Net Zero Assessment - Scottish Budget 2025-2026: taxonomy methodology note

Note on Climate Change Taxonomy Methodology

Context

1. Through the Joint Budget Review, the Scottish Government and Parliament agreed to the development of an enhanced taxonomy to provide a carbon assessment identifying and categorising the emissions impacts of all spending lines in the budget cycle. This paper provides an overview of the methodology used to develop the Climate Change Taxonomy.

Budget Climate Change Taxonomy approach

2. A taxonomy is an approach which assigns data into different groups or categories according to characteristics of that data which are relevant to the assessment. The main benefit of using a taxonomy for the Budget is that it allows for a relatively rapid assessment of the highly complex Budget data under a tight timescale. This is a necessary feature because the full Budget information is usually only complete and available two to three days prior to Budget publication.

3. A taxonomy-based assessment, based on 2015 work for Scotland’s Low Carbon Infrastructure Taskforce, was initially used to assess the capital elements of the Scottish Budget between 2018-19 and 2023-24. From Budget 2024-25 the assessment process was reviewed and improved and its scope extended to include resource expenditure. Further improvements to the process have been made for the 2025-26 Budget.

4. The Climate Change Taxonomy assessment of the 2025-26 Scottish Budget provides a standardised approach to the classification of both resource and capital budget expenditure lines relative to their climate impact. The Taxonomy approach classifies expenditure lines across two dimensions, Alignment and Impact:

• Alignment: this identifies if the spend line is positively aligned with the Scottish Government climate outcomes, is neutral, or is negatively aligned.
• Impact: the scale of impact on Scottish Government climate objectives are rated against a high-low measure.

This approach is described in more detail below.

Scope

5. The Budget is structured into 4 levels of increasing detail. These are;

Portfolio- A portfolio represents each Cabinet Secretary’s area of responsibility.

Level 2- Level 2s represent top level commitments or spending to a given body.

Level 3- Level 3s cover the team level expenditures.

Level 4- Level 4s represent individual programmes of spend.

6. The Budget Taxonomy process is undertaken at the most granular level of expenditure data available, known as level four. The level four lines represent planned expenditure across a range of projects and activities with varying climate alignment and impact and about which the full detail may be unavailable at the time of the Taxonomy assessment. There were over 500 level 4 budget lines in Budget 2025-26.

7. The Budget Taxonomy is an assessment of planned expenditure included in the draft Budget which is categorised either as Fiscal Resource or as Capital. Other expenditure categories are not included within scope of the Taxonomy, specifically: Non-Cash; Financial Transactions; and UK-Funded Annually Managed Expenditure.

8. Also excluded from the scope of the Taxonomy assessment is expenditure assigned to local authorities as part of their block grant or other non-specific allocations. Information on how this funding will be spent is not available at the time of the draft Budget. Overall, the excluded local authority funding is £10.5bn or 19% of the total net Resource and Capital budget.

9. The Taxonomy assessment is conducted on the draft Budget and as a consequence does not include any changes made to the final Budget nor does it reflect the impact of any in-year changes made to expenditure allocations.

Process

10. The 2025-26 Budget Taxonomy involved four key stages:

I. September - October: Rating of the 2024-25 Budget to create an initial taxonomy dataset;

II. Week prior to the Budget: Matching final 2025-26 Budget lines to pre-assessed 2024-25 budget lines;

III. Week prior to the Budget: Evaluating new budget lines;

IV. Immediately prior to Budget: summary analysis, quality assurance and write up.

These four stages are described in more detail below.

