Net Zero and the Future of Green Finance Contents

1The economic opportunities and costs of net zero

Green finance: an economic opportunity

8.In the Green Finance Strategy, launched in July 2019, the Government argued that “leadership on green finance will enable the UK to maximise the economic opportunities of the global and domestic shifts to clean and resilient growth.”11

9.The previous Committee heard evidence that decarbonising the economy could provide the UK with a substantial economic opportunity, both in terms of economic advantage that might be gained through new low carbon technologies, and globally, if the UK could establish the City of London as a leading centre for green finance and other green industries. We use the term “green finance” in this report to encompass the mobilisation of private finance for clean and resilient growth, the incorporation of climate and environmental factors within investment decisions, and the development of “green” financial products.12

10.Sagarika Chatterjee, Director of Climate Change, Principles for Responsible Investment,13 told us that “[…] there is still a very strong opportunity for the UK and the City of London to lead on this. There are strong commercial and trading opportunities, particularly from the green finance side. The City of London, as well as, more broadly, Edinburgh and many other areas of the UK, should be the No. 1 place for green finance”.14

11.Action to develop “green” finance in the UK could have consequences outside the UK, because of the international nature of the City. Positive Money, a not-for-profit research and campaigning organisation seeking to “make money and banking work for society”,15 told the previous Committee that while the UK is responsible for approximately 1% of global CO2 emissions, the City of London “hosts and finances companies which account for a minimum of around 15% of potential global CO2 emissions, and the financial carbon footprint of the UK is 100 times its own fossil fuel reserves”.16

12.John Glen MP, Economic Secretary to the Treasury, confirmed that there is “a significant appetite for people to invest in sustainable financial products”17 and that there were “new technologies that give us faster routes to that net zero goal”.18 Similarly, Kemi Badenoch MP, Exchequer Secretary to the Treasury, argued that there was also export potential: “If we can do this right and become world leaders in carbon capture storage, hydrogen and offshore wind, we can export these technologies […] There are benefits to making sure we get a march on and can be world leading in this space.”19

Economic recovery: taking a “green” approach

13.The development of the UK as a centre for green finance is an opportunity which could be identified in advance and planned for. The coronavirus pandemic, on the other hand, was quite unforeseen; but it has in its way offered a quite different sort of opportunity, by forcing policymakers to think about how to build sustainability and “green” spending into planning for an economic recovery. This Report now looks at what the Government has already done in that respect, and what more it could do to co-ordinate that effort and to influence Government departments in planning their activities and spending so as to assist in meeting the net zero target.

‘Building back greener’ post coronavirus

14.While the Government’s focus over the last year has been the coronavirus pandemic, it has also prioritised achieving economic recovery in line with the UK’s net zero target. In June 2020, the Prime Minister committed the UK to “build back better, build back greener, build back faster”.20 Similarly, in his statement to the House on the Plan for Jobs in July 2020, the Chancellor announced that “this will be a green recovery, with concern for our environment at its heart, and as part of that, I am announcing today a new £2 billion green homes grant”.21 He went on to say that he was “releasing £1 billion of funding to improve the energy efficiency of public sector buildings, alongside a £50 million fund to pilot the right approach to decarbonise social housing”. He argued that this was therefore a “£3 billion green jobs plan to save money, cut carbon and create jobs”.22

15.The Prime Minister’s speech to the Conservative Party Conference in October 2020 highlighted the Government’s commitment to “the green economy, the green industrial revolution that in the next ten years will create hundreds of thousands if not millions of jobs” and announced plans for the UK to become a “world leader in low cost clean power generation”.23 In November 2020, the Prime Minister published a ‘Ten Point Plan’ for a green industrial revolution, which included a focus on “Innovation and finance”.24 The Chancellor of the Exchequer supported this commitment to a green industrial revolution with a number of ‘green’ spending commitments in the November 2020 joint Autumn Statement and Spending Review.25

16.We heard evidence which supported “green” spending measures as a means of supporting the UK’s economic recovery. Professor Nick Robins, Professor in Practice for Sustainable Finance, Grantham Research Institute, London School of Economics, noted that:

