The Environment Strategy for Scotland: Delivering the Environment Strategy Outcome on Scotland's Economy - Evidence Base & Policy Levers

1. Executive Summary

The world faces unprecedented crises of climate breakdown and biodiversity loss, driven by the ways in which our economies have developed. Limiting global heating and its impacts will require a rapid and systematic reduction of the greenhouse gas emissions of all parts of our economies. Creating a nature positive world, where biodiversity loss is halted and reversed, will require substantial changes to the aspects of our economies that are currently putting unsustainable pressure on nature. Circular economy approaches remain underused, with many economic sectors continuing to operate linear, extractive models that deplete our finite natural resources. The prevailing economic model, with its focus on growth and GDP as measures of success, has not adequately responded to these challenges. A change in approach to prioritise more meaningful measures such as wellbeing is long overdue.

In its 2023 Global Risks Report, the World Economic Forum warned that the four most severe risks facing humanity over the next decade are environmental, including climate change and biodiversity loss.[1] The intergovernmental science bodies on climate and nature advise that tackling these crises will rely on urgent, transformative economic and societal change, particularly in developed countries.[2] The Environment Strategy for Scotland sets out the Scottish Government’s commitment to ensuring Scotland plays its full role in tackling the climate and nature emergencies. It acknowledges that this will require transformative changes across Scotland’s economy and society. In turn, these transformations can help to ‘transform Scotland for the better’ by improving people’s health and wellbeing, tackling inequalities, and supporting new opportunities for green jobs and businesses.

This research project was undertaken to support the evidence base for informing the development of a ‘pathway’ for achieving one of the outcomes of Scotland’s Environment Strategy, looking at the transformations in Scotland’s economy needed to play its part in tackling the global climate and nature emergencies. This pathway, and the content of the research, focuses on the functioning of the domestic economy within Scotland and the features and functions of key sectors of the Scottish economy.[3] The ‘economy’ outcome within the strategy focuses, in particular, on the goal of a just transition to a net zero, nature positive, circular economy. This outcome directly aligns with the National Strategy for Economic Transformation’s ambition for a ‘greener economy’. It is also integral to the Scottish Government’s vision for a wellbeing economy,[4] defined as an economic system, within safe environmental limits, which serves and prioritises the collective wellbeing of current and future generations. The Scottish Government’s Programme for Government (2023-24) describes a wellbeing economy as “an economy which meets the needs and aspirations of people and provides opportunities for all”, and commits to “use every lever at its disposal to deliver a wellbeing economy that is fair, green and growing”.

Section A of the report begins with an assessment of current progress in Scotland towards a net zero, nature positive, circular economy. In summary:

• In the transition to net zero, Scotland has set ambitious targets and has made some progress in sectors such as electricity generation, but many other key sectors require a faster pace of emissions reduction to meet 2030 and 2045 milestones. These areas for further action include emissions from buildings, car transport, aviation, low-carbon agriculture, peatland restoration, tree planting, industry and engineered removals.
• Progress towards a nature positive economy cannot be assessed with the same precision, but broad indicators of biodiversity and the economic factors driving its loss can be assessed. Scotland’s biodiversity intactness is among the bottom 25% globally and its land and freshwater species abundance declined by 15% between 1994 and 2020. While some improvements have been observed in forest cover, air pollution levels and the tentative recovery of some commercial fish stocks, economic factors including the intensification of agriculture and overexploitation of fish stocks have harmed biodiversity over the past several decades. Two other direct drivers of biodiversity loss, climate change and invasive non-native species, are increasing and working in synergy. The combined evidence available suggests that a significant transformation across many sectors will be needed to achieve a nature positive economy in Scotland.
• Scotland’s economy was estimated to be 1.3% circular in terms of its resource use in 2022, below the level of circularity estimated for the global economy (8.6%) and the leading economy, the Netherlands (24.5%). Waste management and reduction targets are ambitious, but further system change will be needed to meet them and to reduce the per capita rate of domestic resource extraction to match other similar economies and ultimately to reach sustainable levels.

