What We Talk About When We Talk About a Green Deal: Green Finance

In the final article of his four-part series, Nicholas Trickett discusses the fiscal implications of a green new deal.

If accelerating a global transition to (more) sustainable economic models that also reduce inequality is a chief aim of a Labour government, the City of London is going to play a crucial role. For all of the rightful scorn heaped upon the domineering influence of finance in this country’s politics, only by taking finance seriously can the resources needed to accelerate change at home and globally be marshaled. Protecting London’s position as an international financial hub is vital for a simple reason: it offers whoever is in government a great deal of power to shape incentives for investors and where money ends up going.

COVID-19 is an inflection point for the oil and gas industry, the biggest moneymakers among the world’s fossil fuels. European oil majors Shell and BP are shedding nearly $40 billion in assets, refineries in Europe are facing particular pressure as profit margins continue to drop, and market conditions and investor demands are pushing the sector’s giants to reconsider whether they’re Big Oil or Big Energy. Coal saw historic declines last year, but a potential rebound in natural gas prices due to lost drilling activity from this year’s oil and gas market crash may make coal more attractive without policy intervention. None of this changes the fact that global emissions are still on track to rise if and when the global economy recovers.

In a world awash with debt, green bond issuances have become an increasingly popular fixed-income vehicle for investors looking to finance climate-friendly businesses. It’s estimated that over $250 billion of green bonds and loans were issued for 2019. The volume of green finance must grow dramatically to meet the scale of the economic risks the energy transition poses. The Bank of England estimated last year that up to $20 trillion worth of assets may be stranded by climate change (and some by the energy transition), akin to just under seven times the nominal GDP of the United Kingdom.

Green finance is going to play a role not just in funding but the transition itself. It’s going to have to help compensating the losers, or at least filling some of the financial gaps created by the slow decline of the oil and gas industry in particular. One cannot replace trillions of dollars’ worth of assets underpinning securities, loans, and dividends built on a historically profitable business model with green assets that produce lower, but stable, returns without huge risks. That’s why any green deal policy has to enlist finance to achieve its aims, not rely solely on state spending, direct support for green industries and practices, or regulation to force change. The current economic climate is ideal to make use of renewables’ resilience as capital seeks returns amid uncertainty.

There is an existing ESG infrastructure identifying green finance for bond issuances. Using similar methodologies, a differential tax rate could be introduced, whereby capital gains from green investment are taxed at half the topline rate for each income band – 5% and 10% respectively. By so doing, the relative attractiveness of green financial assets increases significantly and offsets lower-yields compared to legacy energy investments. Similarly, an opt-in 10-year property income tax reduction or holiday in a similar manner could be offered with provisions stipulating that most of the increased earnings be reinvested to make properties net-zero and rent be capped in some manner. Failure to meet both conditions could then trigger the collection of taxes owed at a higher rate plus a surcharge large enough to entail considerable financial risk. The Bank of England can also do a great deal to support green investment. Issuing long-term green bonds with high annual interest payments aimed at pension funds and passive investors looking for returns is an easy way to create a virtuous cycle.

There’s far more to work out and these are, frankly, spitball ideas, but the immense losses for fossil fuel assets caused by energy transition require much larger volumes of capital to be held in green financial assets, more liquidity specifically for green businesses, and policies pushing developers and property owners to spend on greening and realise returns. Investors want more green assets. Adopting innovative approaches to green financial instruments would attract foreign capital and could give the City a competitive edge. Brexit presents immense uncertainty for the financial sector. But the City and Bank of England need to take the European Central Bank’s interest in green bond issuances seriously to maintain London’s position, no matter how hard Brexit proves to be.

Nicholas Trickett is a political risk analyst and writer with extensive experience covering energy and trade politics and political economy in Russia and Eurasia, including a stint as an energy consultant. He holds an MA in Russia and Eurasia regional studies from the European University in St. Petersburg and an MSc in international political economy from the London School of Economics and Political Science.
He tweets at @ntrickett16
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