Finance and Public Administration Committee [Draft]

Meeting date: Tuesday, March 26, 2024

Official Report 809KB pdf

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Scottish Fiscal Commission (Report on Climate Change and Fiscal Sustainability)

The next item on our agenda is an evidence session with the Scottish Fiscal Commission to discuss the commission’s report “Fiscal Sustainability Perspectives: Climate Change”, which was published on 14 March 2024.

We are joined by Professor Graeme Roy, chair, Professor David Ulph, commissioner, John Ireland, chief executive, and Claire Murdoch, head of fiscal sustainability and public funding, all from the Scottish Fiscal Commission. I welcome them all to the meeting and invite Professor Roy to make a brief opening statement.

Unmitigated climate change would be disastrous for society, the economy and the public finances. For that reason, and in line with the Paris agreement, both the Scottish and United Kingdom Governments are committed to limiting future global warming by reducing greenhouse gas emissions. Although those actions are necessary, they impose costs on the public sector.

Our report explores how the Scottish Government’s finances could be affected by aspects of climate change. There are three ways in which public finances will be affected. The first is that there will be spending to repair damage caused by climate change because of storms, floods or droughts; the second is the need to invest in adaptations to reduce damage from climate change; and the third is the cost of actions taken to reach net zero and to limit further global warming.

Regarding the second of those—adaptation—the Climate Change Committee has estimated the economy-wide investment required across the UK as £10 billion per year between 2020 and 2030. The scale of the potential investment required is large and uncertain, and it is also unclear whether Scotland will need proportionately more or less investment than the rest of the UK and what the public sector’s contribution will be. Even with investment and adaptation, there will still be a need for spending in response to the first channel of potential costs, the damage caused by climate change. There is even less information about costs in that area. It is therefore unsurprising that it is not clear how costs in Scotland will compare with those in the rest of the UK.

More is known about the third aspect—the investment that is needed to achieve net zero—and we focus on the likely implications of that in our report. We use estimates from the Climate Change Committee on the nature and scale of the likely investment required in Scotland to reach net zero. We make assumptions about the extent of devolution and the share of public sector investment in each sector to produce illustrative estimates of the investment that will be required by the Scottish Government to reach net zero.

On that basis, we estimate that the Scottish Government needs to spend an additional £1.1 billion annually between 2020 and 2050. To give an idea of the scale of that investment, that is 18 per cent of the 2024-25 capital budget. That number requires careful interpretation. First, it is a projection that is based on assumptions that we set out in the report, which I am sure we will discuss today. It is designed to provide an indication of the likely scale of investment that is required. Secondly, the projection covers only mitigation. It does not cover spending on adaptation and damage from climate change, which we hope to cover in the future as more information becomes available.

By providing illustrative estimates of mitigation investment, we hope to better understand the sources and scale of potential risks to the Scottish budget. For example, given the way in which the fiscal framework works, a significant element of Scottish Government funding depends on UK Government policy decisions and the operation of the Barnett formula. Any differences between UK Government and Scottish Government approaches to net zero could present a fiscal risk to the Scottish Government. Those differences could relate to timing, the extent to which Governments bear the costs themselves or the extent to which they use regulation, tax or other incentives to encourage private sector investment.

One good illustration of that, which we cover in the report, concerns forestry and land use, which is largely a devolved area of responsibility. Scotland accounts for 32 per cent of the UK land mass, roughly half of UK trees and 70 per cent of UK peatlands. The Climate Change Committee assumes that meeting the Scottish and UK Government targets for net zero requires significantly more investment in forestry and land use to take place in Scotland than in the rest of the UK, which means that the fiscal burden of reaching the UK’s net fiscal target may fall disproportionately on the Scottish Government.

Finally, our report recommends improvements in the data and information that are required from both Governments. I hope that that information will help to make a fuller assessment of the fiscal risks that the Scottish Government faces in due course.

Thank you for that and for the interesting and sobering report. I should say that I am not particularly thrilled by the introduction of acronyms such as LULUCF, which means land use, land use change and forestry, although it is clearly important. As you have just pointed out, there is a disproportionate cost to Scotland compared to the cost to the rest of the UK. In paragraph 21 of the report, you point out that the cost in Scotland per person per year of the investment in mitigation is £207, whereas in the rest of the UK it is £149, which is a £58 difference. However, you point out that £54 of that £58 is simply because of land use, land use change and forestry.

Given that that is a huge additional burden to fall on Scotland over many years, should consideration be given to the devolved settlement through the block grant to take that into account?

Obviously, it is not for me to comment on the fiscal framework and the specifics of that—

Ah—I thought that I would catch you out there.

The general point that we make, however, is really important. In the fiscal framework, the devolution and budget arrangements were not set considering issues around climate change. When you start to look at issues such as climate change and how they translate into the budget process, you reveal some interesting dynamics. I certainly learned a lot when we were pulling the report together. You see the potential areas where there could be variations in the risk, given the nature of the fiscal framework.

You are right that one of those is—

LULUCF.

Yes, or “Lulu CF”, as I call it.

This is a basic thing, but the geography in Scotland is different from that in the rest of the UK. Therefore, the opportunity and investment that can come from tackling climate change through forestry and the restoration of peatlands will be more focused on Scotland, but it is a devolved responsibility, so there is a higher share of the burden.

There are other areas where differences in timing between the two Governments in terms of relative prioritisation will have implications for the amount of money flowing through the Barnett formula, and there might well be differences in policy responses, too. For example, if one Government were to choose to rely more on the private sector than on the public sector to do some of the heavy lifting, that would have implications. For me, the key takeaway from the report is that, once we overlay the fiscal framework on, say, climate change, you start to see some really interesting dynamics that are leading to fiscal risks for the Scottish budget.

I will touch on your report in a wee minute, but what you have said is, in effect, that, because Scotland has 70 per cent of the UK’s peatlands, it might be more difficult for Scotland to afford the sort of peatland restoration that is absolutely critical to tackling climate change, because that work would account for a higher proportion of our budget than it would of the UK’s. In that case, does that aspect of the fiscal framework—that is, the aspect relating to climate change—have to be looked at again, or should it just be overlaid by the existing fiscal framework? What is your view on that?

