Fabian Society Environmental Policy Network Seminar

Green Technology: Investing in Our Future

Monday, 19^th July 2010

To achieve the kind of technological advancement needed to meet our 2050 low carbon pledges, there needs to be major changes to the pattern of investment and financial flows currently experienced.  Adrian Gault, Chief Economist, Council for Climate Change led the discussion on how best to achieve this, with panellists Steve Radley, Director of Policy and External Affairs, EEF, and Roger Liddle, Chair, Policy Network.  The event was under Chatham House Rules, and the following report gives an overview of the themes and opinions expressed.

The current scale of the low carbon transition plan and recent reduction in carbon output has been primarily influenced by the recession rather than technological advancement. More importantly, in order to meet the 34% budget reduction set for 2020, two barriers needed to be overcome.

A critical issue for investment in low-carbon technologies was access to finance exacerbated by current fiscal constraints. Given there is reduced capacity post-recession, particularly in venture capital, it was felt there was a role for Government in bridging this gap in easing the increased sense of risk aversion by investors.  In particular, some suggested the Green Investment Bank could deal with these concerns, especially in the commercialisation stage of new technologies which is particularly under-invested. However it was warned, rather than a substitute this must reinforce what is needed from Government: a clear sense of purpose, a clear carbon price for the future, and movement towards feed-in tariffs. 

It was suggested that in some ways, the Coalition Government was more, not less, interventionist.  However there were a number of sceptical voices of the Government’s commitment to the green agenda in the UK.  One participant told the group how recent cuts had disproportionately fallen on DECC at 18%, far higher than other departments which will inevitably impact upon markets and investment.

Already the level of funding on research and development (R & D) is well below that of international competitors.  Currently, the total of public energy spending on R&D in the UK is approximately 0.01% GDP which is low comparatively: Germany spends around double that, the US is almost three times that level, France is five times that and Japan spends nine times that level.

I think the Coalition Government has actually decided that free-market doctrine overrides common sense in achieving a sensible relationship between Government and industry, suggested one participant.

Secondly, clear and structured frameworks including market reform by Government must be established to channel investment flows and signal support for green technology in the markets. Whilst seemingly shifting in this direction, it was generally felt that government remains vague in policy specifics and is yet to detail what exactly this will entail and how.

The performance of the ETS has shown a failure in the carbon markets to incentivise investment, and it was generally agreed within the group the Government’s commitment to raise the carbon floor price is a sensible transitional step to overcome uncertainties over the carbon price, and uncertainties over electricity prices. Carbon is priced at around €15 per tonne of CO₂, very low compared to what the committee has suggested will be necessary by 2020 to incentivise investment in low carbon technologies. 

However some issues were raised with this point: one participant highlighted the potential tension between a national pricing structure and the international market.  How feasible was a minimum price for the UK on an international basis? There is an obvious charge of ‘carbon leakage’ where businesses will set up in countries that offer the lowest carbon price if there isn’t unity on this.

In response, it was argued the UK must explore a full range of options in reforming the energy market which includes feeding tariffs and low-carbon obligation, as well as strengthening the framework around the carbon price.  The market is dominated by 6 major companies in the UK which some felt created a barrier to increased development in green technology. It was felt by some critics that the previous Government had devolved policy to utility suppliers, who were now manipulating the market and restricting access to increased investment and innovation.

Within this context, the industry was recognised as a vital player. The UK has a number of significant strengths and key engineering skills that, with a bit of diversification and a proper framework in place, could be used to develop some of these growth industries such as Carbon Capture and Storage (CCS), offshore wind and marine renewables.  A lot of the skills are already readily available, but need to be fostered and encouraged to create a responsive UK skill base - however the lack of investment remained a significant barrier in making this achievable.

Due to the failure of the carbon market to deliver change and with public spending very tight, many argued for prioritising key industries over others.  Yet there is a danger that the UK could lock itself into industries that aren’t necessarily efficient or able to produce the return on jobs and economic growth expected. The UK at present has no ‘first mover advantages’ in the way Germany has in wind technology for example, which need to be overcome to reap domestic advantages of targeting investment in particular industries. If a big enough market in offshore wind is created, we would expect manufacturers of offshore wind equipment to want to base themselves in Britain, but that is a bit like the Japanese car industry setting itself up in Britain in the 1980s, said one participant. ‘We don’t get the value-added innovation, and the question in industrial policy terms is that in this low-carbon area, where can Britain get this value-added innovation?’

One participant laid some blame on the 2020 targets.  While appreciated as a positive shift in policy commitment by the previous Labour Government, they also created a sense of short sightedness and played into political goals, essentially de-prioritising longer term and more unpopular investments such as nuclear energy. Renewable targets should be set in line with national industry to avoid this, one participant suggested.

Another felt more pessimistic about the market as a whole and argued that the current selection of technology is creative marketing not innovation. Far from opening up markets to new ideas and models, the adoption of technologies such as offshore wind sat very well with existing coal and gas based industries.  This participant suggested instead Government and policymakers should look at community led innovations such as multi model car systems and local waste streams.  This was supported by a number of other participants who felt that the current energy market model is supply led, with little industry or government support for systems or organisations that could reduce demand.  This was experienced primarily on a local level and to have a nation-wide impact there is a need for a national strategy to link up regions and a greater commitment from central government for this local green agenda.

Some participants felt that the new Government was moving in the right direction which was a reason to be positive.  However, the small state ideology of the coalition combined with the slow progress in green technology highlighted reasons to be concerned, and it was clear that the forthcoming spending review could throw up further challenges, particularly for finance and investment.  As well as consistency in policy there is a pressing need for a greater sense of urgency, and a need to strengthen advocacy for low carbon industry in Westminster to make sure the government delivers on our UK low carbon commitments during this parliament and the next.

The Fabian Society Environmental Policy Network is supported by National Grid, UKBCSE, Creative Environment Network, Green Alliance.

The event was kindly hosted by EEF.