For years, the mandate of HM Treasury has been clear: growth, fiscal stability and the stewardship of the UK economy. But as the climate crisis moves from the periphery to the very heart of macroeconomic risk, a fundamental question is being asked in Westminster: is the Treasury’s current economic framework actually compatible with a net-zero future?
On 17 April 2026, the Environmental Audit Committee (EAC) officially launched a landmark inquiry, “HM Treasury and the Economics of Climate and Nature”, to find out.
Fiscal Rules vs Green Investment
At the centre of this inquiry is the perceived friction between the Treasury’s strict fiscal rules and the massive capital injection required for the energy transition. While the Government is legally committed to a “climate-resilient, nature-positive and net-zero economy”, the EAC is questioning whether the “economic heart of government” is providing the necessary arteries for funding.
The inquiry comes at a time when critics argue that the Treasury’s focus on public sector net debt (PSND) creates an “anti-investment bias”. For instance, recent analysis from the Green Alliance suggests that the current fiscal framework ignores the long-term returns of green capital. They estimate that every £1 invested in peatland restoration delivers £4.60 back in benefits such as carbon sequestration and cleaner air. Yet, under current Treasury rules, these long-term gains are often sidelined in favour of short-term spending limits.
Toby Perkins MP, Chair of the EAC, noted during the launch that without funding and support from the economic heart of government, major initiatives such as species protection and the net-zero transition will falter.
The Dasgupta Factor
The inquiry also seeks to measure progress on the Dasgupta Review, a seminal study commissioned by the Treasury which argued our economy is “embedded” within nature, not external to it. MPs will explore to what extent the Environmental Principles Policy Statement is actually applied when the Chancellor sits down to draft a Budget or a Spending Review.
A key case in point is the recent update to the Green Book, the Treasury’s central guidance on project appraisal. While it now explicitly incorporates “natural capital” and the “polluter pays” principle, the EAC wants to know if these changes are influencing real-world decisions. For example, when evaluating a major new transport hub, does the Treasury sufficiently value the “ecosystem services” lost, or is the decision still driven primarily by traditional GDP-growth metrics?
Key areas the inquiry will scrutinise include:
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Fiscal Constraints: Whether current debt-to-GDP targets are preventing the “front-loading” of investment needed to avoid more expensive climate shocks later.
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Risk Assessment: How effectively the Treasury identifies the fiscal risks of biodiversity loss. The Office for Budget Responsibility (OBR) has already warned that delaying firm action until 2030 could see public debt rise by 23 per cent more by 2050 than if early investment were forthcoming.
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Growth Agenda: Whether ministers truly view environmental sustainability as a driver for the UK’s growth, rather than a cost centre.
Strengthening Corporate Resilience and Capital Allocation
Treasury departments in the private sector are already navigating the complexities of ESG-linked financing and green bonds. However, the efficacy of these private-market instruments is often tied to government policy and green tax incentives.
Consider the “first mover” advantage in green technology. If the Treasury fails to provide a stable, long-term subsidy regime, as seen in the past with the frequent changes to renewables support and the cancellation of carbon capture funding, the cost of capital for private firms increases due to policy uncertainty.
If the EAC finds that the Treasury’s internal models are undermining its own environmental aims, we could see a radical shift in how public money is appraised. This could lead to a significant overhaul of green subsidies or the introduction of more robust carbon valuation in public procurement.
As liquidity management and strategic risk planning become increasingly inseparable from climate volatility, the outcome of this inquiry will set the tone for the UK’s economic landscape for the next decade.