The broad conclusion that we make at the end of all of this—again, it is one of the quite interesting things that we have learned from pulling together this sort of report—is that we need to fully understand the interdependencies between the Scottish Government and the UK Government. The UK Government needs Scotland to achieve its net zero objectives—or, indeed, overachieve on them—for the UK to hit its own target. However, not only does the UK rely on Scotland to meet its objective, but Scotland relies on the UK to meet its objective, too, because a lot of the responsibilities fall within reserved areas, and the funding for that is crucial.

Without getting into any specifics of any aspects that need to be renegotiated, I would say that my broad conclusion is that, if you look at this objectively, you will see that, purely from a public finance point of view, what is really important is that both Governments work together and look at the solutions that are needed to get to net zero in both Scotland and the UK.

That is why, in the report, we stress that meeting the climate change targets is a shared endeavour between the two Governments. We mean that in two senses. First, we need to work out how, precisely, reducing emissions in Scotland and the rest of the UK will be a shared endeavour. Secondly, any funding implications need to be worked out as a shared endeavour, too, with the two Governments talking to one another about the issues that Graeme Roy was referring to—that is, the timing of actions that take place, the balance between the use of the public and private sectors, and the balance between devolved and reserved areas. All of those are areas for discussion between the two Governments, and they need to manage things as a shared endeavour by talking to one another.

That thread of shared endeavour runs right through the entire report. One example is the issue of flooding. The recent flooding in Angus cost the Scottish Government £15 million through the Bellwin scheme, whereas the flooding that the UK Government dealt with south of the border cost £10 million, and, as a result, there was only a £1 million consequential. Therefore, there could be disproportion. Of course, that could work the other way, as you have pointed out in the report. There could be an incident affecting only some parts of the UK, and Scotland would get a Barnett consequential even though it was not impacted. There needs to be a bit more flexibility in that respect.

Prior to the update of the fiscal framework, we had the concept of a Scottish economic shock. Obviously, that has now been removed, but should there be something along the lines of, say, a climate shock? Instead of our having to deal with the sort of example that I have just given, with approaches to flooding being enacted in such a way, could we have something more climate focused?

That is a really interesting reflection. In many ways, the example of flooding and its potential impact, which you have highlighted, brings us back to very similar discussions that the committee would have had around the Covid pandemic, with all the nervousness and concern over the amount of funding that was flowing into Scotland being dependent on decisions taken in the rest of the UK. There were concerns—for example, about additional spending on healthcare or business support to support a further lockdown—that Scotland had to wait to see what would happen before the money would flow in.

11:00  

In many ways, it is similar to the situation whereby we might have asymmetric shocks across different parts of the UK but the funding mechanism does not allow for those. One could think of ways in which people could respond to that. As I said, a shock might happen in England for which Scotland would get Barnett consequentials, or it might be one that happens in Scotland, where there are no such consequentials. The ways to manage shocks include thinking about borrowing and savings, so that you can build up funds to respond to them. If the potential risks are going to increase and become more significant, as the scientists say they will, they will become more material over time. That is why you will have to consider whether the fiscal arrangements are working most effectively.

Yes. Paragraph 6 of your report says:

“The Scottish Government ... controls most public spending on Surface Transport in Scotland but many aspects of its regulation are reserved, for example banning polluting vehicles or imposing more stringent emission standards.”

You go on to say that that

“illustrates how policy decisions at the UK level are important in ensuring the Scottish Government can meet its net zero targets.”

Also thrown into that mix are shipping and aviation, for which responsibility is also reserved. How realistic is it to expect Scotland to meet its targets without very strong co-operation from the UK Government?

That is essential. As David Ulph said, this is a shared policy responsibility. Scotland needs the UK to co-operate and work constructively in order for Scotland to meet its net zero targets, but the UK also needs Scotland to implement key policies in areas that are devolved and, in many ways, overachieve in areas such as land use and forestry.

An interesting point, which I certainly learned a lot about while I was working on the report, is that policy responsibilities in areas such as net zero and climate change are quite different from most others. For example, responsibility for health is relatively clearly defined as being devolved. There is a debate about funding for it, but health is essentially a devolved responsibility. I will give a contrasting example on the climate change aspect. The Scottish Government is responsible for public transport and investment in transport infrastructure, roads, rail and so on, but much of the regulation is a UK responsibility. The transition to net zero and climate change are therefore quite different from most other policy responsibilities, where it is relatively easy to define devolved versus reserved areas. There, it is all-encompassing—as you would expect, given the nature of the challenge. It comes crashing into both devolved and reserved responsibilities and, crucially, the careful interaction between them.

When the fiscal framework was initially developed, it was done against a background where the shocks that economies faced were normal macroeconomic ones. Here we are dealing with a different type of shock.

We saw that the framework that we developed coped with the Covid pandemic to some extent, although there were challenges. However, the issue is Scotland’s inability to transfer funds between years and periods. That is the challenge that will arise here, because, as Graeme Roy said, there will be asymmetric shocks. For example, there might be a large flood in the rest of the UK, which generates Barnett consequentials, but there is not much that the Scottish Government can do with those. Equally, there might be a huge flood in Scotland that it does not have the resources coming from Barnett consequentials to deal with.

In the report, we say that, because this is a shared endeavour, the Governments need to think about how well the existing fiscal arrangements will cope with climate change-type shocks, which is the point that you were trying to get to in your question, convener.

Paragraph 38 of your report states that, as has been mentioned,

“Coordination and cooperation by the UK and Scottish Governments will be required to succeed in reducing emissions.”

However, the two Governments might have different policy and spending priorities. Ultimately, therefore, Scotland will be at the mercy of those UK Government decisions, will it not? For example, a future UK Government might decide that it would rather spend the money somewhere else.

