The Chancellor won few green friends yesterday, but his credit-easing plans could offer a boost to low carbon firms and the Green Deal
Alongside his thinly veiled assault on the government's low carbon strategy, Chancellor George Osborne used his Conservative Party Conference speech yesterday to introduce us all to a new piece of economic jargon: credit easing.
There was initially considerable confusion about what precisely it is and how it will work, but by the evening ministers and media appeared in agreement that it basically boils down to the Treasury's lending directly to businesses in yet another attempt to end the credit crunch that has resulted as banks seek to rebuild their battered balance sheets.
At first glance there is plenty to like about the proposal. One of the perennial challenges throughout the economic crisis has been an inability to get the banks to lend to even well-managed businesses with good prospects.
The Project Merlin initiative to encourage the banks to lend more is obviously failing, and it is positive to see the government attempting to tackle the problem directly. It is somewhat bizarre to see a Conservative chancellor tacitly admitting that the market has failed, and that the Treasury must now effectively act as a common or garden high street bank lending to small and mid-sized businesses, but those firms desperate for credit lines will not mind the irony.
However, the scheme faces two major challenges, both of which could be addressed if Osborne sheds his increasingly entrenched opposition to the low carbon economy and offers green credit easing.
The first problem is that, if past experience is anything to go by, the Treasury is unlikely to prove the most effective of bank managers.
It is undoubtedly true that banks have tightened the purse strings and are reluctant to lend to businesses that still represent good bets, but they have also overseen a slowdown in credit because the absence of economic growth raises questions over whether many firms will be able to repay the loans they are awarded.
The key question for Osborne is what makes him think that Treasury mandarins will prove better at selecting between good and bad prospects than the bank managers who do precisely that for a living.
The answer could be to target the injection of credit at green companies. Firstly, low carbon businesses are operating in a green goods and services market that is growing at over four per cent a year, ensuring that their prospects are better than many of their conventional peers'. Secondly, the new loans will not only deliver jobs and growth, but provide the compelling fringe benefits of reduced emissions and environmental damage.
If the credit easing is, as expected, to be delivered by the Treasury's buying up corporate bonds, Osborne should immediately state a preference for buying up green bonds, potentially modelled on the Eco bonds successfully issued last year by wind farm developer Ecotricity.
The current and previous government failed to deliver a stimulus package that was overtly green when the opportunity arose, and Osborne now has the potential to rectify that error, if only he can overcome his apparent distaste for state intervention and the low carbon economy. Perhaps he could start by re-approving the loan to nuclear components firm Sheffield Forgemasters that should never have been cancelled in the first place.
The second major problem is that, while Osborne is keen to characterise the current economic crisis as a debt crisis, it is more than that. It is also a growth crisis.
There is no point making credit more readily available to help small and medium sized businesses expand if there are no customers to drive that expansion. Economists of all persuasions are increasingly convinced that action needs to be taken to drive demand, something the government accepts even if it is unwilling to countenance the tax cuts or stimulus measures that would offer the most immediate means of delivering the desired uptick in demand.
However, there is one government policy that does promise a huge increase in demand for green goods and services at little cost to the Treasury, and which could integrate effectively with the new credit easing programme: the Green Deal.
The building energy efficiency loan scheme received a boost this week with the news that 16 leading blue chips are to launch a Green Deal Finance Company (GDFC) in an attempt to bring down the interest charged on the loans that will allow households and businesses to undertake green building improvements at no upfront cost.
However, experts remain concerned that, even if the GDFC can bring rates of interests down to around six per cent, that will still be too rich to attract many people to the scheme, and would also rule out the installation of more costly energy saving technologies such as triple glazing or solid wall insulation.
So here's an idea: integrate the Green Deal with the credit easing programme, allowing the GDFC to issue corporate green bonds that it can sell to the Treasury at ultra low rates of interest.
The GDFC will then be able to offer households and businesses low rates of interest on their Green Deal loans, maximising their energy savings through the scheme and allowing them to undertake more costly green building makeovers. In turn, the building, retail and renewable energy firms that provide the Green Deal services will enjoy a huge boost in demand, fuelling growth and creating jobs in what is likely to be a relatively labour-intensive sector.
Osborne has done his utmost this week to trash his party's hard-won green credentials, but through his credit-easing programme he now has an opportunity to reverse that damage and provide a real boost to the UK's low carbon economy.
Then again, judging by the anti-environmental tone of parts of his speech yesterday, he is just as likely to use this latest wheeze to furnish shale gas and auto firms with easy credit.
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