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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