As I said, your broad point is correct. The nature of the issue is that there are shared policy responsibilities. In broad areas such as transport, decisions in reserved areas will have an impact on Scotland. There are also areas in which reserved policies will interact with devolved policies. In addition, there is the funding element: whatever the UK Government decides to do in equivalent devolved areas will have a Barnett consequential, which will have an impact on Scotland. There are also the geographical and general variations that will differ between Scotland and the rest of the UK. There are strong linkages in that regard.

It goes the other way, too. Decisions that the Scottish Government makes and those that are made in Scotland have a significant impact on the UK’s transition to net zero. That is why this policy area is quite different from most other policy areas. I cannot think of another policy that is as all-encompassing, with that level of interaction between the two Governments, which will drive the success of both Scotland and the UK in achieving net zero.

What about global decisions? The United Nations climate change conference of the parties meets year in, year out. There is always an element of dismay that it does not go far enough, but what are the implications for decisions that are made at an international level?

We have to take those largely as given, given the relative size of Scotland. However, you are right. One of the things that we highlight is that there are uncertainties, and we are trying to show the direction of travel and the scale of investment that is needed if we are to meet our obligations.

There are uncertainties relating to technology, for example. If the global economy invests significantly in new technologies, that might reduce some of the costs. We talk about where there could be tailwinds and headwinds in relation to achieving net zero. There are potential changes to overall policy agendas that might have an impact on the costs of damage and adaptation. We do not go into detail on that—there is not that much information available. However, if the world does not make the significant emissions reductions that are needed for the climate and the temperatures continue to grow at an unmitigated rate, the potential costs to the public sector in Scotland and in the UK of damage will be much higher.

We have tried not to go too much into that in our report. We are not climate scientists. We have benefited greatly from advice and support on that, but we wanted to show from what channels the fiscal implications can come through into the budget and why the Government needs to prepare and get really serious about costing those various mechanisms.

Definitions are also important. You have said:

“The UK and Scottish Governments should articulate their plans on how to achieve net zero and what level of public spending will be required.”

You go on to say:

“We recommend that spend on mitigation and adaptation be identifiable in budget documentation and outturn so that spending plans can be linked to delivered spending.”

How do we define what is spent on climate mitigation? There is a temptation for people to say that a job is a green job when it may be somewhat more tenuous to another eye, for example. Do you think that there must be agreement between Scotland and the UK on the language that is used, so that they are not talking about different things when looking at those aspects?

I will go first, then Claire Murdoch might want to come in on some of the detail on that.

There are two things to separate. How things such as green jobs are defined and whether things are targeted on the environment and the like can get a wee bit woolly. Ultimately, if we are to achieve net zero, every job will be a green job, or the vast majority of jobs will be green jobs by their very nature.

We think that the Government can do more. It can become much more targeted when it comes to specific interventions and spending that are explicitly designed to support the transition to net zero, or explicitly designed to help us to adapt to the challenges that will come from climate change. Where is the investment in decarbonisation of housing, in grid infrastructure and in green public transport? From our analysis, that is the bit on which it would be really helpful to have more information. That would give us and the committee much greater clarity, and enable us to see where the scale of ambition matches the targets that have been set by the Government.

Claire, do you want to say a bit more about what we have done?

Yes. The main data source that we have used is from the Climate Change Committee, which has an established process for estimating across the UK what it calls the additional capital investment. To a certain extent, therefore, there is a way that that aspect can be measured, and it has been done. We are asking the Government to reflect something similar in its climate change plan and in its budget documents.

It is nice to say that things are all positive for the climate, but we need to see something that is much more specific as to whether the Government is meeting the level of additional capital requirements that the CCC has identified. Can we actually see, in the budget documents and in the climate change plan, what amount of money the Government is spending on specific mitigation activities to reach net zero? At present, the information is not sufficient to enable us to do that, which is why we have had to rely on what the Climate Change Committee has produced, rather than being able to look at the climate change plan or the budget documents.

So, when the draft budget is published every year, we would hope to see something like that, from a Scottish perspective.

If you want to track climate mitigation over time, the climate change plan should set it out for 15 years, and in the budget you should be able to see whether the Government is spending what it has committed to spending. The same goes for outturn data; we all know that what is in the budget is not necessarily what is actually spent over the year.

The Government produces a climate change plan every five years. In the past, that plan has contained a list of policies and proposals, attached to which there ought to be a mitigation figure so that we can see the impact on Scottish emissions. We are asking for a cost to be attached to each of those policies and proposals. Ideally, it would show the split between the public and private sectors, but certainly it should show the total cost.

That is just a step forward. It is consistent with how the UK Government approaches its carbon budget, so ideally there would be a common framework in that regard.

The other piece of information is something that Claire Murdoch touched on. Every year, there is an annex to the budget documentation that talks about the Government’s climate change expenditure. That is a very broad definition—it categorises all items of spend with regard to whether they are negative, strongly negative, positive or strongly positive for the climate or the environment. That is not really tied in at all to the climate change plan, so we are asking for that annex to be explicitly tied to the plan.

Previous parliamentary committees have asked for a proper evaluation framework when the Government has produced its climate change plans, and that would be another mechanism for doing that. The key, however, is to take the climate change plan that the Government has committed to—or is required to—produce, and ensuring that that has the right information in it, and then carrying that over into the budget documentation.

There is a net zero portfolio in the draft budget, but we do not really have anything in the other portfolio sections that looks specifically at climate mitigation.

You talked about public and private sector costs. Interestingly, figure 3.3 on page 33 of your document shows that about 30 per cent of the total cost of capital investment required on the balanced pathway from 2020 to 2050 is in private sector electricity supply; the figure is 20 times greater than the figure for public sector electricity supply. That is not only 30 per cent of the total cost—it is also reserved, which shows the difference in the interaction.

That graph is quite interesting, because if we look at the total costs for the devolved sectors, we see that almost half of those in Scotland are public sector costs, but less than one tenth are reserved sector costs. Does that make you think that the public sector in Scotland has to take a greater lead than it is currently doing?

