The Bank of England (BoE) should target its credit policy to offer low cost loans to banks lending for energy efficient building retrofits and other green projects, according to a leading UK thinktank.
In a report published this week, the New Economics Foundation (NEF) called for the central bank’s term funding scheme (TFS) to be reconfigured in support of projects that reduce the exposure of UK households and businesses to volatile and insecure fossil fuels and help ameliorate both the climate and cost of living crises.
Introduced in response to the economic disruption of the Covid-19 pandemic, the TSF gave banks cheap four-year finance against collateral if they in turn lent more to small and medium-sized businesses.
“We propose that the bank, with support from the Treasury, simply greens the TFS, makes it permanent, and scales it up,” said report authors Lukasz Krebel and Frank van Lerven in a blog post accompanying the report. Simply increasing the main policy rate will do little to stave off external and supply-induced price rises, they say, and may inhibit green projects with high start-up costs.
“Our ability to cut emissions fast enough to avoid climate catastrophe and reduce our dependence on volatile oil and gas is threatened when interest rates go up. Targeted cheaper lending for projects which will move us away from dangerous fossil fuels should be a no-brainer.”
The NEF proposal involves offering long-term liquidity to banks and building societies at zero or negative real interest rates, on the condition that they increase their lending to households and firms for projects that reduce dependence on fossil fuels. It includes a case study of a pilot exercise that could be implemented using existing data and that would target energy efficient building retrofits.
Recent analysis by the International Monetary Fund found that the energy crisis is hitting UK household budgets harder than in any country in western Europe, largely as a result of heavy reliance on fossil gas and an energy inefficient housing stock.
The report was funded by the Sunrise Project, which also funds Green Central Banking.
This page was last updated September 6, 2022
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