Session 2009-10
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Memorandum submitted by The Royal Society for the Protection of Birds, Green Alliance and Greenpeace-UK (UKFI 02) Executive summaryWe believe that financing the transition to a low carbon economy is a key challenge for the UK, with two main strands of finance reformation. One is to create a business environment that maximises private investment in the low carbon economy. The second is to reform public finances to cut waste and increase focus on environmental sustainability. This paper recommends that the Government: · Reduce barriers and risks to investment, for example by extending the Regulated Asset Base system to include renewable energy generation. · Introduce institutional enabling measures such as a Green Investment Bank, a "pay as you save" scheme to support low energy home refurbishment and consider ring-fencing a proportion of RBS lending for renewable energy products. · Secure finance for green investment through tax incentives and tax relief. · Increase green taxes such as the Climate Change Levy and Air Passenger Duty. · Reform subsidies to ensure that public funds are used effectively, and do not support polluting activities. · Reform public procurement policies to drive demand for green goods and services. RSPB and Green Alliance have also submitted evidence with People and Planet and Platform on the specific role of UK Financial Investments in the transition to a low carbon economy. Introduction to submitters 1. The Royal Society for the Protection of Birds (the RSPB) is the charity that takes action for wild birds and the environment. We are the largest wildlife conservation organisation in Europe with over one million members. We believe that sustainability should be at the heart of decision-making. The RSPB’s policy and advocacy work covers a wide range of issues including planning and regional policy, climate change, energy, marine issues, water, trade and agriculture. 2. Greenpeace UK is the autonomous regional office of Greenpeace, one of the world’s leading environmental campaigning organisations. Greenpeace has regional offices in 40 countries, 2.8 million supporters worldwide and around 150,000 in the UK. It is independent of governments and businesses, being funded entirely by individual subscriptions. 3. Green Alliance is an independent think tank working to make environmental solutions a priority in British politics. We work with representatives from the three main political parties, government, business and the NGO sector to encourage new ideas, facilitate dialogue and develop constructive solutions to environmental challenges. 4. This response is based on research undertaken by Friends of the Earth, Green Alliance, Greenpeace and WWF-UK. Analysis and recommendations
5.
Britain now faces triple challenges of building a low carbon economy, maintaining energy security, and emerging from a recession - whilst the financial crisis means that public finances are in the worst state for decades. There is a growing consensus amongst economists and politicians, such as Lord Stern and the UN Secretary General, that we need to tackle these inter-related economic and environmental challenges simultaneously. In particular, action in the next UK Parliament is needed for the UK to play its part in keeping our climate safe. There is currently a huge gap between the level of investment needed to ensure a shift to a low carbon economy and its provision. By 2020, it is estimated that £150-£200 billion of investment is needed in energy efficiency and renewable energy
Helm, D., J. Wardlaw, and B. Caldecott, 2009. Delivering a 21st Century Infrastructure for Britain. Policy Exchange
OfGem: Project Discovery Energy market Scenario’s : October 2009. 6. Given the poor state of the public finances, cutting the deficit and putting us on a low carbon trajectory will require significant changes to the way we secure the capital to deliver environmental commitments and finance supporting infrastructure. This will require action by the public and private sectors. It is important to note here that there are key economic advantages for the nation in investing in this infrastructure; most recently reported by OfGem
Ibid, notes significant advantages in investing in green infrastructure for energy prices in the middle to long term. Maximising private investment in the low-carbon economy Reducing barriers and risks to investment 7. New energy networks, smart grids, offshore renewable energy, carbon dioxide transmission networks for CCS, and natural adaptation solutions including managed realignment, local flood alleviation projects, and habitat recreation should be treated as part of a much larger Regulated Asset Base (RAB) under a model similar to that currently used by the National Grid/Ofgem for electricity and gas networks. By being part of a desirable national asset base, which has been ‘cleared’ through policy and managed by a regulator, the risk of investment becomes much lower – and thus, crucially, so does the cost of capital. Much of the renewal of infrastructure requires significant up-front capital as the most expensive component of delivery, thus lowering the cost of capital by removing policy risk and customer risk makes the proposition more attractive to finance. This is a reworked and extended interpretation of the proposal in the recent Policy Exchange report ‘Delivering new infrastructure for 21st Century’. Institutional enabling measures
8.