When we were looking at the split between the public and private sectors, we were just using the split that the Office for Budget Responsibility used when it produced its fiscal sustainability reports. We did not want to introduce a further complication in our analysis by using a different definition of public sector versus private sector, so we just followed the OBR’s splits in constructing our figures.

11:15  

The general principle of the broader point is quite interesting, in that the nature of the sectors that are devolved means that they are more likely to have heavy lifting from the public sector. As David Ulph said, we are using exactly the same ratios that there would be in England, for example. Buildings, land use, surface transport, waste and agriculture are, largely, devolved sectors but, in general, the OBR and others have looked at sectors that are more likely to rely on the public sector to take more of a lead.

In contrast, for example, investment in electricity supply—given the nature of electricity and the large consumer market—is much more likely to be done with capital from the big utilities companies. Of course, we all pay for that through our bills, but the private sector is largely doing that investment.

What is really interesting about the report is that it is only when you sit down and think and work through it that you realise that a lot of the sectors that are devolved are sectors where the onus is on the public sector to do quite a lot of the investment.

Yes, indeed. There is 43 per cent public share in Scotland, which is quite a lot.

Colleagues want to come in, so I will ask a final question, which is regarding the offshore energy industry. Forty-three per cent of UK oil and gas jobs are located in Scotland, so what challenges does that present for moving to a just transition and net zero?

We have discussed that much more in the context of our economic forecast in “Scotland’s Economic and Fiscal Forecasts”, and we will expand on it more in the upcoming forecasts in May.

The story is that Scotland has huge potential—in the green economy, renewables and offshore renewables—to grow new sectors, new jobs and new investment. The key is transitioning from our current energy sector in oil and gas to the new opportunities. The opportunity there is to use our legacy, assets and skills to create greater market share and punch above our weight in those new sectors and industries of the future. That is where the prize is for Scotland’s economy. It is easy to say all that, but there is risk, and the challenge is how we do it. How do we continue to support that transition for those high-value jobs?

You have seen from our forecasts, before the most recent figures, the gap that has been opening up between Scottish and UK earnings. A large part of that has been explained by what has been happening in the north-east, and that has, therefore, been explained by what has been happening in oil and gas. For short-term economic and tax reasons, managing the transition is a risk for Scotland’s economy, given our disproportionate weight on oil and gas jobs and, crucially, high-paying oil and gas jobs. That is the big adjustment and transition that needs to be managed carefully.

You have said that the oil and gas sector accounts for one in 200 jobs in the UK and one in every 30 in Scotland, but what share of taxation comes from that sector?

It is difficult to get the exact numbers, in part because we get data by region. We can get—and have published in the past—data from His Majesty’s Revenue and Customs about, for example, the north-east region and Glasgow. Where people work in that sector but locate somewhere else, it is more difficult to work out. As you know, income tax is collected on the basis of residence rather than the location of the employer. Lots of people who work in the oil and gas industry live outside the north-east and outside Scotland, so it is difficult to get an exact estimate. That is why we tend to use the north-east as an example, to give us a signal of whether the sector is dragging on Scottish tax receipts or adding to them.

Is it disproportionate?

Yes—of course. Average wages in oil and gas are way above the national average so, if Scotland has a disproportionate number of those jobs, it matters for the income tax revenues that we are collecting.

Ross Greer will open the questions from committee members.

I am interested in what I think is a bit of a contrast between your report and the CCC report last week. I think that you have the balance better and I acknowledge what you said about having worked with the CCC.

Although I agree with the broad criticism in the CCC’s report that we are off track, I note that it was quite critical of the Scottish Government for highlighting the impact of United Kingdom Government policy making—particularly financial policy making—on Scotland’s ability to meet its own targets. However, as you have outlined this morning and in your report, we require a disproportionate amount of spend, but the fiscal framework does not take that into account and the devolution of the relevant powers is not uniform. The CCC made some pretty sweeping comments about the fact that transport, land use and decarbonising buildings are devolved.

This might be just a reframing of some of the convener’s initial questions but is it fair for me to conclude that, as matters stand, it is effectively impossible for Scotland to meet its climate targets and, therefore, for the UK to meet its targets, given how critical Scotland’s targets are to them, without a significant devolution of financial powers to the Scottish Government, an adjustment to the fiscal framework and more direct funding from the UK Government? Is it the case that something that is entirely within the gift of the UK Government needs to change? It is one thing to say that Governments need to co-operate, but we are not talking about two equal partners that have an equal amount to contribute. Are you saying that something needs to change at UK level, whether it is devolution of powers, increased block grant or whatever?

I would not say that, although you probably expect me to. In our report, we simply set out the interlinkages and the potential read-across areas.

Ultimately, there is a choice: Governments can choose to make more progress on buildings and on transport. The Committee on Climate Change makes a judgment that we do not make about whether the Government is making progress on that. We are trying to highlight the scale of investment that is needed by the public sector overall, and where there are areas in which Scotland might need to make more investment relative to the rest of the UK.

On the issue of targets, in order for the UK to get to net zero by 2050, Scotland has to meet its 2045 target. In many ways, Scotland is committed to doing more heavy lifting, and the Government has set that out. With that comes additional cost and the need for additional investment.

We are saying two things in the report. First, we make the point that, because of the limited ability to transfer funds between periods, it matters a great deal to Scotland when the UK Government makes certain decisions, how it splits those decisions between devolved and reserved areas, and between the public and private sectors. All those decisions set the fiscal context in which Scotland has to make its decisions.

Secondly, we are trying to illustrate the scale of some of the investment that might be required by the Scottish Government. That will tell you what must be balanced against other priorities that the Scottish Government has.

You mentioned that split between the public and private sectors. I am interested in what you said about the fact that the report makes presumptions to mirror the OBR’s presumptions about all the necessary funds coming entirely from public spending. I would be keen to press you a bit on the logic behind that, particularly with regard to land use, land-use change and forestry—Lulu CF, to use your pronunciation of the acronym.

