Reaching net-zero will be much cheaper for the UK government than previously expected – and the economic damages of unmitigated climate change far more severe.
These are two key conclusions from the latest report on risks to the government finances from the independent Office for Budget Responsibility (OBR), which includes a chapter on climate change.
The new OBR report shows very clearly that the cost of cutting emissions to net-zero is significantly smaller than the economic damages of failing to act.
Here are four key charts from the OBR report.
Climate damages could reach 8% of GDP by 2070s
The UK could take an 8% hit to its economy by the early 2070s, if the world warms by 3C this century, according to the new OBR report.
(This aspect of the OBR report has been picked up in a Reuters headline: “Global 3C warming would hurt UK economy much more than previously predicted, OBR says.”)
Its latest estimate (blue line) of the impact of “climate-related damages” by the 2070s is three percentage points (60%) higher than thought just last year (yellow), as shown in the figure below.
The OBR says that the increase in its estimate of climate damages is due to using a “more comprehensive and up-to-date analysis”.
(The world is currently on track to warm by only slightly less than 3C this century.)
Unchecked damages could double hit to borrowing
The impact of climate damages on government borrowing would be nearly twice as high by the 2070s, if global warming goes unchecked and reaches 3C, according to the OBR report.
This is shown in the figure below, which compares additional government borrowing each year, as a share of GDP, if warming is limited to less than 2C this century (left) or if it climbs to 3C (right).
The OBR explains that the largest impact of climate damages on government borrowing is “lower productivity and employment and, therefore, lower tax receipts”.
Cost of net-zero halved
When it comes to cutting UK emissions, the OBR says the government will only need to invest just over half as much on reaching net-zero, compared with what it expected four years earlier.
This is shown in the figure below, with the latest 2025 estimate (right) showing a cumulative government investment of 6% of GDP across the 25 years to 2050, down from 11% (left).
(Note that the large majority of “lost government receipts”, shown in yellow in the figure below, are due to fuel duty evaporating as drivers shift to electric vehicles. As the OBR notes, the government could choose to recoup these losses via other types of motoring taxes.)
The OBR takes its estimates of the costs and benefits of cutting emissions to net-zero from the government’s Climate Change Committee (CCC). The CCC recently issued significantly lower estimates for net-zero investment costs, due to more rapidly falling clean-technology costs.
Acknowledging this shift, the OBR says the latest CCC estimates on the cost of reaching net-zero are “significantly lower” than earlier figures.
It notes that the net cost to the economy of reaching net-zero emissions by 2050 is now put at £116bn over 25 years, some £204bn lower than previously expected.
In very rough terms, this figure – which excludes health co-benefits due to cutting emissions and avoided climate damages – is equivalent to less than £70 per person per year.
Cost of action far lower than cost of inaction
Taken together, the OBR findings show more clearly than ever before that the cost of taking action to tackle climate change would be far lower than the cost of unchecked warming.
For the first time, its latest report combines the estimated cost of cutting emissions with the expected damages due to rising temperatures in a single figure, shown below.
The comparison illustrates that climate damages (blue bars in the chart) are set to impose severe costs on the UK public finances, even if warming is limited to less than 2C this century (left).
The OBR also shows how the cost of government investment in cutting emissions (yellow) is both temporary and relatively small in comparison to climate damages.
Moreover, it highlights how unchecked warming of 3C this century (right) would impose far higher climate damages on the UK government’s finances than if global temperatures are kept in check.
Specifically, global action to limit warming to 2C instead of 3C could prevent more than 1 percentage point of climate damages being added to annual government borrowing by the 2070s.
In contrast, the combined estimated cost to government of action to cut emissions never exceeds 0.6 percentage points – even if lost receipts due to fuel duty are not replaced (green).
Beyond these new numbers, the OBR acknowledges that it still does not include the cost of adapting to climate change, or the impact this could have on reducing damages.
Nor does it consider the potential for accelerated transitions towards clean energy, technological advances that make this shift cheaper or the risk of tipping points, which could cause “large and irreversible changes” to the global climate.
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