Section A continues with a review of the Scottish Government’s existing use of the available policy levers for driving the just transition to a net zero, nature positive, circular economy. This finds that, although there have been pockets of success, overall progress has been limited on creating a nature positive and a circular economy, where bold targets have been set but the necessary legislation, policies and implementation are still in train. On net zero economy, the Climate Change Committee advises that the levers currently in place are not yet sufficient to meet climate targets, particularly in sectors like transport, agriculture and domestic heating. Our analysis shows that public investment is the most effective lever in the Government’s toolkit, particularly when deployed with the express aim to leverage greater levels of private finance, but that levels of public investment will need to increase. Private investment will also be needed to transform the economy but will need to be considered carefully and applied where it is most appropriate to ensure it is compatible with a just transition. There has been limited impact and effectiveness from Scotland’s current use of some other economic policy levers such as tax, regulation and public procurement. This is explained partly by the fact that key regulatory and tax powers are reserved to the UK Government (UKG hereafter) and challenges in implementing diverging regulations in areas such as the Future Homes Standard and the deposit return scheme. Action at the UKG level will be needed in alignment with renewed ambition in the use of devolved powers.

In Section B, a Theory of Change approach is undertaken to map out the key intermediate outcomes on the pathway to a net zero, nature positive, circular economy, and to identify how existing policy levers could go further, or new policy levers could be adopted, to steer the economy of Scotland onto a more direct path to achieving these goals. Two Theory of Change diagrams, which draw on key net zero research from the Climate Change Committee and the international literature on best practice for nature positive economies, illustrate the wide variety of outcomes and levers required to progress towards long-term net zero and nature positive goals.[5]

Finally, Section C makes extensive recommendations for how the set of available policy levers can be applied more effectively to move towards a net zero, nature positive, circular economy. These can be found in full on pages 95-118 presented by type of lever and economic sector. For illustrative purposes, broad areas addressed within the recommendations include:

Net zero economy:

• Electricity: maximising the social value (e.g. jobs and local supply chains) from private investment in renewables; scaling up development of community energy projects; and advocating to UKG for improved electricity market design.
• Buildings: supporting the Heat in Buildings Strategy through public investment, delivery plans and legislation; extending the policy focus to include non fuel-poor households; and adopting an area-based approach, centred on communities and local authorities.
• Transport: strengthening measures to promote reduced car-use, including re-prioritising transport spend towards public transport and 20 minute neighbourhoods; franchising public transport and delivering an integrated nationwide fare structure; accelerating introduction of road user demand management schemes; and providing transition support ahead of LEZ enforcement. Additionally, strengthening measures to reduce aviation and shipping emissions, including adopting a 2030 aviation demand reduction target; using powers under the Air Departure Tax to disincentivise unnecessary air travel in a just way; and investing in shipping decarbonisation.
• Industry: working to secure increased funding for decarbonisation through the UKG’s cluster approach; focusing on immediate actions to promote energy and resource efficiency, fuel switching and low-carbon materials, alongside longer-term goals on hydrogen and carbon capture; and implementing whole life carbon policies in construction.

Nature positive economy:

Increasing public funding for nature conservation and restoration and using public investment and regulatory levers to support the transition to regenerative land and marine-based industries:

• Agriculture: ensuring post-CAP payments are heavily conditional on nature positive activities (not just reduction of biodiversity impact); and undertaking a national land use assessment to explore the optimal mix of land uses for meeting nature positive, net zero and sustainable food production goals.
• Forestry: increasing Forestry and Land Scotland funding to accelerate land acquisition for forestry and nature restoration; and increasing support to community-led forestry projects.
• Fisheries : reviewing the biodiversity impact of subsidies; increasing public investment in Marine Protected Areas; and implementing increased spatial restrictions on bottom-contact fishing across a wider area of Scotland’s seas.
• Aquaculture: strengthening evidence on the biodiversity impacts of the sector and directing funding to lower-impact forms of aquaculture.
• In addition, the report includes recommendations on how the following wider policy levers can be used to drive progress towards a nature positive economy:
• Mainstreaming biodiversity, including in national measures of success: introducing mechanisms for mainstreaming biodiversity across SG policies (e.g. via Natural Environment Bill targets and cross-portfolio coordination and monitoring); applying green budgeting approaches to understand and improve the biodiversity impacts of SG budget decisions; and continuing to improve the N atural C apital A sset I ndex as a National Performance Framework indicator.
• Taxation: exploring options for taxes on pesticides and fertilisers to reduce their use in agriculture, forestry and aquaculture.
• Private finance: generating a clearer picture of i) the finance gap for nature investment, ii) the range of funding options for addressing this gap (including from taxation) and iii) the scenarios where private investment is more or less suitable; ensuring private investment is governed by binding criteria for social and environmental benefit; and that blended finance is subject to public scrutiny.
• Business disclosures and financial regulation: including nature positive economy in the missions of the Scottish National Investment Bank (SNIB); promoting voluntary disclosure of nature-related risks and impacts by businesses; and working with UKG to explore regulatory options.