The Scottish Government has already started some quite significant pilot work in private financing around nature. There is a significant political debate to be had around that—I believe that the Net Zero, Energy and Transport Committee is having that upstairs right now—but I am interested in why your report makes the assumption, particularly in relation to land use and so on, that the work will be entirely publicly funded, given that a £2 billion pilot using private financing has already taken place, which shows that what is already happening in that regard is not small fry.

The honest and short answer to that is that we wanted to be transparent and simplistic, because it gets complicated quickly. Part of it was that we wanted to highlight that this is a big issue to discuss, given Scotland’s geography, its share of forest and the potential value for Scotland of forestry.

You are right that we follow the OBR in assuming a 100 per cent public share, but in no way are we saying that that is what will happen or, more importantly, that that is what should happen. We are saying, if there were a 100 per cent public share of investment, what additional investment would need to go into Scotland.

Having done that, we are hoping to pass the issue over for conversations about how that could be done. What is the best way of doing it? Can you secure private investment that could reduce public sector share? What would that look like? How could we be part of the process? How quickly could it happen? What is the nature of all that? I think that you are probing at exactly the right things. We set out what we have done really transparently. You can play around with the numbers and get something different.

I come back to the key point that the level of investment is significant, and the Government needs to set out in detail how we are going to secure that level of investment, whether from the public sector or through finding potentially innovative ways to secure it in the private sector. You could do that with all of the areas, where we have put in assumptions. You can play around with the different assumptions that are there.

I will just add that, in figure 3.8, we look at the LULUCF category using a very simplistic illustration. If, following the assumption that we used in that figure, only 60 per cent of LULUCF was funded by public sector investment, there would still be a big gap between what was spent per person in Scotland and what was spent per person in the rest of the UK. We could have made a different assumption in that category, but the broad principle would remain that having such a big difference in what needs to be invested means that you would need a much bigger private share to bring it down to a comparable level. In that sense, we want to highlight the fiscal risk that will occur, even if you have some tweaks in how you deliver that to the private sector.

Thanks. For my final question—I recognise that I am to some extent repeating myself—I am interested in the conversations that you have with the UK CCC. Last week’s report was incredibly valuable, and I agree with it as a reflection of the past 25 years and of a complete failure to meet the demands that the science has set out, but it left me with a lot of frustration.

We need to triple the amount that we spend on peatland restoration. You know that there is not £40 million of capital money just rattling around, so that will need to come from somewhere. For decarbonising buildings, it is not tens of millions but tens of billions of pounds that we are talking about. Is it not entirely unrealistic to expect the Scottish Government—keeping within the envelope that is available to it under the current confines of the fiscal framework—to deliver, in particular, the capital investment that is required to meet the demands of our climate legislation and the UK Government’s climate commitments?

Again, I do not disagree your the general point, but what we are trying to say is that huge investment needs to be made in the Scottish budget in this area. We gave the number of about 18 per cent of the capital budget, which is a good illustration of that.

That poses tough challenges for Government. Our report has to be read alongside not only the Committee on Climate Change’s report, but what the OBR is saying about the UK. You have to read all three reports together. While the Committee on Climate Change is pushing the Scottish Government, and we are pushing the Scottish Government for greater clarity on this, the OBR is saying very similar things about the UK. The OBR report has a stark number showing that, if we have unmitigated climate change, debt will explode to nearly 300 per cent of our economy. That is completely disastrous purely from the point of view on public finance, not to mention everything else that happens to the economy and society.

In order to be fair, you have to read our report alongside what the OBR is saying about the UK and what the Committee on Climate Change is saying not just about Scotland but about the UK. That is where the broad conclusion comes from that, from a public finance point of view, this area is a significant fiscal risk for Government that requires huge investment across a variety of diverse areas. That becomes even more complicated when you look at it in a devolved context. When you look at it in the round, you get a slightly broader view than one that is specifically critical of the Scottish Government.

When we say that the requirement equates to something like 18 per cent of the capital budget, we want that to be understood in a context where capital funding could fall in real terms, at least over the next five years. That is largely driven by decisions taken by the UK Government to cut capital funding. It is against that background that some of the figures need to be understood.

11:30  

That goes back to the point that Professor Roy was making about the choices facing Government. We cannot not build new hospitals. The cost of decarbonising hospitals is massive, but the challenge is how to balance the long-term unavoidable necessity of tackling that while keeping everybody alive in the interim by meeting all the other needs of society.

I confess that this is not my area of expertise and I am perhaps not understanding some things. On land use, I get the point that we have 32 per cent of the UK landmass, but do the dramatic figures suggesting that we should be spending so much more per head than the UK take into account the state of the land as it currently is? Presumably, some land needs work done on it but some does not.

Claire Murdoch can perhaps provide some more detail but, broadly speaking, the way to think about it is that the Climate Change Committee has looked at the total additional economy-wide investment that is needed in different sectors to get the economy to net zero. That is what we start with, and that will include all the stuff that you are talking about, such as the investment that has to go into the restoration of peatland and, in forestry, the types of trees and preparing the land. That is all in there.

We then ascertain what the public-private split of that is likely to be and we consider the potential fiscal consequences. That is quite different from aspects such as timber production; it is purely about the issues that go into the investment of preparing land for forestry to help soak up CO₂ emissions and into investment in peatlands.

Would you like to expand on some of the detail, Claire?

Essentially, the Climate Change Committee considers four main areas where the costs arise. Some of that involves changing the use of land to forestry, planting new woodland, improving tree density, restoring peatland to stop emissions being released and planting bioenergy crops to replace fossil fuels. Those are the main categories that the CCC has considered, estimating the share of the costs that would need to fall in Scotland relative to the rest of the UK.

If we take forestry, I think that we have been planting more trees than elsewhere in the UK, but that is not enough, in a sense, because the potential for tree planting in Scotland is presumably huge, and it is bigger than in the rest of the UK.

Yes.

That is helpful—thank you.

You have talked about damage, adaptation and mitigation. On adaptation in particular, you have said that you need more plans, costs and data. Is it the case that it does not matter how much data we have, because we are still very uncertain about where we are going? Can there ever be enough data to give us solid projections?

