Green finance

Last Updated:
July 22, 2021
The Issues

Public finance

The scale of the funding gap in addressing the environmental emergency has led many to suggest that private finance alone is not enough, and that public finance is particularly important.

Some propose that governments should increase their own borrowing to directly invest in critical projects that the private sector is reluctant to support, as well as those that are socially important but do not generate high returns.

Even before the pandemic it was argued that there was a strong case for greater direct public borrowing at a time of record low interest rates, which have since turned negative in many places.

Private finance

Central banks, such as the Bank of England, have a major role to play in combatting the environmental emergency. They can do this through their own lending and by how they regulate the financial system.

An international network of central banks has become increasingly vocal about the risks to finance from climate change. They anticipate that growing economic damage will threaten financial stability. They are also concerned about the potential for a financial crisis when fossil fuels are no longer overvalued.

Proposals for further action include penalising loans to high carbon activity and ensuring that quantitative easing only promotes sustainable investment. The UK government has announced plans for large companies and financial institutions to report climate risk in the next five years.

Fossil fuel subsidies

A key part of the green finance equation is ending government support for fossil fuels. This has been described as one of most important measures to deter high carbon investment.

There are a number of ways in which government funding supports the continued use of fossil fuels. UK Export Finance has been criticised for giving loans and guarantees to companies who invest in fossil fuel projects overseas.

While many subsidies exist to encourage the production of fossil fuels – such as tax relief for North Sea oil producers – many exist ostensibly to keep energy prices low for consumers. The pandemic’s impact on oil prices may create a window to reduce subsidies.

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