Committee hears of economic gains and positive outcomes from the government’s net zero strategy

The Treasury Select Committee today held its first oral session on the economic opportunities of decarbonisation and green finance.

Witnesses:

• Chris Stark, Chief Executive, Committee on Climate Change
• Nick Robins, Sustainable Finance Professor, London School of Economics
• Sagarika Chatterjee, Director of Climate Change, Principles for Responsible Investment

During the session, Conservative MP Colin Clark raised the question of whether the oil and gas industry was incompatible with net zero. Sagarika Chatterjee said it was important that investors decarbonised their portfolios. There was a range of ways to do that, one was which was stewardship. That is, how investors engaged with companies, including those in the fossil fuel sector. A specific UK example was that of BP, where there were nearly 60 investors who came together, co-filing a shareholder resolution at BP’s AGM asking the company to disclose how they would align with the Paris agreement. What was interesting was that the BP board got behind the resolution themselves.

She pointed to another example, of Royal Dutch Shell, where investors had pressed the company to think about the Paris agreement and the company indicated in May that they would be aligning executive remuneration with reductions in greenhouse gas emissions targets as well as improving their disclosure.

Colin Clark said energy companies had the engineers, skills, technology and capital to achieve net zero. For investors to divest from those companies might be to ‘cut off their nose despite their face.’ Miss Chatterjee said it was a valid point. Investors were asking if the present incumbents would seize the opportunity of new technologies. “What we are seeing is that some oil and gas companies such as Equinor, Shell and BP, are signalling to investors that they would like to part of this transition and taking steps in the right direction.”

Nicky Morgan opened the session with a question about the achievability of the government’s net zero target and how the impact on the economy was taken into account.

Chris Stark said the target was necessary and absolutely achievable at a reasonable cost, enabling the UK to stop its contribution to global warming by the middle of the century.

He pointed out the government’s clean growth strategy was already in place. More ambitious plans - in every sector of the economy - needed to be in place in the next 12 to 18 months. The net zero target was a “call to arms” to every department.
Sagarika Chatterjee said there was strong global investment behind tackling climate change. It was important for the UK government to be long-term in its vision, but short-term in its implementation of policies. Green finance needed to be a key strategic priority. She said the committee could help to encourage investors get involved.

Nick Robins said the government should think about how to reduce the cost of capital, making it cheaper and easier to invest in green energy.

Rushanara Ali asked about the Treasury’s approach to decarbonisation. Chris Stark said the Treasury in the past had been “wonderful,” but overall they treated the subject with suspicion. He hoped the net zero target would encourage the Treasury to look again at the benefits to the economy, rather than at the short-term costs, as they did at the time of the Stern Review.
Miss Chatterjee added there was a concern that if nothing was done now, there could be an abrupt transition later on, rather than an orderly approach with early action and well-thought-through finance mechanisms.

Chris Stark agreed with Rushanara Ali that the Treasury could do more to take a lead, rather than relying on BEIS. In particular, the Treasury could use all levers at its disposal, looking at this as a whole-economy transition.

Rushanara Ali asked about the chances of the government maintaining a leadership role regarding climate change. Mr Stark said the next 18 months were critical when the government needed to demonstrate not just setting a new target, but also a willingness to put in place the policies and strategies that would deliver it, giving the UK a licence to host COP and to be a global leader. Miss Chatterjee added there were significant consequences of inaction.

Replying to Simon Clarke, Mr Stark said he was very confident the net zero target could be met at a cost of one to two per cent of GDP. He said this could be a pro-growth story. Miss Chatterjee shared Mr Stark’s optimistic view, saying a transition to a low-carbon economy could result in economic gains of $27 trillion by 2030. She agreed with Mr Clarke that there was an opportunity for London and other cities to become the home of green finance on a global basis.

Professor Robins said there was a task for the Treasury to do in terms of analysing the benefits of avoiding catastrophic climate change, health benefits and the implications for growth. There was an “amazing bargain” to be had.

Colin Clark asked about the economic opportunities provided by decarbonisation. Mr Stark repeated that there would be a host of benefits. With regard to the actions of other countries, the key point was the alternatives to fossil fuels were plummeting in price. That was true in China as much as the UK. This was an opportunity for the UK to get ahead of the changes which would happen in the next decade. This was already happening in the energy sector and would also happen in the automotive, health and other areas.

Professor Robins said the hydrogen sector would ultimately be a way of using the UK’s renewable resources. Mr Stark said hydrogen was useful because it could be burned without causing carbon emissions, but also for fuel switching.

Alison McGovern asked about a ‘just transition’ and social dimensions of net zero. Professor Robins said there should be a clear process to help communities in terms of investment. Mr Stark said this was of fundamental importance that he would like the Treasury to look at.

Reply to Charlie Elphicke on the subject of green finance, Professor Robins said the £5 million fund was a small amount, but was a great signal to get the process of linking mortgages to green living going. Mr Elphicke focussed his questions on ways of incentivising people to make their homes more energy efficient.

On the subject of electric cars, Mr Elphicke said the Treasury was “a discgrace” for not investing in chargepoints. Could investment in chargepoints be done by public finance, or could it be done by green finance? Miss Chatterjee said green finance presented many opportunities. Mr Stark agreed that the Treasury and Department for Transport should address the issue of “charge anxiety.” it wouldn’t take much to make that change and he thought it would happen very quickly over the next ten years. It was a classic example of the government getting ahead of the issue.

West Streeting raised the issue of the risk to financial firms of climate change.

Alison Thewliss asked about the role of private institutions in a low-carbon economy.

Catherine McKinnell asked about the role of the Green Investment Bank.

At the conclusion of the session, Chris Stark replied to Nicky Morgan that the net zero strategy had placed the UK as a global leader in environmental issues and other countries were already following suit. Miss Chatterjee added that the UK was viewed throughout the world as leading on the subject.