There are two things that I would say in response. First, there will always be uncertainty around that. Indeed, that is one of the big fiscal risks that we highlight. We need to prepare for that uncertainty, and Governments will have to manage budgets in a world of uncertainty, particularly looking ahead to some of the costs. That is where the greatest risks are. We have already spoken about damage with the convener, and about how asymmetric shocks are, by definition, uncertain. The Government will therefore have to think about how it plans for such things in time.

Very little detailed information is provided by the Scottish Government on likely investments and adaptations, so we could make a lot more progress there. John Ireland was talking about the climate change plan, which is where the Government can start to cost that out. The Government can make more progress and be more transparent about where some of the investments and adaptations will be, and start to give more of an indication about that.

My answer is in two parts. First, more data will be really valuable, and it will help us to get more clarity. However, there will always be uncertainty, and the Government has to plan for that.

One advantage of adaptation as against damage is that you can, in principle, plan ahead and decide what investments you will make in adaptation. The problem with damage is that you might just get a storm in one particular year and there is no way to anticipate when that will occur.

The real uncertainty around adaptation is that we do not know how rapidly the climate will heat up. The scale of adaptation might have to be adjusted in the future, once you learn what other countries are doing and, therefore, the potential scale of adaptation that you need to make. There is uncertainty around adaptation, but it is an uncertainty that you can do some planning for.

The problem that we face at the moment is that we know almost nothing about what the Scottish Government’s plans are to enable us to put any figure on the likely scale of investment.

Should we expect more of a plan when we get the medium-term financial strategy later this year?

I am not sure when we will get enough information from the Scottish Government.

Would it be part of the medium-term financial strategy, or is it a completely separate thing?

The Government currently has a draft Scottish national adaptation plan. One of the things that we can ask for is that, when it publishes the final version of that plan, that has costings in it. At the moment, there are some rough costings on some policies, but not a comprehensive estimate of what the policies in the plan will cost overall and when those costs will be incurred.

Do we know what kind of timescale are we talking about for that?

The plan will be published in its final form in September 2024.

So the Government is committed to that.

There are two parts to that that I think would be helpful to the broader debate on public finances and to the work of this committee. There are specifics that go into a budget, which involves looking at the next five years—or, more often than not, the next year—and understanding the detail in that. Then there is the broader work, which is about the fiscal sustainability stuff. That is more around pre-budget scrutiny and looking ahead to where the big investments are coming. That is where more information and something such as the adaptation plan can inform the broader thinking about how much of the total capital budget will have to go into adaptation and mitigation over the next five to 10 years, and then—to go back to Mr Greer’s point—about what is left for everything else and how to make those choices.

Okay. Perhaps you could just clarify something for me. One of the phrases that is used a few times is “balanced pathway scenario”. I am sure that everybody else understands it, but I do not. Will you clarify what a balanced pathway scenario is? Is it a CCC term?

It is, yes. Broadly speaking, the CCC has five scenarios. The one that we use is the balanced pathway, and there are also scenarios for which there are differences in behavioural change and levels of investment. Claire, could you explain the technical detail?

It is based on the UK’s sixth carbon budget, which is about what the UK needs to do over the next few years and then about the level of investment that is required each year to get to 2050. To use a slightly simpler term, it is essentially the CCC’s central scenario of how the UK can achieve net zero by 2050.

The CCC looks across the different sectors at where and when the investment needs to happen in order to hit all the interim targets, including at the UK level, and at how that investment is best traded off between sectors at different points in time. We have taken those cost estimates, which the CCC produces for the UK and for Scotland, and we use the Scottish figures to estimate the Scottish Government’s costs.

The public share of investment in buildings is a figure of 43 per cent. The convener touched on that, but I am not sure that I understand that either. Is the 43 per cent a rough figure as to what the public sector commitment would be?

It is an illustration based on differences in split among different types of building. Again, we take the relative balance between the public and private sectors from the OBR. You can start to play around with the different shares, so that you can think about having more private investment or more public investment, for example. If the total investment is £36 billion, we use it simply to say what the relative public sector share might be in that.

What is crucial is how that then leads into the funding that potentially flows into that area. Again, we use exactly the same share as for the rest of the UK, so, potentially, the same public sector investment that goes into that area would flow through in relation to funding in Scotland.

Are you saying that the figure is not based on ownership, but on an estimate of where the expenditure would come from?

Yes.

It is an average share across the residential and non-residential sectors. In the public, non-residential sector, we assume that the public sector pays 100 per cent of the costs while, obviously, the private sector bears more of the costs for non-residential private buildings.

In the residential sector, there is a share for the public sector, which will pay some of the costs. The OBR highlights things such as lower-income households, for which you would expect the public sector to take up more of the costs, whereas high-income households would pay the costs of decarbonisation themselves.

That is what I was wondering, because a lot of private owners would not be able to afford very much investment.

A lot of the report is looking at additional investment. However, we are already spending quite a lot on, for example, agriculture, with the replacement for the common agricultural policy. How does that interact here? Is that a factor? That money is already going out, but we can tweak it a bit as to how it is used.

The easiest way to think about it is that we are looking at the additional investment that the economy needs to make between 2020 and 2050 in order to hit net zero. Some of that investment is additional—that is, new—but some of it could come from changing investment that is already in place in order to target mitigation. For example, if you are spending money on public transport, is all of it public transport that will get you towards net zero? That would be an additional investment in public transport and net zero, but you would be cutting investment elsewhere. It is not about looking at the budget and saying that this is raw additional investment, but about looking at the totality of the investment in the economy that is needed to get to net zero. Some things will net off.

That is helpful.

I will just add that the Climate Change Committee says, “Here is the level of emissions in 2020. If we’re going to get to zero net emissions by 2050, how much do emissions have to fall year on year between 2020 and 2050?” The CCC is calculating the additional investment to get that additional reduction in emissions, year on year. That is the figure that lies behind this. We fully accept that there was already a significant spend to get emissions down to the 2020 level compared with the 1990 level; we have already brought emissions down a fair bit.

Are you saying that the CCC is looking at what spend is needed, rather than where the spend comes from?