Circular economy:

• Fully integrating Scotland’s climate change plans with the upcoming circular economy strategy to ensure targets, policies, governance and delivery are aligned, including on consumption-based emissions.
• Adopting a net zero-style governance approach to meeting circular economy outcomes by requiring and tracking contributions from different SG portfolios.
• Signalling intent by setting a clear target for reduction of per capita material use and intensity.
• Advocating to UKG for fiscal incentives (e.g. tax breaks) for businesses to reduce their material footprint by investing in circular product and process standards.
• Exploring incentives for consumers and businesses to promote the product-as-service model.
• Exploring how Extended Producer Responsibility, which exists in sectors such as plastic packaging, could be extended to the textile sector.

Cross-cutting policy levers:

The report also sets out recommendations for using a range of cross-cutting policy levers for achieving net zero, nature positive and circular economy goals. For example:

• Skills and advice: producing a 10 year timeline with actions for meeting the skills needs for a net zero, nature positive, circular economy; working with all relevant agencies (including Skills Development Scotland, the Scottish Funding Council and the Scottish Cities Alliance) to address skills needs in specific sectors; encouraging more students into STEM subjects throughout primary and secondary education; and providing careers advice on the green economy.
• Innovation and R&D: setting a prioritised framework to signal to business and research institutions the strategic areas in which the SG will support and encourage new R&D, with a focus on net zero, nature positive and circular economy goals; and ensuring increased support is available for businesses investing in first-mover innovation (overcoming the challenges of path dependency).
• Development planning: assessing opportunities for local authorities to take a more proactive role in planning and developing places that support net zero, nature positive and circular economy goals e.g. via Compulsory Purchase Order powers, SNIB funding, and legislative changes to enable the public to capture more land value uplift from development.
• Procurement: switching food procurement to vegetarian across SG catering; implementing a plan to increase the proportion of circular economy suppliers to SG; assessing the potential to procure from product-as-service systems; and developing new contracting guidance for public procurement to support net zero, nature positive and circular economy goals, including for transport and buildings.
• Consumer information: considering options for food labelling schemes to inform consumers on the emissions and nature impact of foods; and continuing to work with sectoral organisations to improve consistency of practice and labelling on shelf-life.

Finally, the report reflects on how the wider economic model and policy framework affects Scotland’s ability to achieve the just transition to a net zero, nature positive, circular economy. Broad recommendations arising from this discussion include:

• Shifting to an economic system that is growth-agnostic, targeting improvements in wellbeing rather than GDP.
• Recognising that, while the just transition to a net zero, nature positive, circular economy creates many economic opportunities, it will not be sufficient to focus only on the subset of green interventions that are profitable – a truly sustainable economy is one that consciously limits its demands on nature to ensure they do not exceed what nature can sustainably supply.
• Exploring policy options that more fully incorporate nature and climate-related costs and benefits into economic decision-making (as addressed in some of this report’s recommendations).
• Carefully considering the roles of public and private delivery models in order to ensure a just transition – recognising that an approach based predominantly on promoting private investment risks directing both the decision-making power over what kind of transition occurs, and the financial returns from the subsequent investments, to a small number of investors rather than the public at large.

The full list of recommendations provides our assessment, based on evidence of best practice elsewhere and the approaches available, of directions the Scottish Government should take when seeking to align its economic policy for a just transition at the scale required to address the nature and climate crises it faces. The process of transforming the economy to decarbonise, restore biodiversity and maximise circular material flows presents an opportunity to put wellbeing first, to create a wide range of co-benefits from health to employment, and to bring Scotland onto a sustainable path for the long term.