Green Finance - Environmental Audit Committee Contents

1  The need for green finance

1. Governments agree on the need to de-carbonise the global economy. The challenge is how to achieve this. In this report we look at the actions the UK Government is taking to promote low-carbon investment to contribute to the reduction in global carbon emissions needed to prevent catastrophic climate change. It looks at what actions the Government is taking to provide stable and attractive conditions for green finance, as well as how it uses its own funds to support green investments.

2. The UK, with London at its heart, is a leading centre of global finance, and there are great opportunities for the UK to lead on low-carbon investment. We launched our inquiry with a seminar in the City of London in July 2012 to hear directly from investors what they saw the opportunities and barriers around green finance to be.[1] We then took detailed evidence from campaigners, analysts and investors, including pension funds and asset managers, the Green Investment Bank and those involved in community energy projects. We also took evidence from Michael Fallon MP, the Minister for business and energy.

Commitments and mechanisms to reduce carbon emissions

3. In 2010, governments confirmed, in the Cancun Agreement at the UN climate change conference, that emissions should be reduced to avoid a rise in global average temperature of more than 2°C above pre-industrial levels, with the possibility of revising this down to 1.5°C. In 2012 international agreement was reached to draw up a binding UN global climate change deal by 2015 and to extend the Kyoto protocol until that deal comes into effect. Governments will meet again later this year in Lima to work towards the details of a deal in Paris in 2015.

4. The EU's and the UK's emissions reductions commitments reflect that wider undertaking. The Government's commitments are set out in the Climate Change Act: to ensure that emissions are reduced by 80% by 2050, relative to 1990 levels. Interim 'carbon budgets' are set through legislation, including a Fourth Carbon Budget which, as we reported in December 2013, may be reviewed by the Government in 2014 if emissions are not consistent with the EU emissions reduction trajectory.[2] In December the Committee on Climate Change concluded that there was no reason to change the Fourth Carbon Budget.[3]

5. Increasing investment in low-carbon energy, and reducing investment in fossil fuels, depends on an unambiguous assessment by investors that the international community will produce a credible and significant commitment to reduce emissions in a timescale commensurate with the urgency needed for avoiding dangerous climate change. The Government needs to play a central role in agreeing ambitious and binding international commitments on tackling climate change, both in the EU and in the lead up to the UNFCCC conference in Paris in 2015. Domestically, the Government should announce immediately that following the advice from the Committee on Climate Change there is no rationale for any review of the Fourth Carbon Budget.

6. The UK's climate policies also have to fit within a wider EU policy and regulatory framework. In January 2014, the EU launched its Energy White Paper, A Framework for Energy Policy 2030,[4] which set an overall goal for reducing carbon emissions by 40% by 2030, in place of an existing target of 20% by 2020. It also set an EU wide target for renewable energy, although it proposes that these are not binding at national level. The European Parliament voted in favour of binding national targets for renewable energy, and member states will make a decision at the European Council in late March 2014.[5] We visited Brussels in February 2014 and discussed these proposals with Commissioners, MEPs and the UK Government permanent representatives in Brussels. We heard different perspectives on the importance of these targets, including the value of showing leadership and clear ambition, allowing member states flexibility, and concerns about the EU's relative economic competitiveness. The Government told us "we need maximum flexibility between all options to reduce the UK's carbon emissions" and "each Member State is different, and will need to pursue different technologies, in different orders and in different ways".[6]

7. As the ultimate goal of climate change policy is to reduce global carbon emissions to prevent dangerous climate change, it makes no sense to develop an incomplete regulatory regime that reduces the UK's relative economic competitiveness and results in the 'offshoring' of carbon emissions to places with lower environmental regulation. We recommended in our 2013 report on progress on carbon budgets, that the UK should introduce a supplementary target focused on carbon emissions on a consumption basis.[7] We first recommended in our 2011 report on Carbon Budgets that the Government should monitor UK carbon emissions on a consumption emissions basis,[8] and the Committee on Climate Change has now started to do so. Figures from the Committee on Climate Change show that on a consumption basis the UK's carbon footprint increased over the past two decades so that the UK now has one of the largest footprints in the world. The UK is one of the largest net importers of carbon (both in absolute terms and on a per capita basis).[9] As the EU moves closer towards a single market in energy, the Government should work with European partners to ensure that national emissions targets measure consumption alongside production.

8. We recognise the Government and European Commission's arguments about the importance of flexibility and dealing with individual states' circumstances and energy policies. Although energy efficiency may be more cost-effective than switching to renewable sources of energy for some countries, it is vital that each country has an ambitious and binding target for renewable energy to create a level playing field within the EU. The Government should vote in favour of binding national renewables targets at the EU Council.

