Tomorrow's Budget is a critical test of the consistency and credibility of the Government's policies on climate change. The Government has accepted the overwhelming arguments for reducing our emissions of greenhouse gases by at least 80 per cent, compared with 1990, in the next 40 years.

But recent decisions - such as approving Heathrow's third runway and a relatively weak green component of the fiscal boost - undermine confidence in the UK's ability to meet its climate change target. It is vital that the Government shows it is credible on the environment.

In November the UK's Climate Change Act became the first piece of domestic legislation anywhere in the world to create binding targets for lowering emissions of greenhouse gases. It also created the Committee on Climate Change, an independent institution, reporting to Parliament, that will monitor and advise on progress. The Government has also launched a “low-carbon growth strategy” and a consultation on heat and energy savings. These are sound foundations, but do not yet add up to a clear and strong programme of action to meet our targets. Nor do they give the clear and strong signals that industry and the public need to guide their own investments and commitments.

A price on carbon will be crucial if people are to be faced with the true costs of their actions. Public investment, financial support for poorer households and regulations will all be necessary too. The Government should make clear that consumers and taxpayers will pay higher prices and taxes in the coming decade, particularly for energy, flying and driving. All political parties must be honest about it. The Government cannot shirk the costs of action and the Opposition cannot point-score by attacking or denying the extra costs and prices that are involved.

Energy efficiency should be central to the UK's strategy for reducing emissions, by increasing and improving the insulation of lofts and walls, and the installation of new boilers and double-glazing. The Budget should recognise that homes and businesses will require substantial financial help with the costs.

On electricity and heat generation, renewable sources, such as wind and solar, are likely to be more expensive than the alternatives from oil, gas and coal, at least until carbon prices increase and the prices of fossil fuels rise again. Funding for investment in renewable energy has come under great pressure during the credit crunch. The Budget should recognise that substantial public and private expenditure will be required to accelerate research, development and deployment of renewables.

By 2016 a quarter of our electricity-generation capacity must be replaced, much of it as a result of retiring coal-fired stations. We should not build new coal-fired stations, at Kingsnorth or anywhere else, unless these are fully equipped, by the early 2020s at the latest, with technology that captures and stores carbon dioxide instead of releasing it into the atmosphere. Commercialisation of carbon capture and storage is at an early stage, so strong financial support from the Government is required. The Budget must contain measures to accelerate the development of this technology. China, India and others will use coal as their economies grow and we cannot urge them to use “clean coal” if we do not move strongly ourselves.

Serious investment in public transport must be at the heart of a coherent climate policy. Investment in electric cars for the mass market, powered by low-carbon electricity, will have to be substantial. The Budget should provide further details of how the Government will invest in public transport and achieve its ambition of making the UK a leader in the use and manufacture of electric cars. In the shorter term, earlier scrappage of old cars might make some contribution, but only if it is clear that the emissions saved through removing less efficient vehicles offset those from making more new cars.

The cost of these steps towards a low-carbon economy will not be small. The Committee on Climate Change estimated up to 1 per cent of GDP in 2020, or £15 billion a year, to fulfil UK targets for emissions reductions. We should probably be allowing for up to £20 billion per year, perhaps more, split between direct price increases and public expenditure during the next few years, which should be a period of intensive investment in making the transition to a low-carbon economy. If half of this comes from public expenditure it would represent about 0.7 per cent of current UK GDP, or 1.5 per cent of public expenditure. These significant sums are manageable. The medium-term fiscal strategy, which will inevitably be tough, must make allowance for these costs.

These investments will have strong returns beyond the radical reduction in climate risks. They will also create the engine of growth of the next few decades: low-carbon technology. The potential markets for electric cars, wind and solar power generation and improved public transport, for example, could be very large. This can and must be a recovery that lays strong foundations for jobs and opportunities, and not one that sows the seeds of the next bubble or that reverts to high-carbon activities with no future. And a low-carbon economy will be very attractive: cleaner, quieter, more energy-secure and more biodiverse.

But the Budget can succeed in accelerating action on climate change only if the rest of government policy is consistent. For example, big transport decisions, such as the third runway at Heathrow, should be taken only if they make sense in the context of a coherent carbon and transport policy for the UK, and, preferably, for Europe as a whole. I would be surprised if the construction of a third runway at Heathrow passed that test, which will be applied by the Committee on Climate Change by the end of this year. The runway decision should not have been taken before the committee's examination.

This is the last Budget before the UN Climate Change Conference in Copenhagen in December and the first to be accompanied by parallel carbon budgets. It seems likely that the Government will announce targets for cutting emissions by 34 per cent by 2020, compared with 1990. But the Government's credibility on the environment will turn on its strong commitment to invest heavily in cleaner power; giving powerful support to community and private action on energy efficiency; finding sums in the order of £0.5-£1 billion for the global fight against deforestation; a transport policy that reduces emissions; and a public expenditure programme of several billions per annum over the next ten years that accommodates these costs.

The Government's commitment to both the environment and a strong economy requires both large investments and consistent policies that guide businesses and consumers towards a prosperous, low-carbon future.

Lord Stern of Brentford is chairman of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics. He is also author of A Blueprint for a Safer Planet

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