This blog is one in a series of publications supporting scrutiny of the Scottish Budget 2025-26.
Capital budgets have been under considerable pressure in Scotland, in part due to the significant increase in construction costs since 2020, and also in part due to an expectation of constrained capital funding from the UK Government. Alongside these pressures, there are also huge demands on the capital budget in the context of transition to net zero.
However, investing in the transition to net zero does not all need to be new spend. In a recent evidence session with the Economy and Fair Work Committee, Professor Keith Bell from the UK Climate Change Committee noted that:
“It is worth recalling that investment in renewing our capital stock is essential anyway, whether it is industrial equipment, vehicles, home heating systems or whatever. In relation to net zero and the transition to a low-carbon economy, the next time that any of those investments are made, we depend on a low-carbon option being chosen instead of a high-carbon one.”
This blog will look at the data we have on current capital spending in Scotland, what we know about funding that will be available in the next budget, and what we understand about the costs of the transition to net zero in Scotland.
What do we know about the Scottish Government’s capital budget for 2025-26 and beyond?
The majority of the Scottish Government’s capital budget is determined by the UK Government. Chart 1 below sets out the sources of capital funding at the time the 2024-25 Scottish Budget was published; while the Scottish Government can opt to increase capital funding through borrowing and switching from resource to capital, these are subject to limitations.
SPICe published a blog earlier in the summer looking in more detail at the 2024-25 capital budget.
Prior to the UK Budget in October 2024, the expectation had been that the Scottish Government’s capital budget would fall by 20 per cent over five years. This was due to the previous UK Government’s policy of holding capital budgets flat in cash terms. Policy announced at the UK Budget in October 2024 Autumn Statement means that Scotland’s capital budget will increase by 7.1% in real terms in 2025-26. The direction for spending beyond 2025-26 will be largely determined by the UK Government’s spending review, which is expected in Spring 2025.
Assessing the climate impact of capital spend
We know that the Scottish Government will have somewhere of the order of £7 billion available for capital funding for 2025-26, depending on decisions taken around borrowing and switching resource spending to capital. We have some sources of information which can tell us something about the impact this spending is expected to have on the environment.
Since 2018-19, the Scottish Government has included a taxonomy of capital spend in the budget, which sets out the proportion of the spend classified as low, neutral or high carbon. In the 2024-25 Budget, the Scottish Government made changes to expand this assessment to cover most resource spending in addition to capital. There is some additional detail in the new taxonomy – low and high carbon spend has been renamed positive and negative to indicate how it aligns to the Scottish Government’s intended outcomes and split to identify low and high impact spend within these categories.
The new taxonomy categorises 42% of spending as positive, 51% as neutral and 7% as negative. These are broadly similar proportions to the last capital taxonomy using the old presentation – in 2023-24, 39% of spending was categorised as low impact, 55% as neutral and 6% as high. Part of the movement from neutral to low is due to the reclassification of affordable housing spend lines as, from 1 December 2023, all applications for new developments must use zero-emission heating systems. Healthcare remains the largest contributor to neutral spending.
We can look at some of the more significant capital budgets and their expected impact on the climate. The six portfolios with the largest capital budgets (using the portfolios as they were structured at the time of the 2024-25 Budget) are set out in the chart below.
- In the Transport, Net Zero and Just Transition portfolio has the largest areas of spend categorised as negative (£470 million), covering items including trunk roads and air services. Neutral spend is only 12.8% of capital in this portfolio, and covers Scottish Water investment, ferry services and canals.
- The NHS Recovery, Health and Social Care portfolio – includes the capital budget for the NHS estate and equipment, including the currently paused national treatment centres.
- The Wellbeing Economy, Fair Work and Energy portfolio includes a significant portion (£193 million) of the Scottish Government’s financial transactions funding (a form of capital funding which must be repaid). These are classified as unassessed, as the funding is passed to other national bodies such as the enterprise agencies and the Scottish National Investment Bank, so the Scottish Government doesn’t have sight of its eventual use.
- The Deputy First Minister and Finance portfolio is mostly unassessed as the Scottish Government does not have oversight of local authority spending decisions with these budgets.
- The Social Justice portfolio has the highest proportion of spend categorised as positive, which is due to the affordable housing budget, The remainder of this portfolios spending is neutral, and includes items such as social security.
- The Education and skills portfolio has no spend categorised as positive, and includes capital funding for universities research and innovation activity, for the refurbishment and maintenance of the colleges estate.
A number of these significant capital budgets, such as investment in the NHS, Universities and Colleges estates, are currently not expected to have a positive impact on the environment. If Scotland is to reach net zero by 2045, the Scottish Government will need to find a way of achieving its policy objectives across portfolios in a way which delivers emission reductions.
What about the impact on the climate?
We don’t currently have a way to estimate what contribution (either positive or negative) spending decisions will make to reaching net zero targets. The Scottish Government are currently developing a net zero test for policy, which will help to quantify the impact of policy in reducing emissions. The Scottish Government are also required to include quantified emissions reductions from policies in their next Climate Change Plan, so this is an area where we expect change in the future.
Since 2009, the Scottish Government has produced a high-level carbon assessment of the budget. This model sets out the emissions generated by the purchase of goods and services by the Scottish Government, and shows the direct, indirect and imported emissions covering both resource and capital spending. This is a backwards looking assessment, and does not model any behavioural changes which might result from the spending.
