The behind-the-scenes battle over the level of Government financial support for green energy projects such as giant offshore windfarms broke out into the open yesterday when Chris Huhne, the Energy and Climate Change Secretary, delivered a coded criticism of the Treasury's stance on the issue.
He risked a row with George Osborne's department, after appearing to compare the Treasury
's opposition over the Green Investment Bank
to its scuppering of a similar Keynes-backed stimulus plan in the 1930s. Some economists argue that sticking to more fiscally conservative policies helped to prolong the Great Depression in Britain. The Liberal Democrat minister, who drew the analogy at a private meeting of City financiers, was careful not to criticise the Treasury directly. It is understood that he acknowledged but did not refute media reports of the differences with the Treasury on the issue.
Lack of clarity over the bank's future has also prompted a furious response from a member of the Green Investment Bank Commission – who wanted to remain anonymous – which was set up by Osborne in February to advise on what form the bank should take. He said it was essential that it was able to raise money by issuing Government-backed bonds: "Frankly, if it doesn't there's no point in it existing. If we were only ever going to do one thing, the green bond is the thing we need to do."
He said increasing investment
in green technology
was vital: "It is now an imperative nationally and internationally that governments fund these banks and get on and fund climate change projects because if they don't we won't have a planet. It's a simple as that."
Negotiations over the Green Investment Bank are complex and at a sensitive stage. Huhne and other backers of the plan are anxious not to antagonise Osborne or powerful officials at the Treasury, whose approval is required for it to go ahead.
But the comments – the first time a senior minister has appeared to question the Treasury's position on a green investment bank in public – reflect growing frustration in Whitehall and the City over the slow progress of negotiations.
Both the Lib Dems and the Conservatives committed to the establishment of a bank in the coalition agreement. But the Treasury's priority of reducing the deficit has led to serious differences within Whitehall over how much Government financial backing the bank should have.
Pressure appears to be growing across Government departments on the Treasury to sanction a fully functioning Green Investment Bank. While advocates of the bank argue that some progress has been made in talks, no breakthrough has taken place yet, with some key Treasury officials remaining resistant to the idea.
Huhne has been championing the establishment of a Green Investment Bank which would be able to help deliver the estimated £200 billion of investment in clean power plants, offshore windfarms and smart grids required by 2020. He wants a bank able to effectively leverage capital from the private sector – for example by issuing 'green bonds' – to invest in riskier projects at the early stage. It is likely that this type of bank would have to offer investors either an implicit or explicit Government guarantee.
Osborne committed in the spending review in October to setting up the bank, but the Treasury remains opposed to the idea of a Government-backed bank taking on billions of pounds of liabilities which would add to the deficit. Instead, he wants a more limited bank.
At the meeting, Huhne who had a successful career in the City and was an economics journalist before entering politics, outlined his vision for a Green Investment Bank and why it was required. He drew the analogy with the "Macmillan Gap" identified in 1931 by a Government-appointed commission, which included the economist John Maynard Keynes.
It proposed establishing a Government-backed bank to finance small and medium-sized British businesses
, which were struggling to cope with the global depression and had difficulty securing finance from banks.
But the fiscally conservative Treasury resisted the proposal, Huhne told his audience. Arguably such reluctance to adopt Keynesian-style policies in the early 1930s prolonged the economic slump. It was not until 1945 that the Industrial and Commercial Finance Corporation was set up, which eventually became 3i group, one of Europe's leading private equity groups.
Huhne did not directly say that current Treasury officials have a similarly cautious fiscal mindset, but it is understood that the audience, of mostly bankers and City investment managers, was left in no doubt of the message he was sending.
has also learned that some key department of business officials back Huhne's position that a bank should be a public, Government-backed body. The Treasury would rather the bank is incorporated as a limited private institution because its borrowings would not appear on the Government's balance sheet. But it is understood that Vince Cable's business department recognises that a private bank backed with an initial Government cheque of £1 billion but no other form of support is unlikely to be as effective as a public institution offering investors some form of Government guarantee. His officials also believe a private bank would be more complicated to set up and could run into state-aid problems with Brussels.
No decision has been made on whether the bank should be public or private, and neither has any commitment been made that it should be able to issue green bonds. But the Treasury has agreed to study different financing models to see if some form of Government-backed green bonds could be structured so they do not appear on the balance sheet.
This story has been published under licence from Guardian Sustainable Business, of which GreenWise is an editorial partner.
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