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Infrastructure blog

Financing and funding net zero – the 3 things that need to happen next

Date
27 August 2024

Following the ICE’s Next Steps programme on financing net zero, we examine the progress made to unlock investment.

Financing and funding net zero – the 3 things that need to happen next
Policymakers, investors and international organisations must work together to unlock green finance. Image credit: Shutterstock

As 2030 approaches, the need for an affordable net zero transition in the UK is clearer than ever.

Net zero can play a key role in growing the UK’s economy and ensuring critical infrastructure can be financed in the future through public and private investment.

The government’s existing Green Finance Strategy must be fulfilled at pace in order to enable sustainable investment into net zero.

The story so far

Delays, reversals, and inconsistent plans have held back the UK’s decarbonisation progress. Despite this, the UK has reduced its carbon emissions by more than half.

To help determine how to fund and finance the rest of the emissions cuts required to reach net zero, the ICE ran a Next Steps programme. It examined the opportunities and challenges of delivering a fair transition.

An expert international panel outlined that existing payment options are too short-term, and a longer-term, strategic plan is needed.

Need for strong policies

In its latest progress report, the Climate Change Committee (CCC) emphasised that the positive trends speeding up decarbonisation could reverse without strong policies to build on them.

The report also highlighted that the UK should now be in “a phase of rapid investment and delivery”.

The ICE has highlighted the need for clearer links between what the public pay for and how they are charged to protect them from shouldering the burden of net zero costs.

What’s going on in the financial sector?

Financial actors, such as investment companies and banks, have been setting their own targets in terms of investing in net zero.

By 2023, half of those who disclosed their investment portfolios had each set targets that covered more than 70% of their investments.

This shows that the financial sector is continuing to make much needed progress.

However, the financial markets alone can’t make the net zero transition happen faster.

The CCC’s report emphasises the role of policy in:

  • providing confidence to investors and consumers;
  • managing risks in new markets;
  • removing barriers to delivery; and
  • providing financial incentives in areas like home heating.

Upfront costs will be high – but investment is necessary

The scale of investment needed is huge.

The UK’s second National Infrastructure Assessment (NIA2) highlighted that private finance must increase significantly in the 2030s and 2040s across energy, digital and water.

The upfront costs will be high, but it will mean that the UK’s infrastructure will ultimately be cheaper to run.

What needs to happen next?

1. More certainty

Policymakers, investors and international organisations must work together to reshape the current project environment to unlock green finance.

Green finance refers to any structured financial activity that's been created to ensure a better environmental outcome.

More certainty is needed to provide confidence to investors that the UK is a reliable partner on long-term infrastructure.

Equally, more capital must be directed to finance the net zero transition.

2. More innovative financing mechanisms

More innovative financing interventions are required.

These could be based on the Contracts for Difference scheme that has been in place since 2014 to incentivise investment in renewable energy.

Through this scheme, generators are given an agreed ‘strike price’ (or fixed price level) for energy produced.

Equally, governments need to tell a more positive story around net zero to enable private investors to see the opportunities on offer, instead of focusing on the cost burden.

3. Increased efforts in international climate diplomacy

The new UK Labour government must also focus efforts on international climate diplomacy ahead of COP30 next year.

COP30 is due to be held in Brazil, a country that has shown important leadership in climate finance.

It will be important for Labour to proactively engage with Brazil and other G20 countries to highlight its commitment to work together to address financial issues and challenges.

It must also demonstrate that the UK is a credible international leader in decarbonisation.

‘The green finance capital of the world’

In its manifesto, Labour committed to making the UK the “green finance capital of the world”.

The new National Wealth Fund is one of the central pillars of Labour’s net zero strategy.

It will use £7.3 billion in public sector funding to unlock at least £20 billion in private sector finance to catalyse investment into new infrastructure and the economic transition to net zero.

The intention behind the National Wealth Fund is to power growth and jobs across the UK and create the foundation for a low-carbon economy.

Labour has identified five sectors where capital from the National Wealth Fund could help to catalyse private investment:

  1. green steel
  2. green hydrogen
  3. industrial decarbonisation
  4. gigafactories
  5. ports

Strategic public investment, delivered through the National Wealth Fund, is needed to improve the UK’s decarbonisation progress.

This can incentivise the private investment needed to transition to a net zero economy.

Unlocking local growth

The ICE had previously recommended using the Green Finance Strategy as a vehicle to deliver on levelling up and net zero by formally aligning the two.

However, levelling up was notably not included in the strategy.

The National Wealth Fund can address this gap through its potential to draw in private investment into wider sectors of the economy that would also benefit from capital.

This is a way of creating impact and drawing in additional investment that wouldn’t otherwise be possible.

This can be through sectors but also local delivery entities such as combined authorities (like in the West Midlands and the west of England).

Local growth and decarbonisation

Labour has moved away from levelling up as a slogan, with the renaming of the Department for Levelling Up, Housing and Communities to the Ministry of Housing, Communities and Local Government).

But, importantly, the National Wealth Fund shows that the government is joining up its approach to unlocking local growth through decarbonisation, something the ICE has previously called for.

The key to net zero

Long-term, consistent plans that are backed up by sensible policies are key to reaching net zero.

It will help attract the investment that is essential to help the UK reach net zero targets.

But the pace must be quicker if the UK is going to make good use of this green investment and demonstrate best practice in international climate leadership.

Especially as we build up to COP29 and COP30.


In case you missed it

  • In the latest Infrastructure Policy Watch, New Zealand reviews how people pay for transport and water services
  • ICE Policy Fellow Stephen O’Malley outlines the new government’s proposed planning reforms for England
  • ICE Policy Fellow Ian Parke examines the plans for Great British Energy
  • Laura Cunliffe-Hall, lead policy manager at ICE