Yes.

Okay, thank you.

Good morning. First, I put on the record my thanks for the report. It really fills a gap, and I think that everyone should read and understand it. I am heartened to see that you are doing the session for MSPs tomorrow. I would like to see further iterations of the report, because it is so helpful. The CCC should also read the report, because it gives much more insight into the complexity of a fiscal framework with that level of granularity. Will you have meetings with the Scottish Government about it? I hope that you will, because it is so valuable.

As always, we have engaged constructively with the Government, which has helped to inform our work. Ultimately, this is our report, but the conversation with the civil servants is always really helpful. I learned a lot from doing this work with the team, even just through chatting through the results with them, and I know from the conversations with them that they have found it really helpful, too.

Thank you very much for your kind words about the report. Part of the work will be to try to socialise it as much as possible with a broad and diverse group, which will include key public bodies and key stakeholders such as the Government and the Climate Change Committee.

Given what it sets out, we almost wish that we had had the report before the recent review of the fiscal framework. That would have been valuable.

I come back to the convener’s earlier points. I certainly had not thought about how all those points interact in the detail in the transition to net zero and about what that means in a devolved context.

The broader point is that a lot of the work around fiscal sustainability in a devolved context has not been done; David Ulph and I have been chatting about that. There are some examples, such as Canada, where fiscal sustainability has been looked at in a devolved context, but no one has thought about it in any great detail.

11:45  

A lot of that area is new, and it is only when we start to dive into something like demographics, as we did last year, or climate change, as we have done this year, that we see wrinkles, lumps and bumps that we would otherwise have thought were not important. This work is designed for the long term, to help this Government, and the Government after it, to think about what needs to be done. In time, that should lead to debates about the optimal structure of public finances.

That leads on to the perennial challenge that always comes up with this committee, which is the need for a much more strategic long-range look at public sector finance. That is often expressed as the need for multiyear funding.

Do you anticipate that you will have any discussions with the UK Government, given the critical dependencies that you have set out, in the sense that one needs the other? Do you anticipate that you will be able to have discussions with the UK Government and/or the Treasury?

It is not our job to influence the UK Government in any way, but we speak to the UK Government, and we present our results and findings, as we always do after a budget or after a report such as this. It is always engaged and keen to learn insights. Ultimately, it is up to the UK Government and its ministers to decide what to do in all of this.

This work is really new, and I think that it adds a lot to the debate and understanding around the whole area. What strikes me is that it is so different from most of the other policy areas that we talk about—for example, health is devolved and fuel duty is reserved. If we look at the broad context around net zero and climate change, however, it comes crashing across devolved and reserved responsibilities in a way that is much more complex than any other area that we have looked at.

As you alluded earlier, your report refers to working with a debt to gross domestic product ratio of 90 per cent as a normal baseline, as against the startling figure, if it was all public investment, of 289 per cent. That figure, more than anything—I know that it is the OBR’s figure—makes clear the need for private investment as well.

Does your report accentuate the fact that the volatility in the public sector funding environment will have a direct influence on the confidence of private sector funding to come to the fore? Am I correct in that assumption?

In the broader context, yes. One point that we have not made, which it is important to get on the record, is that we assume that doing nothing on climate change is much worse for the public finances than doing something. We almost kind of park that and say that doing nothing is completely unthinkable, so we are going to look at making progress. It is important to remember, however, that it is not a question of saying, “Well, this looks quite challenging—let’s just not do it”, because the consequences for the public finances and for the broader economy and society are much worse.

You are getting into the broader point about what Government does with all the information. We see the relative scale of the public sector investment, and the relative importance of the public sector, so how does Government think about using not just its spend, but its role as a leader and an enabler, to unlock private investment and capital investment?

On Mr Greer’s point about looking at land use and forestry, a significant chunk of investment needs to take place. If we assume that all of that is from the public sector, it will involve tough choices about what the public sector spends its money on. If you can, therefore, you should think about how you can get innovative funding coming in, such as through the public sector putting in an amount of money and then leveraging private sector investment—that is an option.

There is clearly a political debate to be had in that regard, but we hope that the numbers show what the picture is. There is also a public finance debate, which needs to be balanced between different aspects. If you can secure private investment in some areas, that means that more public investment can go into other areas. If you do not, however, there will be less public investment in other areas.

You kind of make my point for me, when we look at the lack of longer-range thinking. The Scottish Government set up the Scottish National Investment Bank, for example, using financial transactions. This year, we have seen a change to financial transactions and their ultimate withdrawal. The Scottish Government’s ability to have a sufficiently long range to be able to match or attract and use leverage for public sector funding is quite diminished without that longer-term aspect. Your report makes that starkly clear, not least with the reminder that you cannot carry forward across years.

There is a broader point that I will add to that. We have just started doing the fiscal sustainability reports, and I have been encouraged by the way in which the committee has engaged with and supported us in doing that work. It is really important that the Government and the Parliament engage in and debate such issues and work through them, and that the Government responds in a way that takes the principles that we are trying to set out and does much more forward planning.

I note the committee’s comments in its pre-budget report about the Government needing to respond in detail to the fiscal sustainability reports, and about the Parliament needing to have a full debate on fiscal sustainability. It can only be healthy if we at least discuss those issues.

Therefore, there are the technical issues about the budget, but there is a much broader conversation that we need to have about the scale of those numbers and how we respond.

I could not agree more.

Either this committee, or some other committee, needs to start taking evidence about the potential blockages in getting private sector investment—what is working well and what is not working well in that area. We need evidence from people who are in the sector about the challenges that they face in making that investment.

I have a question, which is one of clarification. Professor Roy, you raised an interesting point about future Scottish budgets and said that it would be helpful if we could see the numbers on how much has been spent to mitigate climate change. Should that be done within each portfolio of the existing budget, or are you suggesting that there should be another section in the Scottish budget that shows a cumulative total?

That is a good question. I do not have a specific view on it. I am less worried about how the information is presented—whether there is a specific line within portfolios or whether the information is all collected somewhere else. The key thing is that it is transparent, visible and, crucially, consistent over time. The fun that we all usually have is with the changing definitions and portfolios and so on. My only plea is that the information is transparent and stands the test of time.

