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The UK's Treasury, responsible for its fiscal policy, fulfilled
a pledge to launch the nation's first green sovereign bonds in a 3
March annual budget that explained its plans
targeting finance sector greening.
The detail of how £15 billion (about US$21 billion) in green
sovereign bonds, known as gilts in the UK, will be used to fund
projects and infrastructure to meet national decarbonization
objectives will be revealed in a framework document in June. The
Treasury said the two green bond tranches would be issued in the
summer and later in the year.
The UK's November decision to issue green sovereign bonds came
after the finance sector ramped up calls to issue them. In 2019,
UK-based asset manager Columbia Threadneedle wrote a letter to
government ministers encouraging the bonds' use. This was followed
last year by a green bond proposal backed by 30 asset owners and
investors.
In addition to finalizing its green sovereign bonds, the
Treasury also announced the public will be offered green retail
government-backed savings accounts later this year, likely aiming
to encourage consumers to buy into its greening agenda.
The Treasury's decision to issue the green sovereign bonds and
investment options has not silenced critics, who say the UK
government is running out of time to achieve its promised
"world-first" pledge to be a net-zero country by 2050.
The UK government also pledged last year to publish its net-zero
roadmap ahead of hosting Paris Agreement signatories at the UN
Climate Change Conference of the Parties (COP26) in November. That
same year, Prime Minister Boris Johnson released a 10-Point-Plan
which set a series of targets for wind power, electric vehicles,
and carbon capture, utilization and storage (CCUS) while promising
£12 billion ($17 billion) in funding and to meet existing carbon
commitments.
Critics have said the Treasury's funding commitments still fall
short of the levels needed to put the country on a net-zero path or
support Johnson's commitment to a "green industrial
revolution."
Finance policy changes
Fulfilling prior promises, the budget came out the same day as a
document describing plans for a
National Infrastructure Bank (NIB) able to invest £22 billion
(US$31 billion) in sectors such as sustainable fuels, carbon
capture, and efficient heating.
In another investment-related move, the Treasury announced the
appointment of the former head of the London Stock Exchange, Dame
Clara Furse, to lead a task force on making the UK a hub for
voluntary carbon offset markets.
Treasury pledges are only the tip of the policymaking iceberg.
"The government needs to back these financial mechanisms with
policy and regulatory frameworks that allow the UK infrastructure
sector to reduce development costs and timelines and to unlock the
wider 'wall of capital' that is increasingly seeking investment
opportunities in the sustainable economy," said Norton Rose
Fulbright finance partner Rob Marsh.
However, the Treasury earned high praise from a well-known
figure in climate circles for rounding out its budget with a letter
to the Bank of England asking the central bank to tweak its
monetary policy to address net zero. "This recognizes that the goal
of reaching net-zero emissions by 2050 is consistent, rather than
in competition, with having a robust, stable, and thriving
economy," the Chair of the Grantham Research Institute on Climate
Change and the Environment, Lord Nicholas Stern, said in a
statement.
This type of monetary policy adjustment can potentially tip the
balance toward the UK's financial decarbonization, in contrast to
the Bank of England's past corporate bond purchase programs that
have funded utilities and skewed investment towards high-carbon
sectors, according to a paper published by the Grantham Research
Institute. Last year, the government launched an investigation into
why the Bank of England had failed to address climate risk in its
COVID-19 recovery finance package. The bank had admitted that parts
of its investment portfolio contributed to 3.5 degrees Celsius
(38.3 degrees Fahrenheit) of global warming by 2100, adding
emissions that were "materially above Paris agreement goals."
A fraction of the recommended funding
And in fact, some observers have been pessimistic about progress
to date. Far from progressing to net zero, the UK is currently
emitting too much pollution to meet its legislated carbon budget,
according to the government's arms-length advisory body the Climate
Change Committee.
What's more, the government looks like it may miss the November
2021 deadline it set to create a plan to reach net zero, said the
chair of the watchdog for UK government spending, the Public
Accounts Committee, Meg Hillier in a 5 March report.
The Treasury's green sovereign bond plan will put the UK on par
with the handful of countries in Europe, South America, Africa, and
Asia already issuing such bonds. Europe's largest single green
sovereign bond so far was from Italy on 3 March, although France
has issued the highest value of green sovereign bonds in different
tranches to date.
The UK is poised to compete with these countries for capital. "I
do, however, think there will be considerable demand among
investors for the UK's sovereign green bond— not least given
the strong creditworthiness of UK government debt," said Norton
Rose Fulbright London-based financial services law and regulation
partner Imogen Garner.
The UK also needs to shore up its "patchwork" of existing green
bond regulations to compete with international competitors that
have a standard, with the EU currently developing its own Green
Bond Standard. "In order to maintain investor confidence in the UK
green bond market vis-à-vis those of its competitors, it will be
essential that such standards are in place," said Garner.
Commenting on the relative size of green funding pledges in the
budget, Senior Policy Fellow at the Grantham Institute Josh Burke
said: "Whilst the green recovery package is relatively small by
European standards, announcements on the NIB are welcome as it will
be an important institution in driving a just and sustainable
recovery program."
A co-author of a blog by the Tony Blair Institute for Global
Change, Head of Productivity and Innovation, Jegar Kakkad,
described it as "baffling why the government has chosen to give
[the NIB] only a fraction of the funding recommended by the
National Infrastructure Commission." The commission released its
annual report in February that suggested establishing the NIB, as
well as spending £30 billion (US$42 billion) on urban transport by
2040.
The government should have raised fuel taxes in a way that would
allow the funding of electric vehicles purchases for those who are
too poor to afford them, according to Tony Blair Institute Senior
Fellow Tim Lord.
Other observers said the budget didn't seem green enough. "Ahead
of COP26, this budget was a missed opportunity by failing to set
out an unequivocal direction of travel towards a green zero-carbon
future. [Chancellor of the Exchequer Rishi Sunak] has dropped the
green recovery ball before the try line," said Nick Mabey, the CEO
of environmental think tank E3G.
Funds for hydrogen, wind, carbon capture
testing
While the Treasury's plan for green sovereign bond investments
remains fluid, its budget underlined the government's emphasis on
wind, carbon capture and hydrogen with smaller pots of funding for
pilot-stage industrial transition projects.
The budget is supporting hydrogen markets with several million
pounds earmarked for the Holyhead Hydrogen Hub, set to produce and
distribute green hydrogen for use in trucks in Wales.
It is also funding the expansion of port industrial zones in
Teesside and Humberside for servicing offshore wind farms.
In addition, the Treasury allocated funding to a business park
in the hub of the Scottish oil and natural gas industry, Aberdeen,
to be known as the Aberdeen Energy Transition Zone, which could
supply green hydrogen for the transport sector.
Finally, it will fund a project to develop industry proposals in
line with the government's North Sea Transition Deal, announced
last year. The policy foresees public private partnerships
decarbonizing North Sea oil hubs in Scotland and the northeast of
England through carbon capture projects, renewable diversification,
and hydrogen production.
Posted 11 March 2021 by Cristina Brooks, Senior Journalist, Climate and Sustainability