By Seán Fearon.
A significant but narrowing gap in the Irish just transition literature is how we intend to finance just transition policy, and specifically, what types of finance are best suited to advancing myriad radical policy initiatives.
The answers to this puzzle in green-left circles increasingly form a combination of modern monetary theory (MMT) for states with direct control over a sovereign currency, and deficit spending by exploiting the ultra-low interest rate environment created and sustained by the world’s foremost central banks.
These are vital contributions to a mounting debate on how we best finance just transition policies. Unfortunately, they have little practical application to the North of Ireland, a small state with no meaningful financial or economic autonomy and bound within the constricted, but deliberately crafted, neoliberal confines of the British devolutionary setup.
Lack of fiscal and financial powers
The North of Ireland cannot design and levy taxes. It can’t borrow with any real discretion. The North receives ‘pocket money’ from Westminster called ‘departmental expenditure limits’, based on rates of public expenditure in England. More colloquially, it’s known as the ‘block grant’, and is further topped up by ‘annually managed expenditure’ (AME) to fund pre-determined demand-led spending, such as social protection payments. In short, the directive from Westminster to the Executive in the North is ‘spend what you’re given, and no more’.
This is intentional. Without access to tax-altering powers or an array of low-cost public finance policy options underpinned by the Bank of England, devolved regions have been forced to turn to the private sector. Increasingly this has been forced through a series of contrived mechanisms such as the Reform and Reinvest Initiative (RRI) which, like the older private finance initiatives (PFIs), is intended to induce neoliberal policy outcomes. (RRI allows for limited amounts of borrowing by the Executive of up to £200m per year. However, RRI repayment costs now far exceed borrowing costs of today’s external interest rate environment. Despite being one of the only significant public borrowing avenues in the North it has been flagrantly misused, most notably to bail out the Presbyterian Mutual Society.)
The obvious and structural solution is access to dramatically expanded fiscal and financial powers for the North of Ireland, as partially advocated for in the Scottish Calman Commission and Silk Commission in Wales.
But in the absence of a profound change of policy at the heart of Whitehall, and facing such concrete barriers restricting access to public finance to advance just transition policies, creative thinking is required to drive just transition policies in the immediate term by making better use of existing financial avenues that are either underused or misunderstood.
Utilising funding mechanisms
Financial Transactions Capital (FTC), like other devolved financial mechanisms, is administered to devolved regions centrally by Westminster, and can only be used to invest in private sector (at least 51 per cent privately-owned) capital projects. It can be either deployed as either debt or equity, but its intended purpose is clear – using public capital to lower risk and costs for profit-seeking private entities.
In the North, the NI Investment Fund (NIIF) is the only major body currently using FTC. With a potential capitalisation in the region of £100 million, only half of the Fund has so far been committed for investment. Despite its stated mission to advance green energy projects, no such major investments have yet been made by the Fund, which has essentially focused on securing short term returns from commercial property. But this is a policy choice flowing from the design of the fund itself. NIIF ensure that loans have a maximum maturity of five years, and the fund has chosen only to issue debt finance, drastically narrowing the policy scope for how FTC may be used.
It is perhaps due to this stifled policy ambition that other Departments have failed to see the potential in for FTC. In turn, the ‘spend it, or lose it’ design of FTC means that since it hasn’t been spent, it’s been lost, resulting in a staggering £150m being handed back to the British government in 2019-2020. For a state in dire need of resources to tackle the climate crisis, this is simply wasteful.
Equity investments in green social enterprises, debt financing to housing associations to retrofit homes, and part-funding community energy projects to bring down prohibitively expensive debt-equity ratios to build community-owned wind farms all satisfy FTC criteria and tangible, community-empowering just transition policies. The Welsh Development Bank is an example of similarly creative and citizen-oriented use of the FTC instrument.
Local councils and green municipal bonds
Local Councils can offer the best route for developing and testing progressive climate finance policy. In fact, the major Councils in the North are already exploring means by which they will finance ambitious net zero carbon energy strategies.
The Belfast Climate Commission are in the initial stages of looking at how they might finance their policy recommendations through Council-issued green bonds. Local authority green bonds can be municipal in nature, or can target more institutional (and private) lenders with more clout. However, beyond the progressive simplicity and community benefits of citizen-backed municipal financing, municipal financing is by far the superior route, for a number of reasons.
Firstly, citizens with the ability to invest in a Council-issued green bonds will have access to higher rates of interest than they would if their savings gathered dust in the present interest environment. Secondly, research shows that with a financial stake in local climate action, engagement with and awareness of the climate crisis, and local efforts to tackle it, improves healthily.
Important examples exist in England where green bond projects are at an advanced stage. In July 2020, West Berkshire Council issued the first ever green municipal bond valued at £1m, underpinned by University of Leeds and Place Based Climate Action Network (PCAN) research. Leeds will be launching its own Community Municipal Investments (CMI) later in 2020. All in all, as much as £3bn could be raised across 343 English local authorities, giving a clear route, and indication of potential, for similar policy development in the North of Ireland.
Looking beyond structural restrictions
The above is a brief exploration of some of the means by which the North of Ireland can overcome serious structural restrictions on its ability to finance a just transition, though it is by no means exhaustive.
As Irish green-left circles consider the vast opportunities available to sovereign states to finance just transition objectives, one eye should be kept on the absence of any such opportunities in the North. Short of structural change and real economic independence, action by local Councils and creativity with existing avenues are essential to ensure just transition policies are progressed in the here and now.
Seán Fearon is a PhD Candidate at Queens University Belfast where he conducts research on Just Transition. Follow him on Twitter @Sean_Fearon.
A version of this article originally appeared on the TASC blog and has been reprinted here with the permission of the author.