It is really important to track through time the granular detail of the policies and proposals in the climate change plan that the Government publishes. Whether that is done in the budget documents, as you suggested, or in an annual evaluation report that the Government publishes is less important. What matters is that the detail in the plan is reported on through time, so that we know how each line is moving with regard to the investment that the Government is making.

That is very helpful. I asked the question because, as you know, there have been quite a few situations in which we have questioned how easy it is to track money through the Scottish budget. It is good to know from your expertise whether that is better done in one unit or throughout the system.

I thank the witnesses for the really useful discussion so far. Given all that you have said and the content of the report, do you still believe that the 2030 target is credible?

Again, we do not comment on that. We are trying to look at the public finance elements of it. We take the projections and push them through. We are using the balanced pathway scenario, which does not have Scotland meeting the 2030 target, so those numbers are underpinned by Scotland not meeting the 2030 target.

We highlight that, if we were to try to meet the 2030 target, that would require more investment. It would require not only more investment to accelerate and make up lost ground but more expensive investment, because the nature of the projections are such that certain technologies are embedded in them. Therefore, more investment would be needed there.

Secondly, because reserved policies would not make the target—we assume that the policies are constant—we would have to overcompensate for that.

To answer your question—without answering it, as it were—I say again that our projections do not have Scotland meeting the 2030 target. If the Government wanted to try to do so, it would need more investment than has been set out in the report.

Perhaps I can just add that, in our report, we say that, on the balanced pathway, we see Scotland meeting its 2030 target of a 75 per cent reduction in 2035. By then, Scotland will, according to the balanced pathway, have spent £6 billion between 2020 and 2030 and a further £6 billion between 2030 and 2035. That means that average annual spend will double from just over £600 million a year between 2020 and 2030 to £1.2 billion between 2030 and 2035, because it will get progressively harder to bring down emissions in order to meet the target.

However, as Graeme Roy has said, if you were trying to meet the 2030 target, you would have to spend considerably more than £12 billion by 2030, because you would not have the benefits of technical progress, which would bring better ways of meeting emissions targets, and you would not get the benefits that come with reserved areas, as you would have to do it all through devolved spending. In short, devolved spending would have to go up to more than £12 billion to meet the target by 2030.

We are not saying that that is impossible—we are just highlighting the scale of the financial challenge that Scotland would face.

You say in the report that meeting the 2030 target

“would require technologies and other changes to be more advanced than set out in any of the CCC’s pathway scenarios to reach net zero”.

Just for clarity, are you saying that those technologies are not sufficiently advanced and that it is going to cost more money to do things with existing technologies?

Yes.

Exactly.

So, there is a cost to acceleration. That is very useful.

As a broader question, how does this work map on to the SFC’s other work? The commission has set out the long-term fiscal scenarios for Scotland, but Professor Roy said that he has learned a lot from this process, too. Can we expect very substantial updates with regard to the longer-term challenges in the next iteration of your 2050 vision?

We are trying to do a couple of things. First, every second year, we will be publishing a much more detailed long-term projection. At the moment, that is still largely based on demographics, but for next year, we will be putting a bit more on health inequalities and public health into that projection, largely because we know a lot more about those things and because there is a lot more data on the subject.

Then, every other year, we will do the sort of thing that we are discussing today, in which we take more of a perspective on an issue. In other words, we will take a step back and say, “Actually, let’s think about, say, climate change and what the fiscal risks could be.” We do not have enough data or information on such issues to be able to plug them into our more detailed long-term projections, so what we are doing with these types of reports is highlighting the big issues.

I hope that, in time, as we get more information and detail, we will be able to pull things together into a much more detailed and long-term projection, but for the moment, we will, to an extent, be riding the two horses of highlighting certain issues and doing our long-term projections. We will necessarily have to focus on a smaller set of issues, though.

Just in closing, I would say that your observations on interoperability and the reliance on a collaborative approach between the UK and Scottish Governments, not least with regard to the fiscal trajectory that the country has to follow to meet these challenges, are absolutely right, but do you feel that institutions outside the fiscal framework are reflecting the same concerns? Do you think that ministers and senior civil servants are having these discussions about the scale of the challenge and how, between the devolved institutions and Whitehall, it might be met?

To be honest, I cannot comment on that in any detail, as we have just published this report. However, I hope that, by highlighting the need for interactions and issues with targets, responsibilities and funding elements, our report will inform those kinds of conversations and discussions.

I go back to the point that you have to look at this report alongside the Committee on Climate Change’s own report and what the OBR has been saying at a UK level. When you look at all of those things together, you see the key message—that is, the scale and urgency of the challenge—but also the need for planning and co-operation. If this report can help with that planning and co-operation, I will be delighted.

Thank you.

That concludes questions from the committee. It is interesting to see the huge amount of money that this is going to cost, given that Scotland produces 0.1 per cent of the world’s emissions and oil production currently stands at 108.6 million barrels per day. It really is a global issue, and we can but play a part in resolving it.

Professor Roy, do you or your team wish to convey any further points to the committee before we conclude?

I do not think that there is anything else, other than to thank the committee for its support for our work on fiscal sustainability. That support has been really encouraging, and it has given us a lot of confidence to do this work and to move into new areas. We would not have been able to do that without the committee’s support, so thank you very much.

Thank you for yet another excellent report. We have a commitment from the Deputy First Minister to having a debate on fiscal sustainability between now and the summer recess, and we will continue to press for that.

Thank you for all your evidence and for answering our questions. I hope that members will be able to come to the Scottish Parliament information centre event from 8.30 to 9.30 tomorrow morning in the Holyrood room. Bacon rolls and scrambled eggs are included, and I look forward to seeing you tomorrow.

With that, I move the meeting into private session. The public proceedings are finished for the day, and there will be a five-minute break to allow the witnesses and the official report to leave and to give members a natural break.

12:01 Meeting continued in private until 12:27.