GLOBE-Net - A ground-breaking
report released this week by a commission established by Britain’s
new government has recommended a massive overhaul of financing
mechanisms needed to achieve the UK’s transition to a low carbon
economy.

Citing numerous market failures and other barriers to investment
and innovation, the Green Investment Bank (GIB) Commission has
recommended the establishment of the Green Investment Bank (GIB) to
tackle the low carbon investment needs of the UK, working as a key
part of overall Government policy.

It recommends public money be taken from nine different funds
and quasi-non-governmental agencies, including the Carbon Trust,
and be managed by a single body in order to cut inefficiency and to
reduce bureaucracy.

“We are totally committed to working towards
a low carbon economy in a way that underpins the global
competitiveness of the UK,” Gregory Barker, minister of state for
climate change.

The commission, led by former European chairman of Merrill Lynch
Bob Wigley, proposes the GIB would include a banking division to
encourage retail investment in low-carbon technology through green
bonds and other financial incentives.

Firms developing high-risk technology would receive more money
than through current funding models under its proposals, the
Commission argues.

“We are totally committed to working towards a low carbon
economy in a way that underpins the global competitiveness of the
UK,” said Gregory Barker, minister of state for climate change. “We
see a Green Investment Bank as a very important part of a
transition that puts the UK at the forefront of green technology,”
he added.

It is the scale of the investment required to meet UK climate
change and renewable energy targets that is a shocker. The
Commission estimates investment reaching £550 billion between now
and 2020 will be required. By contrast, only £11 billion was
invested in Britain’s “dash for gas” initiative during the 1990s,
which was considered transformational at the time.

The Commission has identified a number of market failures and
investment barriers in financing low carbon infrastructure, which
have led it to conclude that, without intervention, the UK’s low
carbon targets will not be achieved:

• Market investment capacity limits and limited utility
balance sheet capacity;

• Political and regulatory risks stemming from the fact
that government policy determines expected returns and the history
of policy changes;

• Confidence gaps among investors given technology risks,
lack of transparency in government policy and high capital
requirements for commercialization;

• The challenge of making large numbers of small, low
carbon investments attractive to institutional investors.

In addition to ensuring the UK meets its legal de-carbonization
targets, the case for intervention is supported by a number of
arguments including:

• Ensuring energy security and future growth;

• Reduction of exposure to high and volatile fossil fuel
prices;

• Creation of a large number of new businesses and jobs;

• Underlying externalities and market failures.

On this basis, the Commission argues establishment of the Green
Investment Bank to work as part of overall government policy will
open up flows of investment by mitigating and better managing risk
(rather than simply increasing rewards to investors).

While the Green Investment Bank should be established by an Act
of Parliament as a permanent institution working over the long term
in the national interest, the Commission recommends that the Bank
be commercially independent and therefore not accountable to
ministers or to Parliament for individual investment and lending
decisions.

This is a prerequisite for building credibility with the
markets, it argues. It also should limit direct public liabilities
by placing GIB liabilities off the Government balance sheet.
However, any profits derived from public funds should be reinvested
to further its mission.

Based on consultations with stakeholders in the market, the
Commission has proposed that over time the GIB could develop the
following types of products:

• Early stage grants

• Equity co-investment

• Wholesale capital

• Mezzanine debt

• Offering to buy completed renewables assets

• Purchase and securitization of project finance loans

• Insurance products

• Long-term carbon price underwriting

The Commission suggests that in its initial phase, the Green
Investment Bank should focus on supporting the areas where maximum
impact and speed to implementation can be achieved.

For example, the scale up of investment in proven energy
efficiency projects that can lower the overall development need of
renewable energy sources; investment in enabling technology, such
as smart grids, that reduce the cost for other low carbon
investments; and support of both proven and high impact third-round
offshore wind, should all be priorities.

Market reactions to the sweeping proposals have been generally
favourable. Penny Shepherd MBE, chief executive of UK Sustainable
Investment and Finance Association (UKSIF), said “A Green
Investment Bank should do much to leverage private sector
investment from international and UK pension funds and from private
individuals.

Hugh Savill, acting Director of Investment Affairs at the
Association of British Insurers, said a Green Investment Bank could
help direct long-term funding into eco projects.

“As investors, insurers have an appetite for long term
instruments to match their liabilities. Provided the details are
right, targeting bond issues at insurers’ long term investment
horizons will encourage more partnership between insurers and
government,” said Savill.”

Friends of the Earth’s Senior Economy Campaigner Simon Bullock
said:  “A Green Investment Bank is urgently needed to help
finance the development of a low-carbon economy and create new jobs
and businesses - but it should be independent, funded by auctioning
EU emissions trading permits, and focused on developing the UK’s
vast renewable energy potential and slashing energy waste.

Danny Stevens, policy director at the Environmental Industries
Commission, suggested the green bank should not focus solely on
energy, but also on other aspects of environmental and low-carbon
technologies, including water and waste.”

Establishing the GIB could mean dissolving the not-for-profit
Carbon Trust and directing its £100m of annual funds to the bank.
Approximately £55m a year would be steered away from the Energy
Technologies Institute and the Technology Strategy Board would be
stripped of its £30m annual remit for low-carbon technology
programs.

Some in the green-tech community were concerned by the
suggestion that the Carbon Trust may be dissolved. The Carbon Trust
has been praised as particularly adept in its advisory role to
businesses that want to reduce utility bills and greenhouse gas
emissions. ‘I don’t see the Carbon Trust as broken,’ said Robert
Hokin, chief executive of green energy trade association
ecoConnect. “I question why someone would want to scrap it.”

The Commission’s full report is available href=”http://www.climatechangecapital.com/media/108890/unlocking%20investment%20to%20deliver%20britain’s%20low%20carbon%20future%20-%20green%20investment%20bank%20commission%20report%20-%20final%20-%20june%202010.pdf”
target=”_blank”>here.