The Bank's green future

The science of climate change is clear, despite those leaked UEA emails. The technology to tackle the problem either exists, or is on its way. Now we need to handle the finance. That’s why putting a price on carbon was the most important negotiating point at the Copenhagen summit. It’s also why the next government needs to consider a radical new step: parachuting climate scientists and energy technologists into the Bank of England.

Post-Copenhagen, the world must work towards a global cap-and-trade scheme, in which all carbon dioxide emitted comes with a paid-for permit. If a country doesn’t control its emissions, it will pay through penalties. But this global scheme must also be underpinned by new, innovative national measures. Gordon Brown did well in this regard in 1998 with his “renewables obligation,” requiring power companies to put a rising amount of renewable energy on the grid. With the proceeds he created both the Carbon Trust and the Energy Saving Trust, two independent bodies that have already proved their mettle in the fight against climate change.

However, I have the sense—just as when I was the government’s chief scientist—that Alistair Darling’s treasury is now pulling in the wrong direction. The wasted opportunity of the current economic stimulus package was a case in point. Most of that money could have been directed into low-carbon projects, such as energy efficiency boosts for our ageing housing stock. This also would put unemployed construction workers back to work. South Korea committed 80 per cent of its stimulus money to low-carbon growth. Even China managed 50 per cent. How shaming and frustrating, then, that Britain limped in with barely 10 per cent.

Even without climate change, there is no economic case for the high-carbon status quo. The world spends $1.7 trillion a year on Gulf oil alone. Britain should instead invest its share of this in home-grown energy, boosting the economy and reducing unemployment—the treasury’s own economic goals.

We should welcome the shadow chancellor George Osborne’s declaration that he wants to put the treasury at the heart of the fight against climate change. Indeed, half a dozen Tory speeches outlined an impressive range of measures in late November, from a so-called “green investment bank” to a commitment to cut emissions from government itself more quickly.

But there is a deep-rooted problem that needs to be tackled first. Our economic mandarins are caught in a trap. At best, the treasury sees carbon reduction as a distraction from their primary focus: GDP growth, reducing unemployment, and raising productivity. At worst, they follow the Nigel Lawson school: that even if climate change is real, we should let pure markets operate to solve it. The same is often true for central bankers, who rarely even consider carbon as an important byproduct of a stable money supply and low inflation.

And yet climate change has shown how spectacularly impure markets can be. It is the granddaddy of market failure. The only effective response will be market collaboration, with a global carbon price. At the national level, it must also mean putting climate change right into our nation’s economic heart: the old lady of Threadneedle street herself.

The problem is that any big levers the government might support—carbon pricing, long-term rules forcing more renewables and nuclear energy into the grid, much higher road tax and congestion charges—could be partially undone by the Bank of England, if monetary policy is used to push for less sustainable patterns of growth. So what to do? The obvious option is simply to relocate the climate change committee—to the Bank itself. Established under the 2008 Climate Change Act, the committee is an arm’s length government body—just like the Bank—designed to keep tabs on government emissions. Every five years it holds them accountable for their carbon budget. When I was in government, I recommended bringing energy, climate change and the environment together under one roof: now the new department of energy and climate change (DECC) is well placed to resolve conflicts between the energy industry and the environmental lobby. Similarly, we need to make sure that the Bank of England’s management of the economy is always done with an eye on the carbon implications, and vice versa.

In the first instance, the chairman of the climate change committee should be on Mervyn King’s board of governors. Better still would be if the committee as a whole were run under the Bank’s auspices, so that their respective secretariats were constantly rubbing shoulders and comparing notes. In practice, the climate committee’s staff could also take part in the monthly behind-closed-doors debate at the Bank about the economy and interest rates—known internally as the “Pre-MPC” process—feeding in relevant data to help inform a sustainable monetary policy. A climate expert should be appointed to the Bank of England “court,” its advisory body. And most radically, why not have a climate scientist or an energy technologist on the monetary policy committee itself? Generally there is one labour market economist in the group to stop the monetarists riding roughshod over the jobless. Unemployment is not a price worth paying for low inflation. Climate change isn’t either.