Stock markets could be inflating a ‘carbon bubble’ by over-valuing companies with fossil fuel assets that will have to be left unburned in order to limit climate change, according to the UK Parliament.
In a report, launched in London, the Environmental Audit Committee points out that there is a large green finance gap. Investments are currently running at less than half of the £200 billion needed in energy infrastructure alone by 2020 to deliver national and international emissions reduction targets.
Chair of the Environmental Audit Committee, Joan Walley MP, said, “The UK Government and Bank of England must not be complacent about the risks of carbon exposure in the world economy. Financial stability could be threatened if shares in fossil fuel companies turn out to be over-valued because the bulk of their oil, coal and gas reserves cannot be burnt without further destabilising the climate. The record-breaking extreme weather events causing chaos across the globe should be a wake-up call. The transition to a low carbon economy will be much more painful if we wait until there is a climate crisis before recognising that more than half of the world’s fossil fuel reserves will have to remain in the ground.”
The Government should also ensure that company reporting requirements provide investors with the information required to assess carbon exposure.
The Green Investment Bank
The Green Investment Bank established by the Coalition has made a good start, according to the report, using its initial capitalisation to make a number of useful investments– such as financing low-energy street lighting, by offering local authorities low fixed-rate loans to be repaid from the resulting savings. However, the bank does not currently have the power to borrow in order to leverage and enlarge its investments - limiting its potential to fill the green finance gap.
The Government had pledged to allow the bank to borrow from 2015-16, but the MPs are concerned that transfer of these powers will be further delayed if the condition that the Government has set of debt falling as a percentage of GDP by 2015-16 is not met. Several witnesses to the inquiry questioned why the Bank's borrowing should be controlled when the similar KfW bank in Germany borrowed significant sums in order to provide extensive loan finance to renewables and energy efficiency schemes, particularly community schemes.
The Committee is pleased that the Green Investment Bank has provided funding for the Green Deal energy efficiency schemes. However, take up has been poor and the number of schemes financed by the Green Deal, at less than 1,000, is still some way off what has been achieved in Germany, where, in 2011 alone, the KfW bank financed 360,000 whole house upgrades, supporting 370,000 jobs. The Government must make the Green Deal simpler and more attractive to households. Ministers should consider reducing the assessment fee and interest rate to mirror the more attractive terms of the Help to Buy scheme’s 1.75% equity loans.
The report points out that reducing fossil fuel investment in the short to medium term will depend on investors having confidence that the international community will agree a credible and significant commitment to reduce emissions.