cabinet Secretary for Environment, Climate Change and Land Reform said:
“Should that be agreeable to the committee, the Scottish Government would be willing to commit to working with the Parliament and stakeholders to review the current processes and outputs around budget information as it relates to climate change. Such a review would aim to identify feasible steps to deliver meaningful improvements in cross-portfolio processes and transparency. The review would also need to cover the role of the climate change plan monitoring reports.
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To be clear, I am offering a review of the current processes and outputs, which has also been discussed with the finance minister.”
A remit for a joint working group of Scottish Government and Scottish Parliament officials to progress this review was finalised on 2 November 2020, with the agreed aim of the review being:
“Where feasible and proportionate within the anticipated timescales, to improve budget information on climate change – to understand and reduce spend that will ‘lock in’ future greenhouse gas emissions and increase alignment between the budget and climate change plans.”
In 2021 ClimateXChange, on behalf of the Scottish Government, commissioned the Fraser of Allander Institute to explore options aimed at improving how greenhouse gas emissions are considered in the development of Scottish Budgets and spending decisions. The Commissioned research aimed to explore options which, if implemented, could:
- Objective 1: Improve the extent to which decision making within Scottish Government is supported by an understanding of the consequences of spending choices on emissions.
- Objective 2: Increase the transparency and value of the carbon assessment of the Budget to support scrutiny and informed discussion.
Figure 1 below summarises the timeline for the JBR:
The final report from the JBR group proposes to implement a response to the Fraser of Allander report through three strands of work to improve the information around the climate aspects of spending decisions in the Scottish budget.
- Strand 1 is the establishment of a climate impacts narrative section within the Budget. This is a qualitative description of the impacts of policy.
- Strand 2 is the expansion of the taxonomy approach, currently applied only to capital spending, to cover all resource and capital spending. The Scottish Government will be developing this over the coming years, and are considering how to deepen the taxonomy as well as expanded its coverage so it will be more useful for scrutiny. The Scottish Government have pledged to consult Parliament as this is developed.
- Strand 3 is the development of a net zero test which will be applied at an early stage in the policy development cycle. This will filter policy, identifying those with a high impact (from a climate perspective), and lead to more precise calculations of the impact of policy decisions on the climate. Again, this will be developed over a few years, and the Scottish Government has agreed to consult Parliament as it is developed.
In the letter from the Deputy First Minister and the Cabinet Secretary, the Scottish Government pledges to engage with Scottish Parliament officials and report to Committees as strands 2 and 3 are developed, and to conclude and disband the JBR group.
What information is currently published on the climate impacts of spending decisions?
At the time of 2023-24 Scottish Budget publications, there were three sections which provide some details on the climate impacts of public spending decisions in Scotland:
- The Carbon Assessment. The Climate Change Act 2009 requires the Scottish Government pro provide an assessment of the impact of the Scottish Budget on greenhouse gas emissions. This is produced using an Environmentally-extended Input-Output (EIO) model to estimate emissions. This model is normally used to understand the flow of money though the economy. However, the environmentally-extended version averages greenhouse gas effects for 98 industry sectors and converts the financial inputs from the budget into expected greenhouse gas outputs. This model shows the direct, indirect and imported emissions associated with the Scottish Budget.
- Since 2018-19, the Scottish Government has included a taxonomy of capital spend, which sets out the proportion of the spend classified as low, neutral or high carbon.
- The Climate Change Assessment of the Budget. This was introduced for the first time in the 2023-24 Budget document, and is the first of the recommendations from the JBR. provides an overarching narrative highlighting policy and spending across portfolios, which are aimed at delivering the Scottish Government’s ambition of a just transition to net zero.
These three sources provide a relatively limited set of data from which to scrutinise spending decisions in Scotland from a climate perspective. Chart 1 shows a typical piece of analysis from the annual SPICe budget briefing, using data from the carbon assessment outlined above:
Chart 1: Carbon Assessment of the Scottish Budget, million tonnes carbon dioxide equivalent
The Scottish Government acknowledge the limitations of this methodology in the publication; it cannot be used for example to assess the impact of any given policy on the environment, and it does not measure the potential longer term impacts of policy on emissions in Scotland – there is no assessment of ‘second round’ emissions or indeed emissions reductions.
The Fraser of Allander research also discussed the limitations of the existing capital taxonomy approach:
“This classifies spending lines as high, neutral or low carbon based on which broad category they best fit. These classifications are very broad. For example, all health spending is classified as neutral spending, regardless of the underlying activity. This risks misclassifying high-emission activities as beneficial, or carbon-reduction activities as harmful. It is not known what emissions impact a spend classified as “high”, “low”, or “neutral” emissions actually has. Government investment in decarbonising spending classified as neutral or high carbon spend would reflect negatively on emissions progress, while more emissions-generating projects which are mistakenly classified as low carbon could overestimate progress. More spending classified as “low” therefore does not necessarily result in an emissions reduction.”
Update from the Scottish Government
The October 2023 letter from the Scottish Government provides an update on the implementation of the three strands.
Strand 1 was already implemented in the 2023-24 Budget, but the Scottish Government note that they will seek to improve the narrative section in each subsequent budget.
Strand 2 will be implemented in the 2024-25 Budget. This will ‘expand and enhance’ the existing taxonomy of capital spend to cover capital and resource spending. The update from the Scottish Government does not set out how the methodology has changed beyond its increased scope, so it is unclear whether any of the limitations associated with a taxonomy approach will be addressed.
Strand 3 was the development of a net zero test. The Scottish Government note that an ‘indicative methodology’ has been identified, and that this will be piloted before the end of 2023. This will be improved through an iterative process.
What difference will the enhanced taxonomy make?
The existing taxonomy of capital spend provides relatively little information to inform an understanding how spending decisions are driving the transition to net zero in Scotland. For example, while we can see that over time the proportion of low carbon capital spending has increased, and high carbon spending has reduced, we do not know anything about what the impact of these are; how much emissions do they contribute/ reduce, how long are emissions locked in for, and do these spending decisions chart a path towards meeting the 2030 and 2045 emissions reduction targets?
Presenting the data at a total capital level also provides limited information about which portfolios or policy are driving these data, so Parliament cannot meaningfully debate the climate impact of individual policy decisions.
It remains to be seen whether the implementation of Strand 2 in the 2024-25 Budget will move the needle on our understanding of the environmental costs associated with public spending in Scotland, or whether the commitments in Budget 2024-25 will collectively set Scotland on a path to reduce emissions in line with statutory targets. The JBR final report recommended not just an ‘expanded’ taxonomy, but an ‘enhanced’ approach which could address some of the shortcomings. The devil will be in the detail, and the publication of the 2024-25 Budget Document should provide some answers.
Andrew Feeney-Seale, Senior Researcher, Financial Scrutiny Unit
This blog is the second in a series from FSU looking ahead to the 2024-25 Scottish Budget. Our first blog explored the themes emerging from committees pre-budget scrutiny.
“Avoch Bay on the Black Isle Ross & Cromarty Scotland [EXPLORED]” by conner395 is licensed under CC BY 2.0.