Select Committee on Environmental Audit Third Report


Environmental Transformation Fund


39. One of the four headline environmental announcements in the PBR was the creation of "an Environmental Transformation Fund of £1.2 billion over the CSR07 [2008-11] period".[55] The Environmental Transformation Fund (ETF) was originally announced by the then Secretary of State for Environment, Food and Rural Affairs in June 2006. At the time he outlined the purpose of the ETF as follows:

We believe there is a major opportunity for the UK not just to invest in renewable energy, other non nuclear low carbon technologies and energy efficiency, but also to build successful businesses in these fields. The new Environmental Transformation Fund will grasp this opportunity.[56]

The 2007 PBR clarified that the ETF would be split between a domestic fund for low carbon technology in the UK, and an international fund (the 'ETF-International Window') for forestry protection and low carbon investments in the developing world. Over three years, £370m will be spent on domestic projects, with £800m being spent on projects in developing countries.

ENVIRONMENTAL TRANSFORMATION FUND: THE DOMESTIC ELEMENT

40. The PBR explains that the domestic ETF will be jointly administered by Defra and BERR, with Defra contributing £170 million and BERR £200 million. A further breakdown of these figures reveals that Defra's contribution "consists of £41m of existing commitments, together with an uplift of £129m over the three years of the CSR period", while BERR's funding "consists of £126m expected spend on existing commitments together with an uplift of £41m over the CSR period."[57] In other words, of the £370m over three years, only £170m is new money.

41. This is a relatively modest amount, especially considering that the Stern Review had recommended a doubling of public R&D funding for the energy sector alone.[58] It is all the more disappointing given that when the then Environment Secretary made the initial announcement of the ETF, he simultaneously announced the proportion of carbon allowances that would be auctioned in Phase II (2008-12) of the EU Emissions Trading Scheme. This prompted many people to assume that the ETF would be at least part-funded by the proceeds of the auction. When we took evidence from the then Environment Minister in December 2006, he certainly indicated that it was being strongly considered: "If the proceeds are recycled towards the Environmental Transformation Fund that is being considered, then we would greatly welcome auctioning, and progressively higher auctioning, carefully managed, could generate significant investment income."[59] In the same inquiry, we heard that, at a price range between 15 and 30 euros a tonne, the planned auctioning of 7% of the UK's allocated EU ETS allowances in Phase II should generate between £179m and £372m per year.[60] This contrasts unfavourably with the announced funding for the domestic ETF of £370m over three years, of which £200m is from existing funds.

42. Another concern we have over the details announced for the domestic ETF is that it risks being spread very thinly. BERR has outlined that it will be spent on the following:

  • Hydrogen Fuel Cell and Carbon Abatement Demonstration Programme;
  • Marine Renewables Deployment Fund;
  • Low Carbon Buildings Programmes;
  • Bioenergy Capital Grants Programme;
  • Offshore Wind Capital Grants programme;
  • Near Zero Emissions from Coal project;
  • Carbon Trust's innovation programme, including research accelerators, technology accelerators, and incubators;
  • Carbon Trust funding for new low carbon enterprises, including Partnership for Renewables;
  • Carbon Trust investments in low carbon technology businesses;
  • Carbon Trust energy efficiency loans scheme for small and medium sized enterprises; and
  • Salix Finance public sector revolving loan schemes.

What is more, the BERR website states that this list may soon be added to: "Announcements will be made on any further activities under these programmes and any new schemes from April 2008 onwards."[61]

43. We put it to the Exchequer Secretary that this scale of investment was simply inadequate. She responded that "It is a significant start", and that there were additional funding streams available for low carbon R&D.[62] We believe that the £170m new money over three years, announced in the PBR for low carbon investments in the UK, would have been a significant start several years ago. But the urgency of the need to cut emissions means that this should now be a much higher spending priority. In particular, we are disappointed that this sum appears to be considerably smaller than the amount of revenue the Government is projected to earn from auctioning carbon allowances under the EU Emissions Trading Scheme. We are also concerned that the domestic Environmental Transformation Fund is being spread too thin, and that a considerable proportion of the funding (for instance, the energy efficiency loans distributed by the Carbon Trust and Salix Finance), while welcome, is not aimed at developing step-changes in new technology, which ought to be the focus of the Fund. We recommend that the Treasury revisit the settlement for the domestic ETF as soon as possible, especially once revenues from EU ETS auctions are more certain.

