Carbon pricing is the missing piece in the Chancellor’s green recovery plan

Carbon pricing is the missing piece in the Chancellor’s green recovery plan

If the UK wants to be a global climate leader and finance hub at COP26, a carbon charge should be a core part of its climate strategy, argues the Green Finance Institute’s chief executive, Rhian-Mari Thomas.

The British government is now at a crossroads of environmental, economic and societal change as it sets out its roadmap for economic recovery from the impacts of Covid-19. With the decisions made now determining the UK’s emissions trajectory for years to come, the government must choose consistent carbon pricing to enable markets to play their part in the transition to net zero and a green recovery.

The £3bn energy efficiency programme that the Chancellor introduced recently is very welcome. As the Green Finance Institute’s recent report highlights, energy efficiency upgrades could support more than 150,000 skilled and semi-skilled workers across the construction supply chain and contribute to the wider recovery by enabling increased consumer spending as a result of household energy cost savings.

However, the sum announced falls short of the £65bn required to improve the UK’s housing stock. This funding gap alongside unprecedented pressure on public finances means additional measures are required to raise the capital needed.

As set out in the Zero Carbon Commission’s recent interim report, a robust, sector-specific carbon charge offers one clear way for the government to fill this investment gap. Modelling from the Grantham Institute at the London School of Economics reveals that a carbon pricing scheme could raise approximately £5bn per year between 2021 and 2030. If these public revenues were then used to promote the investment of private capital through providing first-loss and guarantee mechanisms, investment flows could be scaled yet further.

By taking a sector based approach and directing the revenue to support investment in green alternatives, provide funds to cushion households from cost increases, and contribute to core government spending in a way that incentivises consumer and business behaviour change, carbon pricing is a potentially powerful tool to help fund a green and inclusive transition towards net zero. In the context of retrofitting our housing stock, when combined with other policies and innovative financial mechanisms such as those that are being developed by members of the Green Finance Institute’s Coalition for the Energy Efficiency of Buildings, a carbon price can become an effective financial tool to accelerate investment, creating economies of scale throughout the supply chain, creating green jobs and solidifying its recovery as green, as outlined in the Chancellor’s speech

Importantly, a carbon pricing strategy also provides a powerful long-term signal to the market and can play a role informing standardised scenario analysis for investors and lenders.

While recent announcements have shown some clear signals that the government is ready to put welcome resource into the green economy, the proof will lie in the budget this autumn. If the Chancellor wants to showcase the UK as a green finance hub and a global climate leader at COP26, a carbon charge should be a core part of its climate strategy.

The Zero Carbon Commission will publish its final white paper at the end of the summer. The interim findings can be found here.

This article first appeared in BusinessGreen

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