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Financing a Green Investment Bank

08 June 2010 #Environment


All three main political parties included in their manifesto pledges, the creation and support of a Green Investment Bank (GIB), in order to help finance the transition to a low carbon economy. The parties differed on the exact role of the bank, with Labour favouring an infrastructure funding institution and the Conservatives opting for early-stage start-up investing. In reality, a mixture will be required and it seems that other funding bodies such The Carbon Trust and Infrastructure UK may be amalgamated into the GIB, to avoid duplication of roles.

The creation of a GIB was warmly welcomed by both the environmental community and the investment community. However, private investors have cautioned that the role of the GIB should be to complement, rather than compete with, private sector investment. This could mean that a GIB takes a larger proportion of risk in investment projects, agreeing to take the first losses in order to provide private investors with greater confidence to invest in the sector. It has long been acknowledged by those in the investment community that high levels of risk existing in the sector have resulted in lower than optimum investments. It is essential though, that the GIB invests on a commercial basis, so that taxpayers money is not simply written off to pacify private investors.

Party proposals on how best to capitalise the GIB have, in general, been considered too little amounts or not detailed enough. Labour had proposed injecting £2 billion through the sale of infrastructure assets, including the Euro Tunnel. However, this could take years to implement and would in any case be far too small an amount to drive investment in the sector. The British Venture Capital Association have proposed that revenues from the sales of EU ETS allowances be used, which could contribute up to £40 billion by 2020. There have been other suggestions, such as Green Fiscal Reform, which propose redistributing tax revenues in favour of environmental projects. However, with a large budget deficit this will restrict the potential of reducing taxes and force budget cuts elsewhere. It will be important for this public money to leverage private investment in much the same way as the UK Innovation Fund has done.

If we examine some of the proposals, it can be seen that sufficient revenues from environmental taxes are available. The sale of EU ETS permits is organised on a national basis, with the government being allocated a fixed number of permits according to the National Allocation Plan (NAP). The NAP is determined through previous emission levels, industries covered, and emission reduction targets. In the UK the permits are auctioned throughout the year, with the government setting a reserve price. In 2009-2010, the lowest auction bids ranged from €13-18 per tonne CO2e. These auctions raised a total of £365 million, or enough for a wind farm capable of providing over 200MW of power. As we enter Phase III of the ETS, greater revenues will be generated through increasing sector exposure and stricter emissions caps. The full revenue from environmental taxes can be seen in the table. This does not include any potential revenues from reducing subsidies to the oil and gas sector. It also seems prudent to assume that these revenues will increase in the short term as these environmental taxes attempt to internalise the market failures that have failed to account for environmental damage.

This re-distribution of taxes is highly simplistic and would necessitate a reduction in public spending elsewhere in the economy. However, it demonstrates that there is a significant amount of capital attributable to the environmental sector, which could potentially be used to effectively capitalise a Green Investment Bank. The Norwegian Government have used taxes raised from its fossil fuel industry to invest in environmental technologies, and with a fund of over £250 billion is the largest sovereign wealth fund outside of the Middle East. The fund has recently been focused on investing in water technologies and is using its power as an institutional investor to pressure oil companies on their environmental responsibilities. This demonstrates the potential of environmental taxes to play in developing new technologies and protecting the environment external to simply punishing the polluter. A redress in the use of environmental taxes within Britain could create a positive force for change now and into the future.

Written by The EIC Environmental Investment Network.

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