On 15 July 2009 the UK Government published the Low Carbon Transition Plan, which encompasses UK Government policy and strategy on achieving its ambitious renewable energy and carbon reduction targets for 2020 and beyond. While this sets out a route-map for the UK to meet its 2020 targets for cutting emissions and increasing renewable energy use, it does not flesh out the detail of how the transition to a low carbon economy would be financed in the near, mid and long-term future.

On 15 October 2009 the Aldersgate Group published its report, entitled 'Financing the Transition' (the 'Report'), on the currently existing proposals for a possible financing strategy that needs to be in place in order to ensure the transition to a low carbon economy is achieved. This report will be of interest to all stakeholders, especially in the context of the forthcoming Copenhagen climate change summit, the renewed discussion of financing the low carbon transition and discussions of meeting the ambitious targets being in the press on an almost daily basis.

Overview

The Report reviews existing proposals and suggests Government must continue to fill the financing gap in the short term whilst putting in place "a comprehensive framework to enable rapid mobilisation of scale" in the medium term. The Report also suggests that any effective financial strategy requires reducing the risk of investment into low carbon projects, mobilising private sector capital flows and reforming institutional structures. More specifically, the creation of a Government-linked Green Infrastructure Bank or initiating climate change bonds, are encouraged.

In a separate report, the Green Alliance calls for the establishment of a Green Infrastructure Bank and sets out the detail on the potential funding and roles such an institution could play in helping to finance the low carbon transition.

Key recommendations

The key recommendations of the Report are as follows:

  • Government's finance strategy should include:
    • in the short-term, filling the financing gap and re-assessing the £4bn programme of new capital initiated in partnership
    • with EIB in the medium-term, "rapid mobilisation of scale", forming new entities and new products such as climate change bonds or setting up a Green Infrastructure Bank
    • in the long-term, consolidation, by having a financial strategy with a diminishing need for directive financial instruments, public contributions, incentives and even a carbon price and
    • overall, using carbon taxes to bolster the low carbon price on an ongoing basis until a global trading emissions market is properly established.
  • Reducing the risk of investing in low carbon projects, by, for example, issuing Government guarantees, expanding the number of sectors covered by the regulatory asset base to include renewable energy projects, and issuing Government bonds linked to indices such as Government performance against carbon emission targets, fossil fuel prices and carbon prices.
  • Mobilising private sector capital flows, for example by issuing bonds linked to specific low carbon projects, which are underpinned by tangible assets which pay for the bonds' coupon and interest, or issuing "Green Treasury Gilts", clarifying the fiduciary duties of trustees to require responsible investment and demand greater disclosure of environmental, social and governance issues, as well as potentially extending the FSA's objectives to include greater regard to sustainable wealth creation and achievement of carbon targets, and directing investment into lower carbon technologies through public ownership of banks and investment policies of state pension schemes.
  • Reforming institutional structures by the creation of a Government-linked Green Infrastructure Bank, which would explicitly finance and accelerate the low carbon transition through providing capital and guarantees, as well as acting as an intermediary between developers, investors and policy makers, and by the issuance of 'green bonds' to help fund such an institution.

The Report highlights some of the existing proposals, which will no doubt add valuable input, ideas and methodologies into the discussion on the framework of how to finance the low carbon transition.

To access the Aldersgate Group's report, please click here

To access the previous Law-Now launching the 2020 Climate Package Series and the first Q&A guide on Phase 3 of the EU Emissions Trading Scheme, please click here

To access the previous Law-Now issuing the second Q&A guide on the Renewable Energy Directive, please click here

To access the previous Law-Now issuing the third Q&A guide on Carbon Capture and Storage please click here

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 18/11/2009.