Establish a Green Investment Bank. This Bank could create financial products that offer both a risk profile and scale that makes them attractive for the biggest funds. This could be put together from existing HMT agencies, including those that manage PFI projects. The Bank’s remit would be to direct financing towards low carbon and green infrastructure investments while reducing policy risk. Some capitalisation might be possible from green taxation (see below). It is important that the Bank should be a credible and functioning institution in its own right
Most European countries have a state bank as part of their financial services sector and many of them, including KfW in Germany, Credit Agricole in France and ICO in Spain are involved with providing finance for low carbon investments. The European Investment Bank is lending to a number of renewable energy projects. KfW has provided much of the finance for low interest loans to homeowners improving the energy efficiency of their properties. There are now also proposals for a Green Bank being taken to the US Congress. 9. Ring fence a proportion of RBS lending, equivalent to how much they currently make available to energy projects, to create a dedicated low carbon fund or transfer into the Green Investment Bank. This would support lending to renewable energy projects. Sharing the risk between Government and private investors will inspire greater confidence in policy commitment enabling larger sources of private funds to be leveraged. In due course, the Bank should be in a position to direct investment towards the early commercialisation of low carbon technologies in the SME sector–the so-called ‘valley of death’.
10.
Implement a ‘pay as you save’ scheme to support
low energy homes refurbishment. Under such a system the upfront costs of low energy work to a household are funded through a third Party Finance Vehicle. This is financed through private capital, initially established as an arms length Government vehicle (such a
s a
Green Investment Bank) to reduce investment risk. An obligation to repay is linked to the property over an extended period of time and the repayments are calculated to be less than the savings that will be made on the fuel bills. The Climate Change Committee in its recent report
Climate Change Commission, 2009, Meeting carbon budgets: the need for step change Securing finance 11. As a nation we need to save more to provide the necessary funds for investment. Whilst our current savings rate is on the rise, measures are required to maintain this trend and sustain it at adequate levels to finance the renewal of infrastructure and make up the pensions shortfall. It is far better for sustainability that an economic upturn be used to encourage saving that is used for green investment rather than stimulating consumption. We therefore propose: · Tax incentives to save – green ISAs where all savings are exempt from tax · Pension tax relief that focuses on those areas of investment essential for UK green infrastructure renewal. Given the large amounts of money seeking long-term, low-risk, investment, only minimal steerage should be required · Government ensures that new Personal Accounts pensions systems have strong green investment capacity and act as a leader in establishing the duty of pension funds to consider climate and wider environmental risks. Reforming public finances 12. An analysis of the 2009 pre-budget report has revealed that there is a £25 billion gap between commitments on the national deficit and actual measures announced.
Institute for Fiscal Studies, Pre-budget report 2009: analysis from Institute of Fiscal Studies. Green taxes 13. As noted in the recent Green Fiscal Commission report environmental taxes are effective, efficient, can raise stable revenues and will receive public support if they were deemed fair and effective, and accompanied by a reduction in other taxes
Green Fiscal Commission, 2009, The Case for Green Fiscal Reform: Final report of the Green Fiscal Commission.
Ofgem, 2009, Project discovery energy market scenarios http://www.ofgem.gov.uk/MARKETS/WHLMKTS/DISCOVERY/Documents1/Discovery_Scenarios_ConDoc_FINAL.pdf
14. At a UK level particular scope exists to use the following mechanisms to increase funding revenue and stimulate behaviour change: § Increasing the Climate Change Levy § Increasing the Fuel Duty Escalator § Full auctioning of EU ETS from 2013 onwards § Implementing a fuel duty upon domestic aviation § Increasing Air Passenger Duty and converting this from a per- capita basis to a per-plane basis 15. Fairness needs to be ensured by protecting low-income households from energy price rises while their homes are being made energy efficient. Any regressive effects of green taxes should be offset by smart spending and protection of low-income households. Subsidy Reform
16.