… through the Covid crisis, we have seen a greater recognition, particularly from the financial sector but also from the corporate sector and the world of policy, that the way out of this crisis is to move in a more accelerated fashion to the economy of the future, one which is net zero, resilient and more inclusive. We have a legal commitment to that in the UK, particularly to net zero. That would imply that we would want to see funds that are allocated to business in this crisis being done in a way that is consistent with net zero.26

17.Dr Emily Shuckburgh OBE, Director of Cambridge Zero, at the University of Cambridge, told us that “the key question is whether it is a cost to the overall economy. There is plenty of evidence, looking at past investments, that green investments give you a really strong multiplier in exactly these circumstances.”27 Dr Shuckburgh further noted that green investments made good economic and fiscal sense because “[…] if we do not look at putting in place both the jobs and the infrastructure that are relevant to the future, we will be putting money into things that are stranded, in the sense of jobs or assets that do not have any future”.28

18.We also heard evidence supporting the imposition of “green” conditions on the provision of recovery financing for businesses. Professor Robins told us that this could be done in two ways: either by looking at past performance and the carbon or pollution intensity of the business, or by linking to a company’s commitment to net zero and social commitments, such as retraining of workers.29

19.However, when asked about conditionality, Chris Cummings, CEO of the Investment Association, was more cautionary. He told us that:

We are trying to strike the right balance between making sure that the businesses we are investing in are responding to climate change, and setting a course for correction and improvement where necessary, without imposing costs on them, particularly at this time, that could be difficult and could make the difference between the long-term sustainability we want and too much short-term pain.30

20.The Government’s main business lending programmes in the coronavirus crisis—Bounceback loans, Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS)—did not have “green” conditions attached to them. However, in its support to Celsa Steel (UK), Alok Sharma MP, then Secretary of State for Business, Energy and Industrial Strategy, told the House of Commons that the Government had agreed legally binding contractual conditions with Celsa on employment, climate change and tax.31

21.At Budget 2021, the Government announced a new “Recovery Loan Scheme” and set out how it would operate:32

The Recovery Loan Scheme is to help businesses of any size access loans and other kinds of finance so they can recover after the pandemic and transition period.

Up to £10 million is available per business. The actual amount offered and the terms are at the discretion of participating lenders.

The government guarantees 80% of the finance to the lender. As the borrower, you are always 100% liable for the debt.

The scheme is open until 31 December 2021, subject to review. Loans are available through a network of accredited lenders, listed on the British Business Bank’s website.33

22.At present, the Recovery Loan Scheme does not appear to have any green conditionality attached to it. However, in its submission to our inquiry, Barclays noted that:

…via the British Business Bank, the Government already has a number of schemes in place designed to stimulate wholesale lending post COVID-19, e.g. the ENABLE guarantee, CBILS and CLBILS. With relatively simple tweaks, these schemes can be adapted to focus on net zero blended finance solutions. As a significant number of businesses focus on bridging their short-term needs through the COVID-19 pandemic, now is an ideal time for a focused, clear and green COVID-19 recovery program to marry up with the closing of the CLBILS/CBILS window in September.34

23.Although the Government has emphasised the need for a “green” recovery, we note it has not, except in limited circumstances, imposed green conditionality on the support it has provided during the coronavirus pandemic. Whilst it is clear that support schemes were required to be provided without delay the Treasury should set out why it did not include green conditionality for the Recovery Loan Scheme announced in the 2021 Budget.

Government decision making and the Net Zero Review

24.In November 2019, the Treasury launched its Net Zero Review,35 which will consider how the transition to net zero will be funded and will assess options for where the costs will fall. The terms of reference set out what this will involve:

25.An interim Net Zero Review report was published in December 2020, which sets out the analysis undertaken so far, including on uncertainty of cost, policy levers, and household exposure, and seeks feedback ahead of the final report.36 The final report, which will build on the interim report and which will be published in spring 2021, will look at:

