Budget 2011 and environmental taxes - Environmental Audit Committee Contents


Written evidence submitted by Transform UK and E3G

This evidence is focused on the Green Investment Bank.

1.  BUDGET ANNOUNCEMENT

In the Budget on 23 March 2011 the UK Government made the following announcement on the Green Investment Bank:

"The Government is committed to ensuring that the Green Investment Bank (GIB) has the resources to help the UK to move towards a low-carbon economy. The Government announces that the initial capitalisation of the GIB will be £3 billion and that the GIB will begin operation in 2012-13, a year earlier than previously anticipated. Government investment alongside private finance should mean that there is in the region of an additional £18 billion of investment in green infrastructure by 2014-15 as a result of the GIB. The Spending Review allocated £1 billion for the GIB and the Government is aiming for the remaining £2 billion to be funded from the sale of assets. This will include the £775 million net proceeds already received from the sale of High Speed I, ensuring that funding is in place to allow GIB investments from 2012-13. The Government will enable the GIB to have borrowing powers from 2015-16 and once the target for debt to be falling as a percentage of GDP has been met."

2.  CAPITALISATION

We consider the total capitalisation figure of £3 billion to be a reasonable start but still too low. The benchmark for success set by Ernst & Young[95] is £4-6 billion and is supported by the Transform UK Alliance of leading financial institutions, business and NGO stakeholders. This higher level is the amount required to ensure the GIB can raise the scale of finance required to fill the looming low carbon energy finance gap. Ernst & Young estimates that £450 billion of investment in energy supply and demand infrastructure is required in the UK by 2025 but that only 10 to 20% of this funding is likely to emerge from the traditional investors in this sector. To ensure the investment gap of 80 to 90% is met the Government needs to provide £1 to 3 billion more capital over this parliamentary term alone. Based on the investment leverage ratio of X5 outlined in the Budget statement, an additional £1 to 3 billion of Government capital would leverage in an extra £5 to 15 billion of private capital into the low carbon economy. This would be clearly beneficial but is still not enough. To have the transformational investment impact required the GIB also needs to borrow.

3.  DELAY IN POWER TO BORROW

The Government has given initial capitalisation of £3 billion to the GIB which it estimates will leverage an additional £15 billion in private investment—a total of £18 billion. If allowed to borrow and issue Green Bonds the GIB could leverage far more private investment into the low carbon economy. For example, if it was also allowed to borrow £10 billion it could leverage an additional £50 billion of private capital, representing another £60 billion. This would create a total investment of £78 billion in the low carbon economy—approximately four times more than the investment set to be achieved under current proposals.

It is therefore of great concern that the Government announced a serious delay to the power of the bank to borrow which will severely constrain its ability to act as an engine for green growth and economic recovery. This is a great disappointment given the Green Investment Bank represented within the Budget the most innovative policy with the greatest potential to generate growth and jobs in the UK economy.

Furthermore, the detail of the announcement on the delay in borrowing powers has created even greater uncertainty because it is not clear when national debt will be declining as a percentage of GDP. If growth occurs more slowly than forecast then it could be well after 2015.

The 2011 Budget announced that the Office of Budget Responsibility's growth forecast for 2011 and 2012 had been downgraded, citing rising oil prices, higher than expected inflation and the fall in UK GDP at the end of 2010. While the OBR forecast growth will increase to 3% in 2014 (based on assumptions that inflation will fall and household consumption increase), this assessment does not factor in rising world oil prices. It also seems optimistic given the Coalition Government's limited announcements on new drivers for growth and the delay on borrowing it has imposed on the GIB.

The borrowing powers for the GIB have been delayed because of concerns by the Government on the impact on the UK balance sheet. However, it is not the GIB borrowing potential that poses a threat to the UK's fiscal credibility, it is the failure of the UK economy to grow enough.[96] Many other development banks in Europe (eg the European Investment Bank and Germany's KfW) have been making use of their borrowing powers in the face of the European economic crisis. It seems perverse and short-sighted that the GIB should be restricted from doing so at time of such critical need.[97]

It should also be noted that the Government has more than £3 trillion in off balance sheet liabilities that could be brought back on balance sheet at ONS say so. Proposed GIB borrowing in comparison is minimal.