11. To undertake these tasks, a review panel was formed comprising six officials with a range of expertise from across Scottish Government. The role of the group was to review each expenditure line of the Budget and to agree for each one a taxonomic rating for climate mitigation, for climate adaptation and an overall rating. The review panel built on the process used in previous Budgets when the Taxonomy had largely been conducted by one person. The formation of the review panel enabled further discussion and moderation of the assessment of budget lines.

a. Rating of the 2024-25 Budget to create an initial Taxonomy Dataset

12. The Taxonomy Dataset process started with an assessment of the 2024-25 budget. Given that most budget lines carry over in various forms from one budget to the next, using the previous year’s Budget in this way allowed the review panel to conduct the bulk of the Taxonomy assessment during September and October, well in advance of the 2025-26 Budget process, and thereby limited the amount of analysis that needed to be undertaken in the final days immediately prior to publication.

13. The review panel assessed each expenditure line (575 in total) on both a mitigation and an adaptation basis, giving an Alignment and Impact rating for each. Where the panel had a variety of views with no single majority view, then a single rating for both climate mitigation and adaptation was agreed through a moderation discussion. An overall rating for each line, covering Alignment and Impact, was derived based on the view of the moderation panel as to which was most significant.

14. In assessing the 2024-25 Budget, the review panel in some cases gave a different rating to expenditure lines compared to the previous year. In total 40 lines were given a different assessment.

15. 19 lines moved from neutral to positive and 2 to negative. 16 positive lines were reclassified (8 to high impact, 5 to neutral and 3 to low impact). 3 negative lines were reclassified (1 to high impact, 1 to low impact and 1 to neutral). The net result is that positive high impact lines gained 8 lines, positive low impact gained 6 lines, neutral lost 15 lines and negative high gained 1 line. There was no net change to the number of negative low lines.

b. Matching final 2025-26 Budget lines to pre-assessed 2024-25 Budget lines

16. Once the final 2025-26 Budget was compiled, each spending line was allocated a Taxonomy classification. This was done by matching the spend lines in the 2025-26 Budget to those from the Taxonomy Dataset which had been pre-assessed in step ‘a’. This was done through a semi-automated process in which each level four expenditure line was automatically matched by matching criteria before being manually validated.

17. Any 2025-26 Budget line which did not have a corresponding matching 2024-25 Budget line in the Taxonomy Dataset was then processed as part of the next stage of the Budget process (71 new Budget lines in total). A total of 90 lines from the 2024-25 Budget lines no longer appeared in the 2025-26 Budget.

c. Evaluating new Budget lines

18. The 71 newlines in the 2025-26 Budget were provided a Taxonomy classification through an equivalent process to that used in the Taxonomy Dataset (step a). Each new budget line was provided a classification by the lead analyst which was then validated by at least one other member of the review panel. More significant lines received additional scrutiny depending on the time available.

d. Summary analysis, quality assurance and write-up

19. Once the full and final 2025-26 Budget was assessed, the data was summarised, for example to produce results aggregated by category and headline totals.

20. The dataset was subject to a thorough quality assurance process by two separate analysts and the totals matched against those in the main Budget documents.

21. The aggregated totals and other results of interest were then incorporated into the narrative text that was published alongside the Budget.

Interpretation/strengths/limitations

22. The Scottish Budget is complex and its climate assessment needs to be conducted rapidly in advance of the Budget being published. The Taxonomy approach is well-suited to this environment as it allows a large amount of information to be assessed and processed relatively quickly.

23. The limitations inherent in taxonomy approaches are well recognised, for example in reports for Scottish Government by University of Edinburgh Business School and by Fraser of Allander Institute. In particular, some key limitations include:

• Individual Budget level 4s can fund a number of projects and policies each with varying impacts on emissions;
• The Taxonomy provides a broad assessment of the expected scale of impact (i.e. high or low) but cannot quantify emissions;
• The Taxonomy cannot take account of the duration of impact (e.g. some expenditure may have an impact only during the Budget year, other expenditure may have a lasting impact);
• The assessment is based on the judgement of a small group of experts.

24. Nevertheless, the enhanced Climate Change Taxonomy allows a consistent approach to identifying and categorising the emissions impacts of all spending lines in the budget cycle.