Opinion: Meeting the financing challenges of net zero

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Meeting the financing challenges of net zero: a case for smarter public investment by the Scottish Government.

Two recent reports by the Climate Change Committee and the Scottish Fiscal Commission have starkly set out the severity of the challenges facing the Scottish Government in meeting its climate targets. Valerie Robertson, a member of the Climate Emergency Response Group, lays out some ideas on how smarter public investment can speed up delivery on net zero.

Over the past week two significant reports have landed which have set out the seriousness of the challenge facing the Scottish Government to respond at pace and scale to the climate emergency.

Yesterday’s progress report on Scotland’s emissions from the Climate Change Committee, found that most of Scotland’s indicators of progress are off-track and provided multiple examples of the scale at which the pace of delivery needs to increase.

And last week’s report from the Fiscal Commission, sets out the challenge from a fiscal perspective, explaining how the climate emergency will affect public financing in three ways: damage from the physical effects of climate change, and from meeting the costs of adaptation and mitigation.

If left unchecked, our current emissions trajectory will result in more spending directed to recovering from climate shocks, the size and frequency of which will increase with every 0.1-degree rise. This would see debt rise to unprecedented levels – more than three times what we are experiencing now.

The Fiscal Commission’s report comes at a time where capital budgets are the most constrained they’ve ever been, borrowing is near its limit, and when the Scottish Government is under pressure to set out a clear, costed pathway to meeting its climate change targets.

So, how should the Scottish Government respond to the size and seriousness of the challenge presented by the Fiscal Commission? There is no doubt that closer co-operation between the UK and Scottish Government has a key role to play here and there is an urgent need for more detail on the scale of investment needed to deliver Scotland’s mitigation and adaptation plans.

But when it comes to how the Scottish Government manages its public finances, over the past 3 years the Climate Emergency Response Group has promoted some solutions.

Firstly, the Scottish Government must make use of every available lever, and make sure every penny of the Scottish Budget is allocated wisely for more efficient and effective decision-making.

A Net Zero Test would ensure public investment and policies are compatible with the transition to Net Zero and avoid locking us into high carbon ways of living and working.  It’s worth noting that a recent report by the Institute of Government has rightly suggested that this approach also needs to include adaptation.

Secondly, smarter allocation of public investment to maximise leverage of private finance into Net Zero priority sectors and places, through blended finance.

Particular attention is needed to plug the gap in pre-commercial development funding, build investable pipelines at scale, and kick-start pathfinders to test and provide proof of concept for new financing instruments and revenue streams. Research funded by Innovate UK, found that place-based approaches cost less and have the potential to deliver significantly more social and economic outcomes compared to narrower, single sector approaches.

Thirdly, pull out all the stops to tackle delays, barriers and de-risk projects to reduce the cost of capital and provide certainty to investors, enabling the transition to happen more quickly and more cheaply.

This may require redeploying precious public sector resource budgets and staff time or using private sector secondments in the short-term for long term gain. Planning, consenting, and procurement delays increase the risk of capital flight as investors completely withdraw from regions that seem more susceptible to the volatility brought on by climate change, motivated by new regulations requiring ESG disclosures.

Fourthly invest in measures to strengthen Scotland’s net zero, climate resilient economy.

Maximising the economic opportunities from the transition to net zero will help create green jobs, prosperity and inward investment, whilst catalysing business and investor confidence. Taking forward the recommendations from the recent Investor Panel and the forthcoming Green Industrial Strategy will be central to steering Scotland towards a more resilient economy and healthier public finances.

More information on CERG and the group’s most recent recommendations to the Scottish Government are available here.

Please get in touch to find out more.