How can Labour deliver green investment when “there’s no money left”?

Over the next twenty years Britain will need £150bn of investment in the power generation sector if it is to have any hope of meeting its CO2 reduction targets. But how does Labour support green growth when we are sure to find ourselves back in government in an era when we won’t have much room to make major spending commitments?

The answer is to outline a clear vision for a low-carbon economy backed up by precise incentives to stimulate green investment and discourage carbon-intensive power generation. Get this right and a future Labour government could encourage much lower emissions in the energy sector without having to spend a single pound.

Here’s the plan: give every different type of power generation – gas, nuclear, wind, biomass etc – a score based on its carbon-intensity (i.e. how much CO2 is given off by the producer for every unit of electricity). You then provide a financial credit for every unit of green energy and require a payment for the not-so-green ones. The rewards and payments would be proportionate to the Carbon Intensity (CI) score for that energy source. The credits would be dealt with on a per company basis so that EDF, for example, or Scottish Power would balanced their payments for coal-fired power stations against credits for, say, every unit of electricity from wind turbines. If they invest in a Carbon Capture and Storage project, or improve the efficiency of a power station then the CI score goes down and their credits go up. The level of the payments and credits would be phased in over several years but from its inception it would allow businesses to pick out their own path to reducing emissions, whilst ensuring that they get there one way or another.

With this in place you’ve got yourself a market mechanism that creates an incentive to invest in low carbon power generation technology (and to improve the energy efficiency of older assets). The goal is not to ‘pick winners’ but to allow winning technologies to thrive. DECC does currently offer a limited programme of incentives for green power generation technology (called the Renewables Obligation) but this sticks to only those parts of an energy firm that are already invested in green-tech. For a sustainable market price on carbon (specifically CO2 per kilowatt-hour) to emerge there needs to be a genuinely transparent market that covers the whole portfolio of an energy firms’ technology, giving those business a clear signal that going green will pay over the long term. Crucially the scheme is sure to be revenue-neutral over the next 10 years because payments from carbon-intensive technologies would out-weigh the credits for renewables (even DECC don’t expect us to get to more than 35% of our energy from renewables by 2020).

The idea is based on a California policy to reduce emissions from transport fuels, known as the Low Carbon Fuels Standard. From this year, all companies selling transport fuel in that state will have to meet an “average and declining” CI-score across all the fuels they sell. This means that if one company finds it economic to sell a high CO2 fuel (like plain old petrol) then this must be off-set by something greener (like a second-generation biofuel or a more efficient diesel). As with the above proposal an energy firm pays a fixed amount based on their CI score, or they get a credit back.

The payments for high carbon technologies are not designed to be punitive. The aim is not to implement a crude windfall tax on energy firms – this would be counter-productive since it is their capital that is badly needed for green investment. As with the California policy, the payments system would work best if it looked across the board at all the types of energy a firm produces and set out a clear expectation of the required carbon-intensity levels which would then decline (i.e. get greener) over time. Such a policy creates an environmental agenda for Labour that sets up a values-based market rather than one driven by government spending.

Labour has rightly shown its appreciation for the efficiency of markets but it has been slower to recognise that it cannot be indifferent about their outcomes. This clear signal in support of investment would deliver green growth without breaking the bank.

Got an idea for what Labour should stand for “When there’s no money left?” – email us. We’ll be conducting a poll of the best entries, and the winner will present their idea to a “Dragon’s Den” at the Fabian New Year conference.