The UK government should consider extending carbon pricing to cover the whole economy, a group of parliamentarians has argued.

Carbon pricing had been “extremely effective” at driving investment away from carbon-intensive forms of generating electricity, they said, and they had heard evidence that it could be effective in driving decarbonisation in other sectors of the economy.

“Long-term clarity about the future level of that price would allow businesses and investors to plan for the transition to a low-carbon economy,” said the Environmental Audit Committee (EAC) in a report, ‘Green finance: mobilising investment in clean energy and sustainable development’.

Ministers should set out a trajectory to gradually increase the carbon price to continue driving investment away from fossil fuel-based electricity generation, the parliamentarians said.

Nick Stansbury, fund manager at Legal & General Investment Management, said a trajectory towards clear rising carbon prices was “exactly what investors need to see” in many countries around the world.

“Ministers must urgently plug this policy gap and publish a delivery plan to secure the investment needed”

Environmental Audit Committee

“It would be much better if it could be global and coordinated,” he told IPE. “If it can’t be global and coordinated then let’s have it on a regional level, but we need to see that trajectory and that certainty around the end destination so that capital markets can start discounting carbon risk into the price of securities today.”

The select committee, whose remit cuts across government, said the government’s ‘Clean Growth’ strategy would not allow the country to meet its carbon reduction goals.

“Ministers must urgently plug this policy gap and publish a delivery plan to secure the investment needed to meet the fourth and fifth carbon budgets,” it said.

A series of sudden changes to low-carbon energy policy in 2015 had undermined investor confidence and contributed to an apparent dip in investment since then, according to the EAC.

The members of parliament urged the government to promptly respond to recommendations made by the Green Finance Taskforce and provide greater clarity on how it intended to deliver its strategy by the budget announcement in the autumn.

The politicians also lent qualified support to green bonds, saying that if they made additional capital available for low-carbon or sustainable projects they could have “transformational public benefits”.

“We can therefore see a case for incentives to encourage financial institutions and owners of UK assets to issue green bonds, but only once clearly defined standards are in place,” they said.

It was crucial that investors and policy makers be able to have confidence in green bonds, the committee said. Government ministers should therefore set out a timetable for introducing “authoritative standards” on products such as green bonds.

It would make sense for the UK’s efforts to “cohere” with steps being taken at the EU-level under the European Commission’s sustainable finance action plan, the MPs added.

The UK issuing a sovereign green bond could also be beneficial and something the government should explore from the perspective of its Clean Growth Strategy, according to the committee.

As part of its inquiry into green finance, the EAC has questioned the 25 largest UK pension funds about their approach to climate change and urged the government to use its powers to require the country’s pensions and financial regulators to produce climate adaptation reports in respect of their public functions.