In the 2024-25 Budget, total emissions were 8.6 million tonnes carbon dioxide equivalent (MtCO2e). The portfolios which made the largest contribution to this were:
- Deputy First Minister and Finance (2.0 MtCO2e): the vast majority of these are associated with the local government budget.
- NHS Recovery, Health and Social Care (1.7 MtCO2e): Most of the emissions are associated with spending on NHS territorial boards, national boards, GP services and capital investment.
- Social Justice (1.5 MtCO2e): Mostly associated with the social security budget.
- Rural Affairs, Land Reform and Islands (1.2 MtCO2e): The largest contributions are associated with Pillar 1 agricultural payments
- Transport, Net Zero and Just Transition (1.1 MtCO2e): Ferry services, bus services, rail services and the road networks are the most significant contributors.
Chart 2: Greenhouse gas emissions associated with Scottish budgets, 2010-11 to 2024-25
Source: Scottish Government high level carbon assessments
While in absolute terms the emissions associated with Scottish Budget have increased, the size of the Budget has also increased over the 14 years since 2010-11. Overall there has been a reduction in the carbon intensity as, while total emissions have increased slightly since 2010, spending has increased at a greater rate. However, as inflation means that the amount of goods and services purchased for a given amount of public spending will decrease over time, we should expect that carbon intensity of spending will fall over time. The chart below shows that when adjusting for inflation, there has still been a decline in the carbon intensity, but not to the same degree as when expressed in nominal terms. It is also worth noting that the trajectory has not been steadily downwards, and the carbon intensity has fluctuated over this period.
Chart 3: Carbon intensity of Scottish Budgets, total emissions compared to Total Managed Expenditure, since 2010-11
Source: Scottish Government high level carbon assessments
What capital investment might be required to reach net zero?
The UK Climate Change Committee (CCC) publish carbon budgets every five years which set out the UK’s pathway to net zero by 2050, including the pathway Scotland will need to follow to reach net zero by 2045. The most recent budget is the 6th Carbon Budget (December 2020), with the 7th budget due to be published on 28 February 2025.
At a UK level, the CCC estimated that the total capital investment each year (public and private sector) would need to increase from around £10 billion in 2020 to around £50 billion by 2030 continuing at that level to 2050. It estimated Scotland’s share of UK emissions at around 9%, putting the projected investment required in Scotland at around £5 billion per year by 2030.
Earlier in 2024 the Scottish Fiscal Commission (SFC) published a fiscal sustainability report, which estimated the fiscal costs to the public sector of the transition to net zero in Scotland. The SFC used data from the CCC’s sixth carbon budget to estimate that an additional £1,136 million a year capital spend (in 2024 prices) will be required annually between 2020 and 2050, on average. This assumes that Scottish and UK Government policy is set to meet the balanced pathway as set out in the CCC Carbon Budget. This £1,136 million is equivalent to 18% of the Scottish Government’s 2024-25 capital budget. Significantly, the SFC model that additional annual spending will almost double between 2021-25 and 2026-30, before peaking between 2036-40.
The SFC’s analysis suggests there are two sectors where the majority of this additional spending will be required; buildings, and land use. Surface transport, and waste and agriculture will also require additional capital spending.
Another key point raised by the SFC is that there is an important difference in Scotland’s share of UK geography and its share of the UK population. The fiscal framework means that the Scottish Government’s capital resources are largely determined by a population share of spending elsewhere in the UK. This will create significant pressure for the Scottish Government where there is an imbalance between scale of investment required in land use, and the capital funding which might be available. The SFC note that:
“Scotland contains 32 per cent of the UK land mass, roughly half of the trees and 70 per cent of the peatland. The CCC estimates that 30 per cent of UK-wide costs associated with [Land Use, Land Use Change and Forestry] are assigned to Scotland. This is substantially more than Scotland’s population share in the UK.”
Conclusion
Using the Scottish Government’s taxonomy categorisation, we can see that there are significant parts of the existing capital budget which are not currently contributing to meeting Scotland’s climate targets.
There are big questions we cannot answer – we do not know the expected impact of the spend that is categorised as positive, so we cannot say whether current policy, or indeed policy announced in the upcoming 2025-26 budget, will set a course for meeting these targets.
Recent scrutiny of policy by the CCC, and the modelling by the SFC, suggest that despite the capital budget being under a little less pressure than had been assumed prior to the UK Autumn Statement, the Scottish Government still faces a significant challenge in targeting its spending in a way which supports the transition to net zero.
In the Net Zero, Energy and Transport Committee in January the Deputy First Minister noted that in addition to the development of a net zero test, the Scottish Government would consider how the taxonomy could be improved, stating:
“As this is the first year, there is potential for improvements to be made to the evidence base that is used to assess impact. We see this as the start of a process, not the end of the journey. Perhaps after the experience of this budget, the committee might be happy to revisit it to see where we might make further improvements.”
While we await a new set of interim emissions reduction targets, Parliamentarians may wish to consider to what extent the information in the 2025-26 Budget allows us to understand how capital spending is contributing to Scotland’s transition to net zero, and how progress can be made while supporting other policy objectives across portfolios.
Andrew Feeney-Seale, Financial Scrutiny Unit, SPICe
“Whitelee Windfarm” by ms.akr is licensed under CC BY 2.0.