Former Merrill Lynch boss backs green sticks, not carrots

"I don't think incentives work - sticks do."

Not the words of a Victorian school master or firebrand backbench MP, but the assessment of the UK's environmental policy from Bob Wigley, chairman of the government's Green Investment Bank Commission.

Speaking at a meeting last night to discuss the commission's proposals for the new bank, Wigley urged the government to have "the guts" to impose financial penalties on businesses and households that fail to improve their environmental performance.

If some in the audience were tempted to reflect on what might have happened if the former chairman of Merrill Lynch in Europe had managed to convince his financier peers to take a similar "stick-based" approach to financial regulation, they were equally reassured to hear a man with access to senior government minister make an eloquent case for increases to green taxes.

Wigley argued that over the past 10 years the UK's climate change policy had been defined by a small-scale system of grants and advice, when what was needed was a "large-scale systems of sticks, grants, loans and advice".

"Typically, SMEs' (small and medium enterprises) energy costs are three per cent of their total costs, while business rates are 10 per cent," he said, adding that as a result many businesses ignored the potential for energy efficiency savings. "The government could say that 'if you do not take energy efficiency measures we will increase your business rates, but to help you there will be a national loan scheme and professional advice'."

He said that research from the Carbon Trust had shown that simple cost-effective energy efficiency measures could cut SME energy bills by £1bn a year, but added that a stick was needed to make them take the necessary action.

Wigley also proposed that the stick-based approach should be replicated for households, with stamp duty increased for those buyers who refuse to install energy efficiency and renewable energy measures when buying a new home.

"The question is if the government has the guts to do it, because I don't think incentives work – sticks do," he said.

Asked whether he thought the new coalition government had the nerve to face down tabloid opposition and impose such measures, Wigley said he had run the proposals past Energy and Climate Change Secretary Chris Huhne. "He said it was an interesting idea and that we should talk more – he hasn't called yet," admitted Wigley, prompting laughter from the audience.

However, both the Conservatives and the Liberal Democrats committed to increase the proportion of Treasury income generated from green taxes in their election manifestos and insiders have signalled that environmental taxation could be back on the political agenda by the autumn.