26.In 2019, the Treasury also commissioned the Dasgupta review on the Economics of Biodiversity, to assess the economic benefits of biodiversity globally; the economic costs and risks of biodiversity loss; and to identify a range of actions to enhance biodiversity and deliver economic prosperity.38 The review’s final report, published in February 2021, covers the impact of human economic growth and development on nature. One of the report’s main conclusions is that nature’s importance is not reflected in market prices, which has led to underinvestment in the world’s natural assets. The report recommended, amongst other things:

27.Separate to the Net Zero Review final report, the Government has also committed to providing a Net Zero Strategy40 which it says “will set out the Government’s vision for transitioning to a net zero economy, making the most of new growth and employment opportunities across the UK”.41

Co-ordination of Government effort

28.We heard that achieving net zero by 2050 would require the Government to conduct joined-up and coherent decision and policy-making, with an important role to be played by HM Treasury. Baroness Bryony Worthington, environmental campaigner and Crossbench Life peer, told us that an integrated approach to decarbonising was necessary. She told us:

The quality of our policies is imperative and the Treasury plays a central role in that, in ensuring we join up the parts of Government. […] we still spend a lot of money on certain sectors of the economy, including transport. We need to see an integrated strategy of transport infrastructure that hits multiple objectives: clean air, no greenhouse gases, and investment into our industries with sustaining jobs.42

She noted though that “some of the lack of joined-up thinking is within Departments. It is not just between Departments and the Treasury.”43

29.Lord Turner of Ecchinswell, Chairman of the Energy Transitions Commission, also emphasised the important role of the Treasury, saying that “Treasury is in charge of taxes and Treasury is in charge of public expenditure. Although there are many other tools of policy required to build a zero-carbon economy, what the tax regime is and what the public expenditure regime is are crucially important, so that needs to be integrated with the overall strategy.”44

30.The Government has made bold claims that the economic recovery will be a green recovery. In order to achieve that, the Government needs to set out in its Net Zero Strategy who, at ministerial level, will be responsible for delivering net zero, coordinating the roles of different departments, and ensuring that the UK remains on track to meet its net zero target in a cost-effective way.

Spending reviews

31.We received evidence that the Government’s net zero target needs to be integrated into the Government’s spending decisions. Written evidence from the World Wildlife Foundation (WWF) proposed that the Treasury implement a ‘net zero test’ for spending decisions, including at spending reviews and annual budgets. WWF also proposed a Fiscal Resilience Rule as part of the Treasury’s fiscal framework review, which would “guide the decision-making process for the Comprehensive Spending Review”, and ensure “that all spending will be aligned with building the UK’s economic resilience”.45 WWF proposed that the rule would encourage fiscal policy to address future risks to the UK economy, including climate change.

32.The UK operates a system of carbon budgets: legally binding caps on greenhouse emissions over a five-year period.46 Shortly after carbon budgets were introduced under the 2008 Climate Change Act, Baroness Worthington wrote in the Guardian that:

The principle behind carbon budgeting is simply that emissions must stay within a pre-determined limit or compensating actions, such as payment for emission reductions elsewhere, must be taken. This was meant to engender the feeling that every tonne counts, since allowing an emission to take place creates a liability against the budget, whereas, investing in emissions savings effectively creates an asset.47

However, Baroness Worthington told us that in the implementation of carbon budgets “one element that never really got implemented was that, if we are facing a deficit, as in we are not meeting our targets, there is a potential monetary value to that […]”.48 Baroness Worthington explained that “the point is getting the Treasury’s minds to think about this in terms of liabilities, as in if we do not meet our targets we are creating a liability, and assets, as in investments now that decrease that liability over time.”49

33.Kemi Badenoch MP, Exchequer Secretary to the Treasury, told us that it was her intention to hold departments to account for their net zero spending: “We cannot have a plan for net zero without Departments being fully engaged. It is a strategic priority […] All of the various Departments need to take account of which actions help us reduce emissions. This will be important to consider in the spending review. It will be an important part of wider fiscal strategy.”50

34.It remains unclear to us, however, what mechanisms are in place within the spending review process to provide incentives to departments to design their activity and spending so as to meet the Government’s net zero target; nor was it clear to us what the consequences would be for departments that did not do so.

35.In the Net Zero Review final report, the Government should set out what mechanisms it will put in place to integrate the net zero target within departments’ spending review commitments, and how departments will be held to account should they fail to meet their targets.

