British Party Politics Aside, All Banking on Green Investment


With a Budget just announced and an election coming up, Peter Young, Chairman of the Aldersgate Group, tell us the Green Investment Bank is a reality, whichever party is in power in the United Kingdom, while a coalition opposed to a third runway at Heathrow claims that the 2003 Air Transport White Paper is obsolete, because it is inconsistent with the Climate Change Act of 2008.

Peter Young, Chairman of the Aldersgate Group described the Group’s priorities leading up to the budget and the forthcoming election, at a recent important gathering:

Peter Young  welcomed the commitment to a Green Investment Bank (GIB) by the Conservatives and noted that Labour and Liberal Democrats are also discussing banking models, “so we have an opportunity here with all the main parties supporting something of this nature to push it forward in the Budget.”

The GIB would be the cornerstone of a new fiscal strategy which will need to reduce the risk associated with investment, thereby allowing private sector investors to secure their returns and opening up unprecedented levels of capital flows. Mr Young was upbeat about the possibilities: “The money is there. It just has to be possible for the policy risks and the returns to be sufficiently tangible to allow the private sector to move.”

Mr Young specified that the GIB must provide access to capital without adding to the public sector borrowing requirement and must encourage private sector investment but not compete with it. Green taxation must also play a role in reshaping the economy, focusing on polluting areas and away from activities that are valued by society.

Lastly Mr Young commented that, “We have been particularly poor in the UK at converting the investment that we do make in green technologies, into jobs and into developing higher level skills within the UK economy.” HSBC revisited this topic at the end of 2009 and reconfirmed that we’re lagging behind key competitors like Germany, the United States and China in the amount of fiscal incentive being put into developing indigenous low carbon industries and services.

At the same Aldersgate meeting of minds, Greg Barker MP declared that “come the General Election, we are all in it together.”

It will be essential that “everyone that cares about a green future for Britain, about radical action to decarbonise our economy, joins this debate and ensures that more sustainable lifestyles for the people of Britain are absolutely at the heart of this General Election debate.” He warned, “there will be plenty of other voices trying to pull our political leaders of all parties off that platform and onto other topics.”

The Conservative Party is committed to that green future and believes that a genuine, long-term partnership with the private sector will be essential. A Green Investment Bank (GIB) will be central to this partnership and Mr Barker insisted, “It’s got to be a key part of the new financial architecture of the City of London”, to build “the global hub for green capital worldwide, and make the financial services industry here the first port of call for any global company looking to raise finances to power transitional investment policies.”

The Conservatives have established a Commission comprised of “mainstream financial services professionals”, to draw up proposals for the GIB and Mr Barker hinted that the final model is unlikely to be “a stand alone institution like the EBRD, with gazillions of its own executives and big offices. It’s more likely to be a strong sense of governance with the actual functions put out to tender with different investment criteria than you would normally expect to see.”

Mr Barker discussed, using illustrative figures, areas of potential innovation: for example, venture capitalists could provide investment for the best-in-class players, but rather than acquire a 25% IRR (Internal Rate of Return) they might only require 12%. Instead of an investment life of five years, they might be eight or ten, but fundamentally, all this would be carried out “working through the private sector and those experienced investment professionals.”

In terms of taxation, Mr Barker said the Conservatives are “absolutely committed [to] raising the proportion of green taxes as an overall proportion of the tax take”, although they would also aim to reduce the tax burden on businesses and individuals.

James Cameron, Vice Chairman of Climate Change Capital highlighted the “very powerful and somewhat alarming connection between climate change, energy security and natural resource depletion.”

The conjunction of challenges facing us will require unprecedented levels of investment, which can only be effectively achieved, Mr Cameron suggested, through the development of a new institution with the capacity to deal with the inherent complexities of these issues. We need an organisation that works on the long term, whose remit extends beyond the political cycle and which is independent of government. Mr Cameron noted that misaligned incentives in the banking sector are blamed for the credit crunch, but politicians are equally disincentivised to think and act in the long term.

To the challenges of climate change, energy security and natural resource depletion, we can add the fiscal issues of the low level of savings in the UK and colossal levels of personal, institutional and government debt. Mr Cameron urged that the UK must improve the savings culture and spend the consequent capital within the British economy on assets that will generate employment. Our Asian competitors, meanwhile, have high levels of savings and are therefore capital ready. How they choose to deploy that will be hugely influential for the world.

This creates a powerful agenda for the creation of a Green Investment Bank – whether or not it is labelled as such. But, “if we commit both public money and channel private capital into perpetuating the type of high carbon infrastructure that we have today we will lock in costs for future generations. It would be unforgiveable, an absolute dereliction of duty.”

A Green Investment Bank could help change the focus of investment: “Our equity markets are outrageously dependent on a tiny amount of dividend paying stocks, almost all of which are fossil fuel based.” Although there have been promising developments (such as the carbon price – although currently too weak – and a renewable energy policy that is starting to provide returns), no serious alternative exists to investment in these stocks. Mr Cameron urged, “we are desperately in need of a [new] set of investment products for the nation” that can produce long term value and yields. To produce the same sort of consistent yields as those possible with fossil fuels, will require intervention.

