The pandemic has intensified two existing challenges. First of all, we see a widening of the funding gap in green infrastructure that is required to meet the UK‚’s 2050 Net Zero target. Second of all, the breadth and power of the policy tools that can stimulate the economy have been increasingly constrained. These are major constraints on our ability to respond to the current economic, environmental and social crises. However, together they present an opportunity.
The UK is laudably one of the first countries in the world to enshrine its Net Zero goal in law, as it did in July 2019. However, even before the pandemic, UK green infrastructure investment was lagging behind the ~¬£10bn annual estimated requirement needed to deliver our 2050 net zero goal. The recessionary conditions caused by COVID have accelerated that shortfall, despite public sentiment and private sector commitment to a green recovery from the pandemic. As has been much commented, the stimulus requirement to rebuild the economy presents an opportunity to ‚’rebuild green‚’.
However, by what means can we both stimulate and shape this recovery? The pandemic has further constrained our policy-makers‚’ stimulus toolkit. With official interest rates at the effective lower bound (ELB), conventional monetary policy is limited. A reduction of official interest rates into negative territory runs considerable risks. Specifically, negative interest rates threaten financial intermediation and the functioning of the banking sector. Due to the constraints on monetary policy, and the post-pandemic pressures on government balance sheet, the burden on fiscal policy is considerable, yet the political environment does not permit room for much more fiscal stimulus.