Uncertainty of costs

36.While a range of different estimates of the cost of achieving net zero have been produced, the overall cost remains uncertain. In June 2019, it was reported that the Rt Hon. Philip Hammond MP, then Chancellor, had suggested that the cost of net zero would reach £1 trillion, and that analysis by the Department of Business, Energy and Industrial Strategy had estimated the cost at £70 billion per year.51

37.We heard from Nick Mohlo, Director of Aldersgate Group, that:

it is difficult to comment on the precise figure because of the uncertainty of looking 30 years out. There are obviously quite big uncertainties around what the cost of finance would be, which would have a big bearing on the overall cost.52

Mr Mohlo added that his understanding of the Climate Change Committee’s analysis was that the UK “would be looking at an actual resource cost of 1% to 2% of GDP to get to net zero”. He explained that while there would be an increase in cost for some sectors, such as low-carbon heating, costs would fall in other areas of the economy, such as transport, where the Climate Change Committee estimated an annual reduction in cost of around £5 billion.53

38.Lord Turner of Ecchinswell told us that “it is not completely absurd” that the cost to achieve net zero by 2050 might be £1 trillion, but he noted that “by setting that figure up, you are making people think, “I have to find £1 trillion in the Budget to pay for that”.54 In his view, the cost would be apportioned across the time period “at the end of which, by 2050, people might have to accept being 1.5% worse off than they otherwise would be, which if we are growing our economy at 1.75%, means that they will reach, in December 2050, the living standard that they would otherwise have reached in February 2050”.55

39.We also received written evidence from the Global Warming Policy Foundation which set out concerns about the Government’s projected reliance on off-shore wind and its associated costs, and particularly that “no official costings of the net zero project have been published”.56 The Global Warming Policy Foundation called for the Treasury “to prepare and publish a detailed and publicly accessible costing of the project”57 and noted that the Foundation’s own calculations indicated costs approaching £4 trillion, or around £150,000 per household.

40.The Climate Change Committee now estimates in its Sixth Carbon Budget published in December 2020 that the annualised resource cost will be less than 1% of GDP per annum until 2050 but that this would not “necessarily reduce GDP by an equivalent amount”, as modelling suggested that the level of UK GDP “would be around 2% higher than it would have been by 2035 as resources are redirected from fossil fuel imports to UK investment”.58 The Sixth Carbon Budget outlines three possible scenarios which reflect uncertainties over “how far people will change their behaviours, how quickly technology will develop and the balance between options where credible alternatives exist”.59

41.The Treasury recognised the uncertainty of cost estimates in its Net Zero Review interim report, published in December 2020:

… [the] amount of investment required to reach net zero and the consequential impacts on operating costs are difficult to estimate. They are affected by a range of factors, including the precise path of transition, changes in behaviour and the rate at which technology costs fall and efficiency gains made, all of which are subject to significant uncertainty.60

42.We received evidence on the difficulties of economic modelling and of estimating the costs. When asked whether the Treasury’s economic modelling facilitates the effective funding of environmental policies, Chris Stark, Chief Executive of the Committee on Climate Change, told the previous Committee that “the Treasury has several ways of modelling the economy. Some of those models are extremely appropriate and some are not.” He noted that the Treasury had considered net zero in recent years as a “spending pressure”; but in his view, this was not the most appropriate way to look at the issue, as the policies needed to get the UK to net zero were likely to be long-term. He argued that “if you view the policies that are necessary to get us to net zero in three or four-yearly periods as spending pressures, it is going to be extremely difficult to consistently make the arguments for those policies to be in place”.61 He said that the Treasury needed “to lift its horizons slightly”.62

43.Professor Nick Robins, Professor in Practice of Sustainable Finance at the London School of Economics, was critical of current modelling of both costs and benefits, and told the previous Committee:

[…] the current economic models, potentially including the Treasury’s, really underestimate the scale of the challenge around climate change in two profound ways. First, they underestimate the costs, because often they only price things that are measurable and we know that many of these things are hard to measure. Secondly, they have consistently underestimated the benefits of an innovation-led process of growth. […] that leads to unnecessary caution, both in viewing the challenge of climate change as smaller than it is and in downsizing the potential opportunity for the wider economy.63

