Green debt

The economic secretary to the UK's Finance Ministry, Ian Pearson, said in an interview published in the Financial Times newspaper on Monday that the government was considering introducing so-called “green bonds” to the public to help fund the renewable energy industry.

Pearson said that he had asked officials to examine a proposal that would see National Savings and Investments - a treasury-based unit - issue the bonds for sustainable infrastructure projects.

Debt by any other name…

Dr. Martin Weale, Director of the National Institute of Economic and Social Research (NIESR), an independent London-based think tank, told Deutsche Welle that such a move would basically amount to government borrowing, regardless of what name it’s given.

“If it’s something that makes people happier about lending to the government – assuming the government is issuing them – or if it makes it possible for the government to borrow more cheaply than would otherwise be the case, then it seems to be it’s a good idea,” Dr. Weale said.

“Fundamentally, what matters is actually paying for spending that’s done, whether it’s a green idea or anything else, and if you finance it by borrowing, it doesn’t matter too much what you call it,” he said, adding that investors would need to look at the likely yields of such bonds.

Proponents of the green bonds are describing them as a new way to finance infrastructure projects at a time when the government is struggling to balance its books.

However, Dr. Weale points out that it won’t actually reduce the amount of government borrowing. “When we look at how much the government is borrowing and whether it can afford it, people will take green bonds into account just as much as anything else,” he said.

He draws an analogy between last century’s wartime borrowing in Britain and the current trends. “In many ways it’s rather similar to something we saw in the twentieth century: we had defense bonds and we had war loans. And those were names given to government debt to make it easier or persuade people to buy it,” he explained.

Long-term contracts planned

The Finance Ministry’s Ian Pearson was also quoted as saying the government was looking to offer long-term support to wind energy and green waste companies.

"We are thinking of going direct to companies looking to establish energy from waste and wind farm projects and offering them long-term contracts that would both get the public sector a good deal on price but also get the projects off the ground," he told the Financial Times.

"If they had, say, a 15-year contract to supply the public sector, that should make it easier for them to raise finance to get the projects going, while tying in with the green agenda," Pearson added.

Experts like Dr. Weale agree that there’s an argument for such long-term contracts.

“We know that at current prices many so-called green schemes are highly uneconomic. And since the government doesn’t want to do the obvious thing, which is to impose a proper charge for carbon emissions, what they are proposing seems to me the next best,” he conceded.

KfW as a model?

Also under consideration is the idea of establishing a state-run infrastructure bank to help fund energy and other infrastructure projects in the country.

Some analysts have pointed to the enormous amount of investments needed for energy infrastructure not only in Britain but across Europe. However, there are doubts about how such projects can be financed at a time when credit flow remains a problem as the global economy slowly recovers from recession.

As a means of mobilizing capital for such purposes, some analysts in the UK have suggested setting up an infrastructure bank on the lines of Germany’s state-owned development bank KfW.

Competition for private banks

Some analysts say the proposal could set off alarm bells for private sector banks. However, Dr. Weale from the NIESR disagrees.

“I think private sector banks aren’t terribly worried about competition. They’re very short of capital. They are not wanting to lend - as far as one can tell. And if they’re not wanting to lend, they shouldn’t be upset that other people are doing the lending instead,” he said.

Dr. Weale says that if the private sector banks were to raise more capital, perhaps they could compete for that sort of business as well.

Author: Ranjitha Balasubramanyam
Editor: Sam Edmonds