Wednesday, 24 March 2010

Green investment bank may be announced in the budget, but what would it deliver?

Financial and environmental experts give their views on how it should be set up, and what its financial resources should support, Tuesday 23 March 2010 13.39 GMT
A green investment bank or fund is expected to be unveiled in Alastair Darling's budget tomorrow. But there is little clarity on how it would operate, or what it would invest in. The idea has been studied by a range of financial and environmental experts, so the Guardian asked a panel of experts two questions:
1. How should it most effectively be set up?
2. What should it use its financial resources to support?
Sean Kidney, chair of the Climate Bonds initiative
1 - We have some great models in the world: the European Investment Bank, KfW in Germany, Caisse Depots in France. It needs to be run at arms-length from government and have a brief to judiciously use the limited funds available from the government to mobilise the private finance we need to transform our energy system. But above all it must be focused on the engineering of investment in energy and related areas to achieve a transformation to a low-carbon economy.
2. First it must kickstart debt markets for energy efficiency overhauls in this country. That's the low hanging fruit of carbon emissions cuts, where we reduce our power bills while buying time to transform our energy system. To cut emissions we need very big investments to be made; but despite evident economic benefits, things are moving very slowly. It's just too complicated or marginal for most people and businesses. Second is renewable energy which, driven by innovation and mass manufacturing, is getting cheaper every year. Over the next 10 years we have to replace more than half of our old power plants, and we need to make sure we do so with clean energy. A green investment bank can use climate bonds to capture those future savings to pay for a rapid build-out of clean energy now. This could break the logjam for deployment of climate change mitigation.
Doug Parr, policy director at Greenpeace UK1. First of all, the bank needs to be up and running quickly. Our European neighbours have already begun the upgrades necessary for the transition to a low carbon economy. Second, the bank will need to provide low interest loans which are guaranteed by the government. Some of the required capital can be raised from the sale of public assets, but we must also consider bolder ideas such as directing publicly owned banks, such as RBS, to invest in this scheme. Over the longer term the government should use tax revenues from carbon intensive industries to fund this bank and help kickstart the clean, renewable technologies that will secure Britain's prosperity in the 21st century.
2. It must be clear that only low carbon projects like offshore wind farms, ports and advanced electricity grids will benefit from financial support. It is vital that this project is not used as a fig leaf to divert attention from a carbon intensive, business-as-usual approach in other government departments. Industry experts predict that up to £37.5bn is needed each year to upgrade our creaking energy system. If it delivers, this new bank can help secure this investment, creating thousands of new jobs, fighting climate change and securing Britain's energy supplies for good.
Tom Burke, founding director of sustainable development consultants E3G
1. The trick to establishing a successful green investment bank is get its distance from the Treasury right. Being either too close or to distant will see its initiative crushed. It must be established by statute to secure its independence and its public purpose must be defined with great clarity to ward off subsidy seekers. The majority public shareholding should be equally split between the department of energy and climate change, to reflect its responsibility for carbon budgets, and the Treasury.
2. A green investment bank should focus exclusively on funding infrastructure. The foundations of a low carbon energy system are smart grids, high speed rail links and electric vehicle charging networks - the platforms for a wide range of technologies. They are to 21st century competitiveness what the motorways were to the 20th century. The private sector will not build this infrastructure on time and to scale without public participation. The green bank's task is to lower the cost of capital for this infrastructure not to be an extra pocket to feed nuclear or renewable technology subsidy seekers.
Tom Murley, chairman of the British Venture Capital Association's Energy, Environment and Technology Board
1. A Green Investment Bank should be set up as an independent agency similar to the KfW Bank in Germany or the European Investment Bank. Its purpose should be to invest in sectors, companies and projects, originated and vetted by the private sector, filling funding gaps where private sector capital is not available or addressing specific market failures. While it should be a consultee on low carbon and renewable energy policy, it should be independent of policy formation.
2. The bank should invest in support of the government's long term renewable energy, energy efficiency, low carbon and energy security targets. This would include a range of investments, from debt for large offshore wind projects to potentially investing in venture capital funds backing new innovative technologies. It should seek commercial returns on investment, so as not to displace private capital and to provide returns that can be reinvested in other companies and projects.
Andrew Simms, policy director at the new economics foundation
1. The banking failure laid bare the private sectors' veiled dependence on the public sphere in bad times. But, a publicly owned Green Investment Bank will be proactive, not just there to pick up the pieces of mistakes made elsewhere. It should provide affordable credit, capital and guarantees, and in the process leverage further investment, but only to groups, companies and initiatives that will help push a rapid transition to a low carbon economy. Capital can be raised from a mixture of bonds, carbon taxes, the redirection of resources held in other part public owned banks and "green" quantitative easing. Working mostly at a large scale, the Green Investment Bank will need a network of more local, sister banks able to provide capital for smaller scale initiatives.
2. The priority will be to finance a new low-carbon infrastructure for Britain. From new and renovated low-energy building stock, to a new multi-scale, multi-technology renewable energy power system, to a clean, efficient, transport network with a hugely enhanced role for mass public transit, the bank would be instrumental in rewiring the nation for a low-carbon, high well-being future. In essence, it will help to write a national insurance policy against a future of high and volatile fossil fuel prices, geo-political insecurity and carbon constraints due to global warming.
Chris Goodall, author
1. The German state investment bank KfW is an attractive model. This entity lent €60bn last year, almost half of which went to companies involved in environmental protection of one form or another. It raises money on the international capital markets but its conservative policies and long-term perspective have meant it has been able to continue supporting smaller companies and environmental projects throughout the last two difficult years. If implemented here, our equivalent should be located outside London, have lending offices spread across the UK and offer private individuals a chance to invest in its activities.
2. In 2009 KfW put about €9bn into building refurbishment. Its activities have been geared towards helping property companies and social landlords improve the poor insulation standards of post-war German housing and commercial property. It has helped improve many hundreds of thousands of homes, providing more comfortable accommodation that it is much cheaper to run. KfW's lending has also created an effective and flexible eco-refurbishment industry. This has improved employment and skills, particularly in the less prosperous eastern parts of the country. We should copy the German emphasis on housing renovation as a primary activity of the bank, rather than let the UK entity focus on risky venture capital investments.
James Cameron, vice chairman, Climate Change Capital
1. It is crucial that this institution is set-up rapidly, has a clear low carbon mandate, and is funded at a level commensurate with the scale of the financing challenge we face. It should be set up to catalyse private sector investment and transcend political cycles. Given Britain's fiscal situation, it should sit off the government's balance sheet and have the task of delivering our low carbon transition in a cost-effective way for consumers and business. One of its key objectives should be enabling pension funds to deploy capital in low carbon infrastructure.
It could do this by issuing asset-backed green bonds, for example, to improve Britain's energy efficiency or build offshore wind farms. However, there is no need to build a huge physical institution. The institution could be capitalised by existing banks, including the state-owned ones. Government expenditure via the Carbon Trust and other relevant quangos could be used as well. Funds raised by selling government assets, as suggested by the chancellor, might be used successfully, but this could take more time than we have.