44.We raised uncertainties about costs with Ministers. The Exchequer Secretary for the Treasury, Kemi Badenoch MP, recognised the inherent tension between achieving the UK’s net zero goal by 2050, and ensuring that it was achieved in a cost-effective way, saying that “the Government’s priority is that we do this in a way that is sustainable and not in a way that loses people their jobs or their livelihoods”.64 She also told us that the Treasury was still assessing where the costs for achieving net zero would lie, but she did say that “between businesses, taxpayers, and consumers, it is about making sure that the balance is fair”.65 When asked about the costs of not taking action, Ms Badenoch told us that while she recognised that the physical impact of climate change required action, “we have not got to a point where we have been putting a figure on it. That is something that we will be looking to do very soon in the future”.66

45.While Ms Badenoch committed to providing the methodology around the calculation of cost estimates of the transition to net zero, she noted that “I am not sure whether that is something that would be in the review itself. It would be quite difficult. I think we can provide in other forums ways of explaining the methodology”.67 However, Ms Badenoch committed to going “as far as we possibly can to show the working and be as transparent as we possibly can”,68 acknowledging that the “consequences could be catastrophic if we do not accurately estimate what the costs are going to be”.69

46.The Chancellor should publish the Net Zero Strategy as soon as possible and should set out, in conjunction with the Net Zero Review final report, the principles upon which the UK will fund its transition to net zero carbon emissions by 2050.

47.There are a number of different estimates of the cost of achieving net zero by 2050. However, the Government has not yet committed to its own cost estimates and should set these out as soon as possible. The Government should include in the Net Zero Review final report its own methodology on costs; and it should set out clearly where the uncertainties lie. The Treasury should also include a range of scenarios on how net zero might be achieved, and the associated cost for each scenario.

Regional impact of transition to net zero on high carbon industries

48.The 2015 Paris Agreement, to which the UK is a signatory, states that signatories would “tak[e] into account the imperatives of a just transition of the workforce and the creation of decent work and quality jobs in accordance with nationally defined development priorities”.70 This was followed at COP24 in 2018, when the then Prime Minister signed the Solidarity and Just Transition Declaration Silesia, which reaffirmed the “imperatives of a just transition of the workforce and the creation of decent work and quality jobs” and recognised that “the circumstances of economic sectors, cities and regions that are most likely to be affected by the transition vary from country to country”.71

49.The Government’s Net Zero Review interim report, published in December 2020, recognised the likely differing regional impact of a transition, observing that it would “lead to significant changes in the structure of the economy” and that these changes would “have knock-on impacts on sectors, jobs and regions.”72 It acknowledged that “employment losses concentrated in high carbon sectors are possible if these sectors cannot adapt or absorb the costs of decarbonisation”.73

50.Some of our witnesses expanded on this point. Professor Robins, Professor in Practice of Sustainable Finance, Grantham Research Institute at the London School of Economics, told us that:

Just transition is already part of the Paris agreement. We can translate that commitment in a policy sense, for example, when we come forward with the national infrastructure strategy, when we think about the skills and retraining that is going to be required. In terms of the regional dimension, the transition is not going to happen equally across the country. The country is very differentiated between rural, post-industrial and urban.74

51.Dr Daniel Klier, Group Head of Sustainable Finance at HSBC, observed that financial institutions were now running scenarios on their lending exposures to identify which geographies and sectors were most affected. Dr Klier said that “We need to do the same for the UK economy, to identify exactly what we mean, which industries and which parts of the economy are affected, and then launch a cluster strategy for those. Investors, banks and the wider community here will be able to act only if we point fingers at where we have concerns”.75

52.For the Government’s part, Niva Thiruchelvam, Deputy Director, Head of Net Zero Review at the Enterprise and Growth Unit in HM Treasury, told us that “The Net Zero Review is looking specifically at climate change mitigation and the optimal path to get to net zero by 2050. As part of that, we are looking at distributional issues [...], and a just transition is very much part and parcel of that”.76

53.The Treasury’s Net Zero Review final report should include clear sectoral pathways towards decarbonisation and should address the key policy decisions as to the future of high carbon industries. Particular attention should be given to the potential regional impact of those decisions, and the Government should set out a framework and strategy for supporting those communities which will be most impacted by these changes. This is especially important given the Government’s commitment to a Just Transition as part of the Paris Agreement.

