What is COP26?

In 2021, the UK, together with its partner Italy, will host the 26th UN Climate Change Conference of the Parties (COP26). As an international United Nations Framework Convention on Climate Change (UNFCCC) conference, COP26 is part of a series of conferences held every year and attended by signatory countries and other parties.

This year, both a pre-COP summit (running from 30 September to 2 October) and a youth event (from 28 to 30 September) were held in Milan, Italy. The main conference will be held in Glasgow, Scotland, between 31 October and 12 November. The conference was initially due to be held in 2020 but was postponed due to the Covid-19 pandemic.

Described by the UK Government as “an event many believe to be the world’s last best chance to get runaway climate change under control”, the conference will see world leaders arrive alongside tens of thousands of negotiators, government representatives, businesses, and citizens. The goals of the conference are to:

  • secure global net-zero by mid-century and keep 1.5 degrees within reach;
  • adapt to protect communities and natural habitats;
  • mobilise finance; and
  • work together to deliver.

What does the UK’s presidency mean?

Bodies such as the Energy and Climate Intelligence Unit (ECIU) have argued that as the host of COP26, the UK has an important role in bringing together parties in advance of the conference and ensuring progress is made during the event. The ECIU has  explained that:

The UK has an opportunity to take a number of international actions—on diplomacy, trade and investments—which could increase the likelihood of a successful outcome at COP26. Thoughtful UK decisions can strengthen other countries’ ability to deliver climate action; but short-sighted decisions can undermine international action and hinder countries’ achievement, for example, of their own nationally determined contributions (NDCs). Scrutiny of the UK actions in the run up to COP26 will be intense, with many complex and sometimes conflicting agendas potentially challenging the diplomatic effort.

In a report published in April 2021, the House of Commons Foreign Affairs Committee has argued that the UK’s presidency “will not be a success unless it sets a path to net zero made real by changes to our economy that recognise the real cost of carbon output and are secured by ambitious green financing”.

In the run up to COP26, the Government has made several announcements on what it is doing to tackle climate change. This includes a net zero strategy, which will constitute the UK’s submission for its plans to reduce emissions under the Paris Agreement. As part of wider plans, it has also considered how the ‘green book’ can support its objectives.

The ‘green book’

What does the green book do?

The Government’s ‘green book’ describes how major public sector investment projects are assessed. It provides technical guidance to help officials advise ministers on how best to achieve a given policy objective. It does not set policy objectives, but “sets out a rigorous yet pragmatic approach to weighing up the costs and benefits and illuminating the key issues, uncertainties and risks” in potential projects. As ultimate decision makers, ministers are not bound by recommendations arising from green book appraisals.

Are there problems with the green book?

In 2020, an HM Treasury review of the green book concluded that it failed to support the Government’s objectives in areas such as ‘levelling up’ the regions and reaching net zero. The review said this was because the process relied too heavily on cost-benefit. analysis, also known as the benefit-cost ratio (BCR). The review found that the BCR placed too much weight on benefits that could easily be assigned a monetary value, with insufficient weight given to whether the proposed project addressed strategic policy priorities. The review also suggested that the BCR approach discouraged the coordination of separate projects that might address the same issue.

Other concerns noted in the review included:

  • a lack of transparency in the project evaluation process;
  • insufficient expertise and resource, for example in local government, to fulfil all the requirements of a comprehensive green book appraisal; and
  • inadequate evaluation of projects after completion, which could promote better practice in the future.

During its review, HM Treasury said that it had consulted with “a wide range of stakeholders”. These included: academics; the National Audit Office; the National Infrastructure Commission; analytical experts; users of the green book both in Whitehall and the devolved administrations; and the northern powerhouse, regional and local government.

Commentators have also criticised previous versions of the green book. See an earlier House of Lords Library briefing on this topic for further information.

How has the new version changed?

Following the review, the new December 2020 version of the green book now requires project proposals to contain a much clearer outline of their strategic objectives from the start and how these link to the Government’s priorities. The review said that only options with a “strong strategic case” would now enter the BCR stage of the process. The result of the BCR might therefore be less critical to whether the project is approved. For example, a project with a low BCR could go ahead if it were the best option to achieve a particular objective. Conversely, an option with a very favourable BCR would not be approved if it did not address strategic objectives.

The review also described steps that the Government was taking to improve the quality of submissions. For example, it stated that the Government had put in place:

  • a stronger review process at each stage of a proposal, provided by both HM Treasury and specialist reviewers in government departments;
  • more training and support for those submitting projects for appraisal; and
  • greater emphasis on project evaluation, to help understand “what works”.

The review said these changes would turn the book into “a vital tool for progressing the Government’s priority outcomes and wider public value agenda”. It added they would take place against the background of planned increases in investment and infrastructure spending.

What is changing on environmental impact?

The new green book requires all projects to consider their impacts on carbon emissions, whether or not they directly target the net zero objective. It also provides further guidance on how emissions should be assessed.

