Decarbonisation of the UK economy and green finance


A submission to the UK’s Treasury Committee by the Grantham Research Institute on Climate Change and the Environment

This written evidence was submitted on 26 July 2019 to the Commons Select Committee inquiry into decarbonisation of the UK economy.

Summary points

  • Her Majesty’s Treasury (HMT) occupies a unique position in government to drive the transition towards net-zero greenhouse gas emissions while maintaining a focus on economic growth. While other government departments have a role to play, none has the crosscutting, economy-wide focus of HMT. This focus can enable HMT to deliver complementary, growth-driving policies and investment under a coherent net-zero strategy. The Committee on Climate Change has signalled the pathway forward; now HMT needs to implement it.
  • This is a global issue that the UK can lead on. The UK has set out a vision of being a ‘Global Britain’, both in terms of responding to global challenges and capitalising on opportunities for the UK. The challenge of decarbonisation fits both of these criteria. The UK has a responsibility to address climate change, given its historic emissions. Furthermore, by becoming a first or early mover for key zero-carbon products and services, it can derive economic opportunities from the global transition that is already underway. This could uncover new export markets for the UK, as well as bringing good jobs and boosting the productivity of UK firms.
  • Innovation will be key to tackling the dual ambitions of achieving net-zero emissions while driving economic growth. HMT can use a variety of policy levers such as R&D tax credits, targeted regulation and prizes to crowd private investment into R&D, steering companies towards innovation in zero-carbon products and services. However, to achieve this, incentives need to be aligned in support of recognised ‘missions’ across the economy, at both the national and local level, and addressing the supply and demand side.
  • The UK has had success in ‘greening finance’ but needs to get better at ‘financing green’, particularly domestically. The UK’s Green Finance Strategy highlights both of these roles of green finance as being critical in the coming years. The UK has led the finance sector, both domestically and internationally, in mainstreaming green principles into financial processes such as due diligence and disclosure to investors. However, it has struggled to convert this leadership into investment for the infrastructure and innovation that the UK will need to fulfill its domestic decarbonisation ambitions.
  • A new National Infrastructure Bank established by HMT could be a critical tool to manage the transition to a zero-carbon economy. Given constraints on public spending in the fiscal remit, private finance will be crucial for meeting the UK’s infrastructure needs. A new, independent and dedicated institution should be created, such as a National Infrastructure Bank, to provide transparency and credibility around finance for sustainable infrastructure. This institution could align expectations on the future growth path and avoid a muddled path where the UK invests in both inefficient high-carbon technologies and sustainable infrastructure.