11 HM Treasury and Department for Business, Energy & Industrial Strategy, Green finance strategy; Transforming Finance for a Greener Future, July 2019, p 6

12 HM Treasury and Department for Business, Energy & Industrial Strategy, Green finance strategy; Transforming Finance for a Greener Future, July 2019, p 7 - 11

13 Principles for Responsible Investment is an independent membership body for institutional investors supported by the United Nations

14 Oral evidence taken on 2 July 2019, HC 2233 (2017–19), Q14 [Sagarika Chatterjee]

15 Positive Money, ‘Making money and banking work for society’, accessed 8 April 2021

16 Positive Money, (DUE0063) para 4.3

20PM: A New Deal for Britain”, Prime Minister’s Office, 10 Downing Street and The Rt Hon Boris Johnson MP, press release, 30 June 2020

21 HC Deb, 8 July 2020, col 976 [Commons Chamber]

22 HC Deb, 8 July 2020, col 976 [Commons Chamber]

23 The Conservative Party, ‘Boris Johnson: Read the Prime Minister’s Keynote Speech in full’, accessed 12 February 2021

24Prime Minister Boris Johnson outlines his Ten Point Plan for a Green Industrial Revolution for 250,000 jobs”, Prime Minister’s Office, 10 Downing Street and The Rt Hon Boris Johnson MP, press release, 18 November 2020

25 HM Treasury, Spending Review 2020, CP 330, November 2020, para. 29

31 Written Ministerial statement, 2 July 2020, HCWS332

32 HM Treasury and Department for Business, Energy & Industrial Strategy, ‘Guidance: Recovery Loan Scheme’, accessed 9 April 2021

33 HM Treasury and Department for Business, Energy & Industrial Strategy, ‘Guidance: Recovery Loan Scheme’, accessed 9 April 2021

34 Barclays (DEC0052) p 2

35 HM Treasury, ‘Net Zero Review terms of reference,’ accessed 12 February 2021

36 HM Treasury, Net Zero Review: Interim report, December 2020, p.3–5

37 HM Treasury, Net Zero Review: Interim report, December 2020, p 5–6

38 HM Treasury, ‘Collection The Economics of Biodiversity: The Dasgupta Review’, accessed 17 March 2021

40 HM Treasury, Net Zero Review interim report, December 2020, para 1.22

42 Q2

43 Q5

44 Q3

45 World Wildlife Foundation (DEC0054) pp 1, 4, para 30

46 Climate Change Committee, ‘Advice on reducing the UK’s emissions’, accessed 9 April 2021

51UK net zero emissions target will ‘cost more than £1tn”, The Financial Times, 5 June 2019

52 Q6

53 Q6

54 Q8

55 Q8

56 Global Warming Policy Foundation (DEC0009) pp 1–2

57 Global Warming Policy Foundation (DEC0009) p 2

58 Climate Change Committee, The Sixth Carbon Budget The UK’s path to Net Zero, (December 2020), p 21

59 Climate Change Committee, The Sixth Carbon Budget The UK’s path to Net Zero, (December 2020), p 24

60 HM Treasury, Net Zero Review interim report, December 2020, p 4

61 Oral evidence taken on 2 July 2019, HC (2017–19) 2233, Q12 [Mr Chris Stark]

62 Oral evidence taken on 2 July 2019, HC (2017–19) 2233, Q12, [Mr Chris Stark]

63 Oral evidence taken on 2 July 2019, HC (2017–19) 2233, Q12, [Professor Nick Robins]

70 United Nations, Paris Agreement, (December 2015), p 2

72 HM Treasury, Net Zero Review interim report, December 2020, para 2.27

73 HM Treasury, Net Zero Review interim report, December 2020, para 2.30

Published: 22 April 2021