Government subsidies must be focused on areas that support an effective transition to a low carbon economy and restoration of ecosystems, and removed from supporting projects which inhibit such objectives and produce perverse incentives. A recent Green Alliance briefing identified a variety of areas where public finances could be reformed, and save up to £12 billion between 2010/11 and 2013/14.
Green Alliance, 2010, Cutting back on carbon spending: ways to cut public spending and reduce support for a high carbon economy, http://www.green-alliance.org.uk/uploadedFiles/Our_Work/Cutting%20back%20on%20carbon%20spending.pdf
17.
Road building is an expensive operation that supports a high carbon activity. There is evidence that the assessment methodology for transport spending does not reflect national policy objectives and fails to take proper account of legally binding carbon reduction targets. A two year moratorium on road expansion would save £2.4bn over two years. The roads budget could be cut by a further £2.8bn once the appraisal methodology has been reformed.
Ibid.
18.
Tax breaks and allowances for high carbon activities should be reviewed. In particular, abolishing zero-rating of VAT for aircraft and ships could raise an estimated £2.2 billion. Abolishing allowances against Petroleum Revenue Tax and Climate Change Levy could save £2.9bn.
Ibid. 19. Farming is fundamental to achieving a healthy countryside that produces food sustainably, is rich in wildlife, and supports rural industry while assisting the move towards low-carbon farming. The vital countryside goods and services managed by farming, such as carbon sequestration, need to be properly supported through measures such as agri-environment schemes. However, the current subsidy system in the UK spends more than £2.5 billion per year on direct payments that have unclear objectives, and fails to spend enough money on paying for public goods. A shift in Common Agricultural Policy funding towards agri-environment schemes will help ensure better value for public funds, conserve our natural resources, reduce diffuse pollution at source, sustain our protected areas and deliver biodiversity targets while supporting farming that delivers real public benefits.
20.
Tropical forests are the storehouses of biodiversity and critical carbon stores. Every year, forest destruction causes almost one fifth of the world’s greenhouse gas emissions, most of this in tropical areas. Urgent interim financing of between £550 million and £915 million of UK public funds is needed before 2014. Government funding falls far short of what is needed. Not only has the UK Government’s funding been inadequate, the policy of the Renewable Transport Fuel Obligation (RTFO) has contributed to tropical forest destruction, while imposing additional costs on households through higher fuel bills. Currently 3.25% of vehicle fuel must be made up of biofuels. Three years from now, that will have risen to 5%, and we will have collectively paid up to £720m more for fuel as a result.
RSPB, 2009, Challenge 2010: politicians must cut waste and invest in nature. Public procurement21. Public procurement should be driven by sustainability criteria. The Government should prioritise areas where expenditure is a sufficiently high share of the market to provide market transformation and investment confidence. The Office of Government Commerce should be fully mandated and resourced to roll out sustainable procurement skills and procedures at all levels of government. 22. The public sector should set bold new specifications for the sustainable products and services it seeks to purchase in the longer term (eg in five years time). These Forward Procurement Commitments would guarantee future markets for low-carbon goods and services and unlock investment in the development of new products (low carbon vehicles, energy efficient buildings, lighting etc).
23.
Greening public procurement could also save us money. Reducing public sector energy and fuel consumption might save £1.5bn over four years, especially if the MoD can also cut some of the costs of the logistics of transporting and protecting its fuel supplies.
Green Alliance, 2010, Cutting back on carbon spending: ways to cut public spending and reduce support for a high carbon economy. Conclusion24. It is our view that managing the levers of the economy in order to encourage green investment will become one of the priorities for any future government in the short and medium term. This submission is an attempt to make a constructive contribution to that debate. 25 February 2010 |
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| ©Parliamentary copyright | Prepared 13:26 on 15th March 2010 |