4.  NEXT STEPS FOR GIB CREDIBILITY—BORROWING POWERS & LEGISLATION

The Budget announcement did not state whether the GIB would have its borrowing powers enshrined within its constitution and in legislation. It is essential to do both in order to give the market as much certainty as possible that the Green Investment Bank will be able to borrow, that the GIB will not be subject to political risk and that it will be able to operate independently and at sufficient scale to meet the UK's carbon reduction targets.

The Green Investment Bank should be allowed to borrow as soon as it is up and running. Just like other development banks , the Green Investment Bank can protect itself by ensuring its portfolio of investments does not present a risk to its financial sustainability by operating a transparent risk management system and by conducting professional due diligence.

It is essential that when the Government publishes its detailed GIB plans at the end of May 2011 it announces legislation to set up the Green Investment Bank and that the power to independently borrow will be enshrined within this legislation.

Without legislation the market will perceive a strong risk that the GIB may never turn into a proper, fully functioning bank and if it does so it may have those key borrowing powers quickly rescinded or heavily restricted. This will have a damaging impact on the entire low carbon investment market.

Legislation will also enable Parliamentary scrutiny for the Green Investment Bank which is essential for the establishment of an institution that is getting £3 billion + of public money and is central to the UK's commitments to reduce greenhouse gas emissions.

In addition, legislation offers the best way to establish the bank in terms of creating the custom built governance structure, mandate and transparency requirements it needs to operate effectively. Legislation can also play an important role in helping to smooth the path to EU state aid clearance for the GIB.

By announcing legislation, ensuring the power to borrow is enshrined within this legislation and by giving the GIB the power to borrow from the beginning, the Government can still enable the GIB to fulfil its enormous potential to maximise the UK's climate and energy and economic security.

E3G

E3G is an independent, non-profit European organisation operating in the public interest to accelerate the global transition to sustainable development. E3G builds cross-sectoral coalitions to achieve carefully defined outcomes, chosen for their capacity to leverage change. E3G is not a campaigning NGO, a thinktank or a consultancy, although its activities overlap with all of these models. E3G is an attempt to build a new type of organisation which can help drive change inside existing global frameworks at a rate consistent with preserving critical ecological limits. E3G aims to creatively reconcile the conflicting imperatives of day-to-day politics and long term climate change risks, and E3G senior staff have unique experience at the highest levels of Government and from the private and NGO sectors. In its first five years E3G has:

—  Played a critical role in Russian ratification of the Kyoto Protocol.

—  Gained agreement to cooperation on a full-scale EU-China CCS demo plant.

—  Delivered €6-8 billion for 10 CCS power plant demos in the EU.

—  Developed the concept of Low Carbon Zones and gained agreement from the Chinese government to five LCZ pilot projects in areas of five to 15 million people.

—  Proposed a public UK Green Investment Bank to support low carbon infrastructure, and played a critical role in delivering UK government agreement to establish it.

—  Initiated and supported the first UN Security Council debate on climate security.

www.e3g.org

Transform UK

Transform UK is a programme of E3G and is an alliance of business, finance, union and charity organisations that campaigns together to accelerate investment into the low carbon economy.

Transform UK founded the campaign for the Green Investment Bank in January 2009. It seeks to build consensus among key stakeholders on the most effective model for the GIB to support the rapid transition to a low carbon energy system and co-ordinates the alliance campaign for its delivery.

21 April 2011


95   "Capitalising the Green Investment Bank" (October 2010)-Ernst & Young Back

96   SME R&D tax relief will be increased to 200% in 2011 and 225% in 2012. Back

97  Moody's warned that poor growth could hit the UK's AAA sovereign debt rating. Back


 
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Prepared 7 July 2011