Mr Cameron acknowledged that the current public attitude towards climate change is unfavourable, with a backlash against the science of climate change. However, he remains confident it will pass and articles will start to appear reasserting the validity of the science. One example has already appeared in The Times, click here to read it. He warned, “you should expect this climate change debate to ebb and flow. You should never expect unanimity of view in science. Why would you ever? Science works by disagreement!”

Professor Paul Ekins, Director of the Green Fiscal Commission (GFC) argued that green fiscal reform “is an absolute cornerstone policy … without it the low carbon transition won’t come about.”

The forthcoming Budget must deal with reducing the deficit in an environmentally responsible manner, supporting environmental technologies and low carbon jobs, and stimulating the low carbon economy. Professor Ekins declared that, if these three questions were not explicitly addressed “then I think there is a dereliction of duty going on.”

To this end, he focused his comments “explicitly and unapologetically” on green fiscal reform, “because it is the only policy – the only one – that will do all three of those things.” Green fiscal reform is a tax shift, not an increase, so the overall revenues remain the same.  Professor Ekins pointed out that, “since 1999 the proportion of tax revenues coming from environmental revenues has fallen”. He voiced his consequent disappointment in the recent government proposals to increase National Insurance by 0.5% (to fund the deficit), because “at a time of high and rising unemployment, to increase the tax on jobs seems to me to be completely daft.”

The precise tax proposals can be found in the Green Fiscal Commission (GFC)’s report, accessible on their website. All the proposed taxes are already in operation elsewhere, for example many European countries have a tax on car purchase, which was widely criticised in the press as politically unworkable. Professor Ekins argued that this tax is vital to curb the trend towards larger vehicles, which has negated the efficiency gains made by engine designers.

“With this single policy of a green fiscal reform, our modelling suggests that we [can] hit the Government’s carbon target for 2020 of a 34% reduction in greenhouse gas emissions.” This policy would, however need to be flanked by a raft of complementary policies to ensure that vulnerable households, for example, or UK competitiveness are not adversely affected.

In conclusion, Professor Ekins emphasised that green fiscal reform “will stimulate investment, it will bring about behaviour change. An absolutely key point is that efficiency measures by themselves do not reduce demand – the rebound effect will very easily gobble up efficiency measures unless they are accompanied by systematic price increases.”

Frances O’Grady, Deputy General Secretary, TUC referred back to Mr Barker’s speech, commenting “I hope that Greg is right when he says we’re all in this together. I fear that some may find themselves more in it than others.”

The TUC’s priorities for this Budget will be to ensure it helps growth, green jobs and green skills and makes available a £5bn Strategic Investment Fund, based on the French model. The TUC also advocate a Green Investment Bank.

Ms O’Grady urged that when considering government intervention, context is important: “when people worry about the Government interfering … I think we need to remind ourselves that governments interfere constantly in business and the markets and the question is not whether we should have big government or small government, but how can we ensure that we have intelligent government when it comes to industrial strategy.”

Ms O’Grady said she had encountered employers and unions alike asking for certainty, delivered by a policy framework from government which would allow them, in partnership, to do the rest. Certainty, for example, is needed in the energy market, not just in renewables but also nuclear and clean coal.

The Government should get to grips with the UK’s £220bn procurement budget, which could be better used to stimulate green behaviours and technologies. The TUC firmly supports a new green infrastructure, which would not only affect big companies, but would stretch down into an entire supply chain of SMEs.

However bearing in mind the estimation by Dieter Helm and his colleagues, that the UK infrastructure will require £434bn by 2020 of investment, the question must be asked: “what do we do if the money is not forthcoming from the markets? Because we’ve got a deadline, a literal deadline on this agenda, that we need to beat.”


By Amy Drew (29 March 2010):

It now appears that the High Court in London has ordered the UK government to consult with the public once again on the proposed construction of a third runway at London’s Heathrow Airport. A coalition of local councils, residents, and environmental groups sought a judicial review against the proposal. They argued that the government’s approval of the scheme was at odds with environmental targets. Some campaigners also argue that the first public consultation was unfair.

Despite the very good defense that was heard from the Department of Transport, Lord Justice Carnwath just recently ruled that the 2003 Air Transport White Paper is obsolete, because it is inconsistent with the Climate Change Act of 2008. The judge also expressed some real concerns over the hardship that would be caused to the local community by the third runway.

Thus, the coalition, which brought up the successful legal challenge, is now calling on the government to end the uncertainty and scrap the runway plan for good. Of course, it’s not quite that easy. Supporters of the proposed development argue that a third runway at Heathrow is essential for the economic prosperity of south and east England. Not only that, but they say that it would create a ton of local jobs.

People who oppose the plan, including Greenpeace, said that it would be environmentally damaging. They also said that it would destroy local properties and increase noise pollution. Overall, they feel that the whole plan would bring nothing but trouble.

Either way, both sides of the argument have good points that they are trying to make. This is going to be one battle that rages on for quite some time.


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