Green Alliance FSUK0004
Written evidence submitted by Green Alliance
Green Alliance is an independent think tank and charity focused on ambitious leadership for the environment.
As part of our greening the economy workstream, we have launched a green finance programme. This programme aims to support parliamentarians to shape government and Bank of England policy to align the financial system with a 1.5°C world
To inquire into the initiatives and their impact, with particular regard to:
To date, the government’s approach towards green finance has been to wait for the private sector to raise the ceiling, in terms of voluntary best practice, before raising the floor through mandatory standard-setting. This can be seen with the voluntary pledges on climate-related financial disclosure before mandatory reporting became government policy, and more recently on net zero transition plans. Corporate approaches to financing existing and planned fossil fuel projects, therefore, must be considered in relationship with government policy.
In recent years, the government has played a key leadership role internationally on fossil fuels. For example:
To reduce the contribution of fossil fuels to the UK energy mix further, the government must introduce stronger, underpinning rules. (See pathways to reducing investment in fossil fuels section).
Over the past decade, the financial sector has adopted a more joined-up approach towards encouraging the decarbonisation of the economy. Some examples include:
Despite improving coordination on net zero, the financial sector continues to fund environmental breakdown. The financed emissions of the City of London, for example, make it a larger emitter than Germany or Canada. Since 2016, the five largest British banks – including those with net zero targets – provided £275 billion in finance for fossil fuel companies.
In terms of financing net zero, the level of private investment still falls well short of the CCC’s investment target of £50 billion per year from 2030 to 2050. Financing gaps are particularly stark in certain sectors. In the natural capital sector, for example, GFI’s Finance Gap for UK Nature Report estimates a £44 to £97 billion funding gap requirement to meet the UK’s key nature-related goals over the next decade.
To harness the collective power of the financial sector, a degree of policy intervention is needed to fix gaps and foster the right environment to crowd-in investment in net zero:
Between 2016 and 2020, oil and gas companies in the UK received £9.9 billion in tax relief for new exploration and production, and £3.7 billion in tax relief for decommissioning costs. To reduce private investment in fossil fuel extraction, a combination of taxation and policy measures are needed:
Largely, investment in renewable energy generation, distribution, and storage has been private investment led. Although, since The ten point plan for a green industrial revolution, published November 2020, the government has committed the following public funds storage:
To mobilise greater private investment in renewable energy, the government should:
Private investors require predictability from government policy to invest. It is exactly at times of turbulence, like we are currently experiencing, when the government must ensure policy remains consistent. If policy changes in a kneejerk manner, confidence will be damaged beyond the current crisis.
Supply chain and energy market disruption resulting from the invasion of Ukraine has undermined progress to move away from fossil fuels.
A good case in point is the letter that the Chancellor Rishi Sunak wrote to the Bank of England in April with recommendations for the financial policy committee. In the letter, the Chancellor wrote:
The Government is taking a balanced approach: committed to accelerated investment in low- and zero carbon technologies, while supporting our strong and evolving UK hydrocarbon industry. Where practical and relevant, the Committee should have regard to the Government’s energy security strategy and the important role that the financial system will play in supporting the UK’s energy security - including through investment in transitional hydrocarbons like gas - as part of the UK’s pathway to net zero.
This new position towards increasing domestic oil and gas production has been demonstrated recently on several occasions:
The government has responded to supply chain and energy market disruption by focusing primarily on increasing domestic fossil fuel production. This sends a poor signal about the government’s net zero priorities. Whilst it will only have a marginal effect on investor behaviour, the government should be incentivising low carbon investment instead.
Domestic fossil fuel production is neither the most efficient means of reducing dependence on Russian fossil fuels nor compatible with the UK’s net zero goal. Research by E3G shows that energy efficiency, clean heat and renewables can replace four times the gas we import from Russia by 2025. The IEA has labelled the failure to accelerate energy efficiency during this period as “utterly inexplicable”.
Fossil fuel assets are exposed to significant levels of climate-related financial risk, both physical (e.g., infrastructure damage from increasingly frequent extreme weather events) and transitional (e.g., stranded assets as global economies make the shift to clean technology).
Research by the University of Exeter suggests half of the world’s fossil fuel assets will become stranded by 2036 under a net zero transition. These assets are currently valued between $11 trillion and $14 trillion.
The scale of stranded fossil fuel assets represents a major risk to not only the financial system, but the state and taxpayers who might be left covering the costs. To avoid this, there are several regulatory approaches the government and Bank of England can undertake:
Sam Alvis, Head of Economy, Green Alliance