Alexander Pannett 10.25am
Last Thursday, Vince Cable announced that the Green Investment Bank would be headquartered in Edinburgh after a long running selection campaign involving 19 British cities.
The decision has been criticised as being led by political concerns to tie Scotland to the rest of the UK in advance of the proposed Scottish independence referendum in 2014.
However, this overlooks the extremely strong bid by Edinburgh for hosting the Green Investment Bank. Edinburgh is the largest financial services centre in the UK outside London, it has a huge potential for green energy production, has existing expertise in green energy and oil and gas technology, has world class higher education and R&D facilities nearby and the Scottish Parliament means that it can enjoy more political support than other politically under-represented cities in the UK.
Which is why British cities need elected mayors to help attract more business to their regions.
This is not to say that there is not a political angle behind the decision and the government should receive credit for concentrating on the needs of the Scottish people and highlighting the huge mutual benefits that the Union brings to all people in the UK. A unified UK green energy market brings the benefits of large economies of scale to Scotland that further advances the Unionist cause and provides a level of funding that would not be possible under an independent Scotland.
But what will the Green Investment Bank do?
The bank will have an initial capitalisation of £3 billion.
It will be a key component of changing the UK towards a green economy, working with other green policies to help accelerate additional capital into green infrastructure and will be an important tool in addressing market failures that effect green infrastructure projects.
The Green Investment Bank will build the necessary deep expertise in financial markets and green investments, working towards both achieving significant green impact and making financial returns.
However, the government has received criticism from green groups for not allowing the bank to have borrowing powers from the start of its launch.
The leading climate change economist, Lord Stern, has claimed that the bank will be stronger if it is allowed to build up its portfolio, which is necessary if every green technology is to be given a chance to pitch for finance. Lord Stern insists that the Green Investment Bank’s borrowing powers are needed to tackle the extensive market failures that have not accounted for the global environmental damage that industrialisation has wrought.
The government has declared that the bank will be allowed to borrow money subject to the targets for reduction in the national debt being met and further state aid approval being granted. But George Osborne has already pushed back the date for ending the structural deficit until 2017. This would mean that the bank may only be allowed to start borrowing in five years time.
The Confederation of British Industry has long called for the bank to be made effective, and have criticised the way the Green Deal and ECO are being set up, saying the Green Deal will not meet its targets as it is currently designed.
If the date by which the Treasury is to permit the bank to have borrowing powers is put off even further, this will severely curtail its already reduced effectiveness.
The issue is that any borrowing that the bank does engage in will be listed as a liability on the government books, worsening the deficit further. When such severe cuts are being implemented to other departments, it is un-conscionable for the government to be taking on more debt to finance un-proven green initiatives whose failure could lead to further bad debt for the UK taxpayer and even threaten the nation’s vital triple A credit rating.
It therefore seems a pragmatic policy for the government to use the initial 3 billion in funding to evaluate which green projects will be economically feasible and then to allow borrowing powers when the nation’s finances can afford the loans.
Despite the necessity of fiscal caution, it is utterly vital that the government allows the bank to access the markets as soon as it can. It is estimated by Ernst and Young that the transformation to a low carbon economy will need £450 billion of investment by 2025 and this Keynesian stimulation will create jobs, helping the recovery.
Considering the pressing concerns of climate change and the economy’s need for growth, the government must not wait too long to set the Green Investment Bank free or miss a golden opportunity to make Britain a world leader in a burgeoning, vital and global green industry.
Follow Alex on Twitter @alpannett