Responding to climate change is perhaps the biggest global challenge of the 21st Century, and the transition to a low-carbon economy will require investors to take account of the reality of a carbon-constrained world. This shift is happening, but there are obstacles to overcomestock markets are currently over-valuing companies that produce and use carbon (a 'carbon bubble' consisting of fossil fuel assets which will have to be left unburned in order to cut emissions to the levels required to limit climate change), and there is a green finance gap with investments currently running at less than half of the level needed to deliver the decarbonisation implicit in national and international emissions reduction targets.
The UK, with London at its heart, is a world leader in finance, and there are great opportunities to lead on low-carbon investment. The Government must play a central role in concerted international efforts to address climate change and ensure that markets price-in the cost of carbon. More must be done to secure the required levels of green investment in areas such as low-carbon energy generation, energy efficiency, and transport. The Green Investment Bank has made a good start, making investments which will contribute to filling the gap in the required level of green investment. The Bank needs to be able to borrow to significantly enlarge the scale of its work. The Government must declare in Budget 2014 that the Bank will be permitted to borrow in 2015-16 as originally planned, to demonstrate continued commitment and ambition.
Robust regulatory frameworks, policy certainty and ongoing commitment to green investment is vital. Over the past decade, successive governments have helped to build political consensus around the existence and urgency of climate change. The Government should support binding national renewable energy targets in the EU, as it is an important driver of the transition to low-carbon energy generation. The Government has taken steps to help establish a more stable regulatory environment through its Electricity Market Reform and should look to avoid further regulatory change, such as its restructuring of the Energy Company Obligation.
The Government's Community Energy Strategy addresses a number of the concerns raised during our inquiry and includes provisions likely to boost local schemes. We are, however, concerned that recent proposals from the European Commission may slow the transition to a low-carbon economy. The Government should work with the Commission to ensure proposals to reduce the threshold for small-scale feed-in tariffs are not carried through because they risk undermining the viability of community schemes. Priority needs to be given to securing early State Aid approval for the Green Investment Bank to invest in community energy and ensuring that all local authorities have the tools and resources to play a full part in making such schemes a widespread and successful part of the UK energy mix.
Increasing the flow of green finance is a responsibility divided between different Government departments and other entities. The Government needs to do more to accelerate progress and monitor impact. It has a range of ways to help co-ordinate its efforts between departments, including the advice of the independent Committee on Climate Change. Working to a single strategy would create greater certainty and a more favourable investment outlook. The Government should re-visit and expand its strategy on Enabling the Transition to a Green Economy to evaluate progress and identify areas for improvement. This would bring together and align:
- the UK's position in international negotiations on emissions reduction and climate change;
- action to deliver our carbon budget commitments and Climate Change Act obligations;
- the Industrial Strategies;
- the National Infrastructure Plan;
- the Green Investment Bank's role and the scope of the projects it supports, and the Infrastructure Guarantee programme;
- opportunities to take advantage of and direct EU funding towards green infrastructure;
- green-proofing Government grants, including the Regional Growth Fund and Local Enterprise Partnerships;
- community energy; and
- funding for adaptation to climate change.