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.
The New Economics Foundation argues that the government has plenty of headroom to significantly increase its borrowing for green investment.
The Office for Budget Responsibility's (OBR) Fiscal Risks Report 2021 identifies unmitigated climate change as a "large, and potentially catastrophic," fiscal risk. The OBR notes that the costs of achieving net zero emissions are “significant”, but would be greater without “decisive action” and “early steps” to mitigate climate change. (Watch the OBR’s short video summary here).
The Grantham Institute at the London School of Economics argues that public finance is essential to make the green transition profitable for private companies. The economics of transition may not be initially appealing and up-front costs may be high.
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.
The Centre for Climate Change Economics and Policy argues that macroprudential regulation and monetary policy by central banks is critical to effective climate action.
The Grantham Institute produced a policy report arguing for every bank in the European System of Central Banks to adopt net-zero strategies, and explaining how to green their prudential and monetary policy.
The Green New Deal Group discusses the importance of coordination between central banks and finance ministries on climate change. Positive Money argues that the Bank of England must be given a green mandate.
The New Economics Foundation, 350.org and Positive Money propose measures that the European Central Bank should take on climate change. NEF outlines a series of proposals for how the Bank of England could respond, including stress testing financial institutions in the UK economy for how resilient they are to climate change.
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.
The Overseas Development Institute catalogues fossil fuel subsidies across the G20. One of its major findings is that the G20 spends almost half a trillion dollars annually subsiding oil, coal and gas production.
The International Energy Agency (IEA) called for an immediate end to new fossil fuel developments in its report Net Zero by 2050: A Roadmap for the Global Energy Sector. The report marks the first time the world’s most influential voice on agency has modelled a pathway consistent with the Paris Agreement goal of 1.5C of warming, and underlines the benefits of clean energy in terms of jobs, energy costs and energy access for poorer households.
Oil Change International, Platform and Friends of the Earth Scotland argue for a phase out of North Sea oil and gas extraction. They advocate for subsidies to be redirected to support a just transition for workers. IPPR's Net Zero North Sea outlines ‘A managed transition for oil and gas in Scotland and the UK after Covid-19’.