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Funding and financing net zero: 7 things to consider for a fair transition

Date
30 March 2022

Peter Reekie discusses the role of government, businesses and consumers in financing a fair transition to net zero. 

Funding and financing net zero: 7 things to consider for a fair transition
Before delivering the projects needed to transition to net zero, the question of who pays and how must be answered. Image credit: Smile F/Shutterstock

Infrastructure professionals are generally keen to get on with delivering the projects needed for the transition to net zero and can get frustrated when the focus seems to be on policy development.

However, most recognise that the fundamental challenge for policy makers, and in particular politicians, is the question of who pays, and how.

During ICE’s recent presidential roundtable on financing a fair net zero transition I offered seven points which my experience suggests are central to answering those questions.

1. Financing is relatively easy if funding is available

The difference may sound pedantic, but funding is what ultimately pays for the assets, goods or services people need, and financiers will only provide capital if they can see a route to being repaid.

We need to focus on creating investable propositions with a source of ultimate funding, and then the financial engineers will fill in the rest.

In respect of the ultimate source of funding, HM Treasury was right to say in its Net Zero Review that: “As with all economic transitions, ultimately, the costs and benefits of the transition will pass through to households through the labour market, prices and asset values”.

Yes, there are complexities, but the financing cart can only come after the funding horse.

2. The economic impact will be manageable but some costs will be significant

As the Climate Change Committee has said, the economic impact of the transition will be manageable, if not positive, compared to doing nothing.

However, the individual costs and reallocation – including asset values and energy contractors and their workforces – will be very significant in some cases.

At the householder level this cost can only come from general taxation increases, paying as a consumer for asset (home) values. For business transition, the costs must eventually be passed on to these same consumers.

3. Government can best meet its ambitions through regulation and incentives

Given asset ownership and economic structure in the UK, significant tax increases and public sector delivery does not seem to be the way to go.

This means ultimate funding will come through consumer charges and asset values.

This must be complemented by consumer protection and targeted support for those who cannot reasonably afford it to deliver the ‘fair’ element of the transition.

Government is therefore mainly going to meet its net zero policy ambitions through regulation and incentivising people to spend their money, rather than by spending its own money raised through taxes.

4. There is a well-trodden path for this

Past experience shows us the route we need to follow to reach the desired destination:

  • Indicate the intention.
  • Give advance notice of mandatory changes through regulation so that supply and finance markets can see what’s coming.
  • Incentivise the early adopters and use public spending power for its own decarbonisation needs at the front end to build markets.
  • Switch to supporting those unable to pay as the market builds, costs reduce and regulation bites.

How much support and incentivisation is needed will be determined by the relative cost for households and businesses to act versus doing nothing.

This is changing rapidly with global energy prices, but we have to start down the track before we can know the full effect of that in every marketplace.

5. The UK economy needs to create a level playing field

Under a regulatory model it is vital that the UK economy protects its edges and creates a level playing field.

Some things are easy – if all homes have to be transitioned, there is a level playing field.

For businesses, it is important that they remain internationally competitive. This means overseas suppliers of goods and services not being able to undercut them because the costs of transition are not imposed on them, or because they receive different support from their own governments.

6. In some sectors place-based coordination will be vital

There are some sectors – buildings in particular – where place-based coordination is needed. This will require more public sector market intervention.

We need place-based planning, and delivery, undertaken locally with strong central guidance and support.

There must be mechanisms for local regulation where needed, such as for heat networks.

A recent report by PwC for Innovate UK highlights the potential benefits. Furthermore, the Energy Systems Catapult has issued guidance on how to approach local energy system planning.

7. Upskilling can help deliver a fair transition

All of this is without mentioning supply chain development. Change at scale can’t be delivered without skilling up a workforce.

There will be many challenges in achieving that, but also enormous opportunities to spread economic benefit. Drawing on transferable skills from declining industries will help deliver the ‘fair’ element of the transition.

Perhaps another roundtable discussion for another day.

Read the full report on ICE presidential roundtable on financing a fair net zero transition

Read the report

Guest Blogger: Peter Reekie is the chief executive officer of Scottish Futures Trust.

Scottish Futures Trust is a Scottish government owned centre of infrastructure expertise. Thoughts are offered in a personal capacity.

*ICE welcomes guests to share their views about infrastructure policy issues on the Infrastructure Blog.

These views are the views of the individual. If you are interested in writing for the Infrastructure Blog, please email [email protected] ICE reserves the right not to publish articles that have been submitted.

  • Peter Reekie, Chief Executive Officer at Scottish Futures Trust