The Government has also developed guidance on accounting for climate change and the value of the environment for people and the economy (the “natural capital approach”). The new green book references these, as well as providing further guidance on valuing projects’ impacts on the natural environment, accounting for natural capital stocks and valuing costs and benefits that cannot be measured in monetary terms.

The book also refers to the Government’s net zero review’s final report, stating that it would “set out a framework for considering the appropriate policy levers to use in different situations and to manage impacts on households, businesses and sectors”. On 19 October 2021, HM Treasury published the final report.

What is changing on measuring future costs and benefits?

The green book sets out a framework for measuring costs and benefits that arise in the future and comparing them with those that arise today. To achieve this, costs and benefits in future years are converted to a value in today’s money. This is known as a ‘present value’ calculation. It requires a discount rate to be applied to future benefits and costs.

The effect of discounting is to give preference to present benefits over future benefits. This reflects the view that people generally prefer to receive goods and services now rather than later. The green book applies a standard discount rate of 3.5% per annum to future benefits and costs. However, a reduced rate of 1.5% per annum applies to policies that impact health or life outcomes. This means that future health and life benefits are not reduced by as much as other future benefits when performing BCRs.

HM Treasury has previously recognised the standard discounting technique may not be appropriate for projects with long time effects, such as those addressing climate change. It said these raise “fundamental ethical issues concerning the responsibility of the current generation to future generations”. For example, it argued that environmental damage might lead to “irreversible wealth transfers from the future to the present”. Because of this, for periods over 30 years a reduced discount rate already applied in the previous green book. In addition, slightly lower standard and reduced rates (3% and 1% respectively) can be used to conduct a “sensitivity analysis” for environmental projects that affect future generations.

However, the 2020 green book review was concerned that such adjustments still do not adequately allow for environmental effects. It therefore announced a further review of discount rates in BCRs that would involve external experts.

In September 2021, HM Treasury published the conclusion of its discount rate review. Following consultation with “leading economic experts”, the review concluded that the green book should not change the discount rate for environmental impacts. It argued that “this was deemed to be an imprecise way of accounting for effects such as lack of substitutability and increasing scarcity in the environment”. Instead, the review argued that more effort should go into making forecasts of future environmental benefits and costs more accurate. It said:

In particular, the academics favoured improved valuation for environmental impacts and updating these estimates to reflect latest evidence. A key example of this is supplementary guidance to the green book on the valuation of greenhouse gas impacts developed by the Department for Business, Energy and Industrial Strategy (BEIS). In September 2021, BEIS published updated values for the impact of greenhouse gas emissions, to reflect latest evidence and the UK’s net zero target. Reflecting these updates in appraisal leads to an increase in the cost estimates resulting from increased emissions.

What has been said about the changes to the green book?

In December 2020, as part of its inquiry into the Spending Review 2020, the House of Commons Treasury Committee issued a call for evidence on changes to the green book. The committee received both oral and written evidence in response to its request. In May 2021, its chair, Mel Stride (Conservative MP for Central Devon), wrote to Treasury Permanent Secretary Tom Scholar about the committee’s findings.

Summarising the evidence his committee had received, Mr Stride said that the changes to the green book have been “largely welcomed”. He especially noted the movement away from the use of a BCR towards a wider consideration of place-based impacts. However, Mr Stride also highlighted several points that focused on the changes aimed at supporting the Government’s objectives regarding levelling up and reaching net zero. As a result, he posed ten questions to the Government, including:

  • When will the methodology for assessing environmental benefits under the green book be finalised?
  • Does the Government plan to incorporate net zero as a core element of the green book appraisal framework, and to include net zero-related criteria in the options appraisal? If so, when?
  • How will the Government undertake rigorous monitoring and evaluation to determine the effectiveness of cost benefit analysis (CBA) and cost effectiveness analysis (CEA) appraisal frameworks, to guard against any risk that CBA and CEA do not take into account fully the benefits of environment projects which are difficult to measure?

Mr Scholar outlined the Government’s response in a letter dated 4 June 2021. Focusing on the questions relating to environmental appraisal and net zero, he said that achieving net zero “is both a policy objective and a legal requirement”. As a result, he said that:

In the green book, it is therefore viewed as a constraint on all proposals and an objective for relevant proposals when considering the strategic case. Additionally, any environmental costs and benefits should be included as part of the economic case.

He also said that the methodology for assessing environmental costs and benefits in appraisal under the green book “will always to some extent be ‘work in progress’ as we look to incorporate the latest best practice”. In addition, he noted that, alongside the review of the discount rates described above, the Government was:

  • updating the green book supplementary guidance on the valuation of energy use and greenhouse gas emissions on an annual basis;
  • working on producing guidance on biodiversity valuation; and
  • committed to concluding a review with academic experts into the application of the social time preference rate to environmental impacts this year and incorporating any changes in the green book.

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Cover image by Mikael Kristenson on Unsplash.