Green finance 'gap'

9. James Leaton of Carbon Tracker told us "the imperative to tackle climate change will require an energy transition. It will require changes to our energy system and infrastructure."[10] Josh Ryan-Collins from New Economics Foundation reminded us of Lord Stern's comments that climate change is "the world's biggest market failure", because "social and ecological environmental externalities are not incorporated into the price mechanism".[11] Michael Liebreich of Bloomberg New Energy Finance described "a systemic failure of valuation, an overvaluation of the fossil-related and extractive industries and various other utilities and some other asset classes".[12] There is a role for Government to set and enforce rules to reduce emissions, and establish detailed policy and regulatory frameworks domestically to correct this failure.

10. To deliver our emissions reduction commitments, the UK needs to make significant investment in renewable energy and energy efficiency. Our 2011 report on the Green Investment Bank identified estimates of the costs of the required investment in new low-carbon infrastructure in the UK, some of which were as high as £550 billion over 10 years,[13] a figure reiterated in our current inquiry by New Economics Foundation.[14] This figure includes a range of sectors, including transport and other infrastructure. Shaun Kingsbury, the chief executive of the Green Investment Bank, referred to a figure of £200 billion over the next 10 years, including £110 billion needed for new low-carbon generating assets and supporting infrastructure.[15] This report primarily focuses on the available finance for low-carbon energy projects, although we recognise that the gap for wider low-carbon and environmental projects is even greater than this, and is also extremely important to close.

11. After the 2008 global financial crisis, banks' instincts have been to lend less, particularly for long-term projects:

    Long-term debt financing (on which many renewable energy projects, for example, have been dependent) has become much less attractive to banks to provide. The introduction of new regulatory requirements such as the BASEL III regime, and mounting pressure from regulators and shareholders has required financial institutions to meet more stringent capital, leverage and liquidity thresholds on their balance sheets to ensure their ability to meet their obligations over sustained periods of financial stress. Such obligations reduce appetite to hold long-term assets in banks' debt portfolios and can mean that financial institutions charge more for their available capital.[16]

Robert Rabinowitz of Pure Leapfrog, one of our witnesses on community energy projects, told us "the longer the time frame for the funding, the more the risk weighting from a Basel perspective, so the less inclination [institutions] have to do it. It is about finding long-term finance."[17]

12. Shaun Kingsbury highlighted a gap between the "£20 billion a year to be invested" and the "£8 billion to £10 billion a year going on at the moment".[18] As initial investments have not reached this level, the annual requirement continues to increase in order to reach the required £200 billion of low carbon investment by 2020. There is a significant green investment gap. The current level of green investment is running at less than half of the level needed to deliver the decarbonisation implicit in national and international targets. A significant scale-up is needed.

13. Attracting investment in 'green' projects depends on a favourable assessment by investors of the balance of risk and reward. Any actions that Government can take to remove instability and risk, and increase certainty about reward will assist investors. In this report we primarily focus on low-carbon energy generation, energy efficiency and community energy, and related electricity transmission and storage infrastructure. We explore whether investors have the certainty and information they need for such a risk-reward balance in Part 2 of this report, and what the Government is doing to help provide finance for investment in Part 3.

1   Ev 68  Back

2   Environmental Audit Committee, Fifth Report of Session 2013-14, Progress on Carbon Budgets, HC 60 Back

3   Committee on Climate Change, Fourth Carbon Budget Review-part 2 , (December 2013) Back

4   European Commission, 2030 climate and energy goals for a competitive, secure and low-carbon EU economy (January 2014)  Back

5   European Parliament MEPs want binding 2030 goals for CO2 emissions, renewables and energy efficiency (February 2014) Back

6   Environmental Audit Committee, Seventh Special Report- Energy Subsidies: Government response to the Committee's Ninth Report of 2013-14, HC 110, paras 27 and 28 Back

7   Environmental Audit Committee, Fifth Report of Session 2013-14, Progress on Carbon Budgets, HC 60 Back

8   Environmental Audit Committee, Seventh Special Report of Session 2010-12, Carbon Budgets, HC 1080 Back

9   Committee on Climate Change Reducing the UK's carbon footprint and managing competitiveness risks (April 2013)  Back

10   Q16 Back

11   Q154 Back

12   Q39 Back

13   Environmental Audit Committee, Second report of Session 2010-12 The Green Investment Bank (figure 1) Back

14   Ev 88  Back

15   Q76 Back

16   Ev 94, para 5 Back

17   Q190  Back

18   Ev 71 Back

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Prepared 6 March 2014