Committee warns UK of low-carbon investment shortage
A parliamentary committee which audits energy policy has issued a stern warning
The UK’s financial stability and its greenhouse gas (GHG) reduction targets are in jeopardy because of a gaping shortfall in low-carbon investment, a new report has claimed. The report, published by the UK’s Environmental Audit Committee (EAC), said there is a looming gap in finance for low-carbon energy investments.
The EAC, which reports on UK government energy policies to the House of Commons, said low-carbon investment is currently less than half of the £200 billion ($330bn) needed in energy infrastructure funding alone by 2020. Without this, the UK is unlikely to reach its national carbon emissions reduction targets, it said. The UK wants to cut carbon emissions by 80% by 2050, relative to 1990 levels.
Shaun Kingsbury, chief executive of the Green Investment Bank, said between £8bn- £10bn was being invested in low-carbon infrastructure and generation every year, while around £20bn a year was actually needed.
The EAC said that, to deliver the UK’s emissions reduction targets, it will need investment in new low-carbon infrastructure, which could cost as much as £550bn over 10 years.
The Green Investment Bank, which was established by the UK’s coalition government in 2012, has helped to provide funding for low-carbon energy by financing initiatives such as low-energy street lighting and by offering local authorities low fixed-rate loans.
However, the bank does not currently have the power to borrow in order to leverage and enlarge its investments - limiting its potential to fill the green finance gap. The government had pledged to allow the bank to borrow from 2015, as long as the UK’s debt reduction targets are met.
Joan Walley MP, the chairman of the environmental audit committee, has argued strongly for allowing the bank to borrow, even id public debt remains flat, saying the move would boost green investment and create jobs.
Mind the gap
The EAC report also said it believed investors are over-valuing companies which develop fossil fuels, in part because it will not be possible to burn all the fossil-fuel assets held by those companies without causing catastrophic climate change.
This echoes the findings of a 2013 report from Carbon Tracker and the Grantham Research Institute which said between 60% and 80% of total global fossil fuel reserves cannot be burned if we are to keep global warming within a 2 degree centigrade level.
The report said to keep global temperatures within a 2 degree C rise of pre-industrial levels – the level which climate scientists agree would cause catastrophic climate change – then we can only burn around 565bn to 886bn tonnes of carbon dioxide (CO2) between now and 2050. This is just a fraction of the 2,860bn tonnes of CO2 which would be emitted if total global fossil fuel reserves were to be burnt, it said. “As a result, the global economy already faces the prospect of assets becoming stranded, with the problem only likely to get worse if current (low-carbon) investment trends continue,” Carbon Tracker said.
Walley added that the government and Bank of England should not underestimate the damage carbon can do to the UK economy. “The UK government and Bank of England must not be complacent about the risks of carbon exposure in the world economy,” Walley said. “Financial stability could be threatened if shares in fossil fuel companies turn out to be over-valued because the bulk of their oil, coal and gas reserves cannot be burnt without further destabilising the climate.”
The EAC said the Bank of England’s financial policy committee should seek advice from the Independent Committee on Climate Change to help it monitor the systemic risk to financial stability associated with insufficient low-carbon investment.
The government should also ensure that energy company reporting requirements provide investors with the information required to assess financial exposure to carbon, it added.
The EAC said to address the green finance gap, the government must provide a stable policy framework that maintains investor confidence and helps markets price in the cost of carbon. It also wants the government to abandon its review of the fourth carbon budget (2023-2027) and use the implementation of electricity market reform to make a clear commitment to avoiding further unplanned regulatory and subsidy changes for low-carbon energy. It could do this by setting a 2030 carbon intensity target and setting out indicative funding levels in the levy control framework until that date, the EAC said.
The environmental audit committee also wants the UK government to take a more central role in steering international climate talks and committing to global, stringent carbon-reduction targets.
In January, the European Commission (EC) outlined plans to cut GHG emissions by 40%, from 1990 levels, by 2030. The EC also plans a European Union (EU) wide target for renewable energy to comprise at least 27% of the group's energy mix by 2030.
The white paper is designed to build on the previous 20:20:20 EU climate policy. This policy envisaged a 20% reduction in GHG emissions below the 1990 level, a 20% share for renewable energy sources in the energy mix and a 20% saving in primary energy consumption, all by 2020.
The new 2030 proposal aims to take further steps towards the EU's aim to cut GHG emissions by 80-95%, from 1990 levels, by 2050. But it has been criticised for not making the targets legally-binding.
Edward Davey, the UK’s Energy and Climate Change Secretary, said the fact that the EU-wide renewables target of 27% was not legally binding allowed member states to work flexibilly to meet their GHG-cutting targets in the most cost effective way. “We continue the push for our EU partners to sign up to the UK position of a 40% reduction in domestic greenhouse gas emissions,” Davey said. “We call for urgent action on reaching an ambitious 2030 energy and climate change agreement, to spur on investment in green, reliable energy and build momentum for a global climate deal.”
The EAC report points out that reducing fossil fuel investment in the short- to medium-term will depend on investors having confidence that the international community will agree a credible and significant commitment to reduce emissions. The committee called on the government to continue to play a central role in agreeing ambitious and binding international commitments on climate change, both in the EU and in the run up to the UN climate talks in Paris 2015.