ENVIRONMENTAL TRANSFORMATION FUND—INTERNATIONAL WINDOW

44. The PBR explained that the Environmental Transformation Fund—International Window (ETF-IW) "will support development and poverty reduction through environmental protection and help developing countries to tackle environmental challenges. [… It] will work to support adaptation to climate change, provide access to clean energy, and help tackle unsustainable deforestation."[63] The Comprehensive Spending Review confirmed that it will be funded 50:50 by Defra and the Department for International Development (DfID), each contributing £400m over three years, all of which is new money. (Although £50m was already committed, at Budget 2007, to fund the Congo Forest Conservation Initiative.)[64] The ETF-IW will take the form of capital grants to a fund managed by the World Bank, which will distribute funds to recipients in the form of loans.

45. We welcome the announcement of £800m new money over three years for environmental investments in the developing world. This was probably the most significant and impressive announcement in the PBR. Certainly—while raising several issues, some addressed below—WWF told us they were very impressed with the scale of this funding:

[…] £800 million is a very substantial amount. This is the first time that a government has put forward so much money. [… I]t could make a massive impact [… T]his fund is really to be welcomed and could make a potential impact on global carbon emissions.[65]

46. At the same time, we have a number of concerns as to the design of this fund. First, its focus appears to be rather confused, given that the three different types of project it is intended to fund—low carbon energy investments, forestry protection, and adaptation to climate change—are each quite different. This combines with the concerns expressed to us by WWF over the management of the fund by the World Bank, and the way in which funding is to be distributed in the form of loans, with the expectation being that recipients will earn a profit and thus repay what they have borrowed. While this might be appropriate for energy investments, it is far from clear that this is appropriate for funding forestry conservation or adaptation projects. In particular, we are concerned that the emphasis on awarding loans to profit-driven projects will lead to funding being awarded to biofuels plantations, about which we have recently expressed serious reservations.[66] For instance, WWF told us:

[…] the World Bank is including in its definition of clean energy large hydropower dams which do not abide to the World Commission on dams, or biofuels without any sustainability criteria. We are concerned that the ETF might contribute to such technologies which have negative social [and] environmental impacts.[67]

While the Exchequer Secretary responded to this concern—telling us the Government did not expect to give over total control of the fund to the World Bank, and saying it would be "patently absurd" if support for biofuels meant "we got rid of all the forests"[68]—her statement stopped far short of the comprehensive assurance we were looking for. The Government should work with the World Bank to ensure appropriate governance standards are in place for the international ETF to deliver a suitable disbursement mechanism that places rigorous sustainability criteria at the heart of what the fund delivers. Furthermore, the Government should look again at whether this fund should be dedicated solely to low carbon energy investments, with forestry protection and climate change adaptation being funded by separate instruments, less focused on profit-making opportunities.


55   HM Treasury, 2007 Pre-Budget Report and Comprehensive Spending Review: Meeting the aspirations of the British people, p 113 Back

56   HC Deb, 29 June 2006, col 397 Back

57   "Environmental Transformation Fund", BERR, www.berr.gov.uk/energy/sources/sustainable/etf/page41652.html Back

58   HM Treasury, Stern Review on the Economics of Climate Change, p 347 Back

59   Environmental Audit Committee, Second Report of Session 2006-07, EU Emissions Trading Scheme: Lessons for the future, HC 70, Q131 Back

60   Environmental Audit Committee, EU Emissions Trading Scheme: Lessons for the future, Q65. Exchange rate as of 29 November 2007, 1 euro = £0.7147, http://markets.ft.com/ft/markets/overview.asp Back

61   "Environmental Transformation Fund", BERR, www.berr.gov.uk/energy/sources/sustainable/etf/page41652.html Back

62   Q164 Back

63   HM Treasury, 2007 Pre-Budget Report and Comprehensive Spending Review: Meeting the aspirations of the British people, para 7.78 Back

64   The Government explains: "The new fund initiative will support proposals made by ten central African countries to protect the Congo Basin rainforest - the second largest in the world and roughly twice the size of France - from destruction. The main threats are due to logging, mining and clearance for agriculture." "Budget 2007: Benn announces £50 million UK contribution to new Congo Basin rainforest conservation fund", DfID press release, 21 March 2007 Back

65   Q66 Back

66   Environmental Audit Committee, First Report of Session 2007-08, Are Biofuels Sustainable?, HC 76-I Back

67   Q51 Back

68   Q170 Back


 
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