Financing net zero: the opportunities and challenges

Earlier this month, Jonathan Spruce, ICE trustee, chaired a panel debate on financing the transition to net zero, joined by international experts from politics, finance and academia.

The panel unanimously agreed that a fair transition to net zero can be costed – but the question remains of how soon we can make it happen.

It’s also essential that the burden of payment doesn’t fall upon the public alone in a cost of living crisis.

The discussion highlighted the leadership required to ensure we can deliver a fair transition and the need for the right metrics to measure both success and failure.

Above all, our panel highlighted that there are significant opportunities and challenges when it comes to funding the transition to net zero.

Paying for a fair transition in a cost-of-living crisis

The panel acknowledged that existing payment options are too short-term, and a longer-term, systematic plan is needed.

Lord Tony Berkeley and Alan Whitehead highlighted that justice must be financed into any payment changes in the future and that the burden of paying should never fall on those who are the most vulnerable in our society.

Whitehead also highlighted the very real link between high energy bills and investment in net zero. About 25% of household bills consist of operators’ requirements for the transition to net zero.

It was argued that this requirement needs to be transferred onto general taxation rather than on bill payers to recalibrate the funding system and make it fairer.

Opportunities for saving on cost – learning from Portugal and Spain

In the UK, the supply price of energy is still linked to the price of natural gas.

Eleanor Akers argued that the UK should learn from the examples of Portugal and Spain.

These countries have been granted exceptions by the EU to decouple, or separate, the price of electricity from the price of natural gas as their production is prominently from renewable sources.

This renewable supply can therefore bring down the cost of generation if applied in the UK.

If this saving was reflected in the supply portion of the energy bill, it would free up capital to invest in a more flexible infrastructure system that can deal with unsteady amounts of generation and meet future unpredictable demand.

A systems approach is needed

It was highlighted that electric vehicles (EVs) put more demand on the grid.

If everyone in the UK charged their EV at the same time it would overwhelm the grid. Therefore, a systems-level approach is needed with a supply and demand profile measuring impact to ensure we’re using our infrastructure intelligently.

Data is key to helping us understand this.

What is the role of infrastructure banks?

Kate Levick highlighted E3G’s work in partnership with the UK100 on bringing together public and private finance and cited the investment principles needed for the long-term success of the UK Infrastructure Bank.

If the bank uses its role innovatively and examines what’s needed strategically in a national context, we can understand better where we want to use investment and make it go further.

Suranjali Tandon explained the role of a national infrastructure bank is to bring together public and private capital.

Very often private capital is unwilling to come forward because of the rate of return and the risk associated with these investments, but there are other solutions.

For example, imposing taxes on fossil fuels. Then, that money can be diverted to a public bank which could help finance net zero projects.

Global solutions for a global problem

In the aftermath of the November COP27 global summit in Egypt, Kate Levick referred to the need for fundamental financial system reforms to finance the net zero transition globally.

Instead of ‘greenwashing’, private investment can and should be leveraged into net zero and adaptation.

Nuin-Tara Key drew on her experience in the California governor’s Office of Planning and Research (OPR), highlighting that if we aren’t able to get ahead of the costs of managing the physical risks and impacts of climate change, it will negatively impact on our ability to meet net zero.

A recent study from the University of California found that the 2020 wildfire season undermined huge efforts to combat climate change by releasing the equivalent of 16 years of greenhouse gas emissions in one year of wildfires.

Land use and management, and thinking about how we’re managing our natural systems, must be part of our global net zero approach alongside managing public sector budgeting.

Tandon highlighted the need for 44 billion INR of funding in India, and public and private finance - both have a role to play in creating an enabling environment to deliver net zero.

Maximising speed and scale

The need for us to speed up the net zero transition and ensure the investment to deliver it is scaled up was a recurring theme of the discussion.

Levick emphasised the need for a bigger national policy plan to make it easier for firms to invest and highlighted that there are huge economic opportunities relating to skills for the climate transition.

The government’s green finance strategy is an important opportunity to build on the existing net zero strategy and set out how the UK’s transition will be financed.

We also need ongoing independent analysis to inform policymakers about whether things are working or not, so this information can be fed back into decision-making.

Similarly, Whitehead highlighted the significance of regulation. Finance and backing must be put in place to make these regulations work. There must also be a long-term view to follow regulation through consistently over a specific time period.

Key focused on the metric of carbon and decarbonisation to achieve net zero but also measure the broader economic risk from the climate that is central to her work at WTW.

She also spoke of the importance of ensuring the alignment of workforce development, job training, and investments in developing markets for the future.

What happens next?

Companies with a sustainable growth mindset and sustainability culture will be able to adapt to rapidly changing economic conditions. E3G’s taskforce recommendations state that a company’s climate transition plan should be part of its overall strategy.

An intelligence-led approach is realistically the only way we can determine what needs to be built (and what does not need to be built) and where - and then what capital is required to build it.

We also still need better links between what the public pay for and how they are charged to protect them from shouldering the burden of costs in a cost-of-living crisis.

Progress must be made in the short-term to ensure success in the longer-term when it comes to financing the net zero transition.

The ICE will continue to work with decision-makers across the political spectrum and international organisations and governments to ensure the transition to net zero is funded fairly.