Last year, the UK Government’s Net Zero Strategy outlined that of all UK emissions, 82% are within the scope of influence of local authorities, underscoring the transformative role local governments could play in achieving national net zero ambitions.
But unlocking the huge potential of place-based, local and regional climate solutions is not easy. Local authority budgets are stretched, energy bills are increasing, and there are not yet clear pathways to finance net zero projects at both the regional and household level.
Innovate UK and the Green Finance Institute are partnering to address these challenges and strengthen climate finance for local authorities. Our work will define and trial new financial solutions that will help overcome these barriers, shifting the status quo from top-down approaches to a new model where local actors have greater power and resources to identify and develop projects, and build resilience to climate change.
As explained by the team leading this work – Sophie Kempthorne from Innovate UK, and Jeremy Gorelick and Emma Harvey from the Green Finance Institute – this project will be a blueprint for developing net zero financing solutions that meet local needs and support households, raise awareness of the routes to finance, and channel capital into local solutions.
Sophie, you are leading this work for Innovate UK. Tell us about the transformative role local authorities can play in addressing climate change?
“At Innovate UK, we’ve seen first-hand how instrumental local authorities are in delivering net zero solutions. A recent study – commissioned by Innovate UK from PwC, Otley Energy and the University of Leeds – found that ‘place-based’ carbon reduction measures led by UK cities and towns would produce far better environmental, economic and social results, at much lower cost, than a national ‘one size fits all’ approach.”
“At the same time, local authorities can maximise the opportunities the transition presents, including the reduction of energy bills for households and the creation of jobs and long-term economic growth in our communities. So, there is a clear opportunity here and a chance for meaningful progress in addressing climate change.”
Jeremy, from your perspective at the Green Finance Institute, what are the barriers that local authorities face when financing solutions and how can we overcome them?
“One of the main challenges is that there is no statutory responsibility for local authorities to take action on net zero. Yet authorities feel a moral obligation to act. In fact, nearly three quarters – 74% – of UK local authorities have declared climate emergencies to date. This creates a tension point because many local authorities have developed a pipeline of conceptual ideas within a broader net zero strategy, but are not able to translate these ideas into something which is both financially sustainable and technically feasible.”
“Navigating the available mechanisms for financing project delivery is also a barrier to implementation. Local authorities are not always aware of the range of financial solutions available to them and, as a result, a few financial mechanisms may be used time and time again. But these do not sufficiently direct the flow of capital to support and sustain net zero projects.”
“Through our work at the Green Finance Institute, we know the complexity and scale of the climate crisis means we need new and innovative financial solutions that channel finance towards outcomes in the real economy. Therefore, new solutions and non-traditional sources of funding must be considered and made easier to access for local authorities.”
You have already been speaking to local authorities, what is their appetite for net zero solutions?
Sophie: “Our work to date shows that local authorities have a genuine appetite to deliver net zero solutions – such as integrated energy systems – that give communities the heat, power and mobility solutions they need with lower emissions, and at a lower cost. The National Audit Office recently found that almost two thirds of councils in England are aiming to be carbon neutral 20 years before the national target. But they need more support in securing both private and public finance to get there.”
Jeremy: “There really is enthusiasm from local authorities. But also a sense of trepidation around the cost of the transition to net zero. Only last month we held a roundtable with local authorities of various sizes. They were all committed to identifying and delivering net zero solutions around local infrastructure and energy, but needed more knowledge and information about the financial solutions available to them to really understand how to fund net zero projects.”
Emma: “This is why our work with Innovate UK is so important, because together we can test and scale innovative financing solutions, share knowledge and best practice, and catalyse product development to help local authorities deliver real, tangible outcomes.”
Jeremy, what is the opportunity for the financial sector?
“Climate finance for local authorities is a real opportunity for finance. According to the UK Cities Climate Investment Commission (UKCCIC), to whom the Green Finance Institute is an adviser, the investment opportunity is around £500 billion. So, if we can find the right financing models, working with local and national government and the investment community, we can capitalise on this dividend.”
“It’s also encouraging that the UK Infrastructure Bank, tasked with accelerating investment into ambitious infrastructure projects to support local growth and tackle climate change, will be able to issue £10 billion of government guarantees, helping to unlock more than £40 billion of overall investment. The Chancellor recently reiterated the need to work with local authorities as part of the Advisory Service of the UK Infrastructure Bank. This sends the right signals to the market.”
“But there is still a degree of confusion about the role of the private sector when it comes to local authorities. We’ve held a number of conversations with institutional investors who’ve been frustrated they can’t find a suitable way to direct investment into climate finance at the local level. So we are seeking to clearly demonstrate the opportunities for all through our work with Innovate UK and help develop a national pipeline of local authority projects.”
Emma, local authorities are clearly influential in raising and deploying investment into net zero projects. Has the Green Finance Institute’s Coalition for the Energy Efficiency of Buildings identified other important actors in this space?
“As Jeremy mentioned, local authorities are concerned about the cost of the transition to net zero. But one of the important findings from the Coalition for the Energy Efficiency of Buildings (CEEB) – which now has over 370 members – is that local authorities do not need to fund the transition alone, nor should they be expected to. There are exciting opportunities for existing and new financial products provided by private finance and by government, so costs can be shared. This is what this project between Innovate UK and the Green Finance Institute will demonstrate.”
Jeremy, what are the next steps on this project?
“We will soon be releasing our first report with findings around the financing options available to local authorities for net zero projects, which will highlight the range of financial mechanisms available today.”
“Following this, and based on emerging demand from local authorities, we will publish a comprehensive knowledge guide to catalyse project development and help local authorities deliver real outcomes. But this is just the beginning. We know there is a huge opportunity to unlock investment opportunities and will be extending this programme to help more local authorities deliver net zero solutions.”