Nick Robinson is the head of the Climate Change Centre at HSBC bank.
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HSBC published a report comparing the 'greenness' of 20 different stimulus plans worldwide in February. What was the incentive for a bank to embark on such a study?
We started picking up towards the end of last year that there's an increasing discussion about a green 'New Deal'. For us, the question was 'is this going to be financially significant?'
I suppose the two things that made us want to look at this in some depth was when China issued its stimulus plan in November, and then obviously when following the American presidential elections, Obama took office and it was clear that he was going to have his fiscal stimulus and there was going to be a strong green component.
So that's our mission and doing this was actually to look at if there is something of interest for investors about this. So I think that's what we've been trying to do, to say what the size of it is now and [whether it is] significant enough. And also then, where it is being allocated, by geography and by climate change themes.
We have a climate change index to look at companies listed on the world stock markets. So we have 18 different climate change themes, which we then use to classify the various stimulus plans we have identified.
So that was our core piece of work, and the update that came out today (31 March) is literally an update, so we extended the coverage to have some more countries, to have all the G20 countries. And some of the existing plans changed a little bit, and there were some more announcements.
Can you already see different results emerging from the various emphases and sizes of the green stimulus?
The changes are more at the edges. I think what we see at this stage is that we've come to the end of the first phase. It's essentially the phase starting at about October last year [which is] coming to an end now at the G20. So this is where we're seeing the first phase culminating.
There isn't any new information in terms of the effectiveness, because many of these plans are very new. Even in the first report in February, there were some indications in China that the stimulus was coming through.
But I think it's still too early to tell in terms of how effective they have been, and that's what we are going to be monitoring quite carefully going forward, because that's obviously what investors are interested in. It's not just how big, where, but actually when this is going to become effective in terms of an incentive.
When is the stimulus going to happen? The EU, for example, has been criticised for putting energy projects into its recovery plan that will not in fact take effect for another two years.
We've done some analysis overall in terms of when we think the money will be spent. But this is largely going by what the governments say is going to happen, so mostly in 2010. In 2009, we say it's probably going to be mostly in the second half.
Obviously, you can have delays. That's our big concern, that now that most countries have introduced their plans and we know what the broad outlines are, how do we ensure that this money actually is spent in a timely fashion?
That's the three words the IMF uses, the plans used to be "timely, targeted and temporary". So how do we really ensure that this stimulus has an impact in terms of stimulating demand and so forth? This remains one of our unanswered questions, one of the things that we will be looking at.
How big did you find the green dimension of the stimulus plans? You cite quite large numbers, but the New Economics Foundation think tank, for example, published a report arguing that only 0.6% of the UK stimulus plan was additional green spending.
That's right, but I think one of the issues is we have taken our way of looking at climate change, which is through our climate change index. And we've said these are estimates, because in some cases it's not clear from the political language what exactly is being allocated.
We think then we are fairly happy with the estimates. We've tried to be as conservative as possible, so I'd rather be in a situation of revising upwards rather than revising downwards.
A particular issue is actually what is new money. That suggests that actually there is quite a lot of interpretation in that. We are quite confident with our figure of 7% in the UK. But it just shows that you can actually have quite a wide range of figures.
You say that the US and China are well ahead of Europe, both in terms of the size of their stimulus packages and their green dimension. What is the likely reason behind that?
I suppose there are a number of reasons. In China's case, it has its tradition of central planning. It has large financial reserves.
Those two things put together mean that it was able to respond quite quickly and with cash. In a sense, it was able to bring forward some of the infrastructure spending on rail, water and so on, which it would've done later on. I think that's one reason.
In the US, clearly the Obama administration came into office knowing that they had to have a fiscal stimulus. And I think there had been quite a lot of preparation in advance to design what the climate or green element could be. The Center for American Progress had done quite a lot of analysis. So I think they were quite well briefed on that.
Another reason is that there are quite big differences, particularly between Western and OECD countries in terms as what are known as automatic fiscal stabilisers. In Europe, the welfare payments are much more generous and automatic. So if people are put out of work, the system kicks into place, whereas in the US this is not the case.
So although the stimulus hasn't been as big in Europe, the additional, the automatic stimulus, means that probably the two measures might be equivalent. I think it is to recognise that actually the stimulus is seen as additional, but I think in Europe there is a case to be made that if you looked at the automatic measures we already have in place, it's probably broadly in line.
Obviously, those don't have any climate change dimension to them.
Do you see any differences between emphases in European countries?
The biggest focus in Europe is on buildings efficiency, which seems to be quite a consistent focus. Which is good.
Probably about a third of the stimulus which is allocated in Europe is around buildings efficiency, and that's the area where most people are saying 'that's got the highest stimulus potential', or at least savings. It creates jobs quickly and is relatively speedy.
One thing we have found quite surprising is how limited the stimulus to renewables has been to date. That was in a sense moving from the popular understanding and the popular discussion about a green 'New Deal' to actual reality.
Really, only in the US has there been a targeted measure to boost the renewables sector. Again, you can partly explain that by the fact that the US needs to put in place almost the foundations of the renewables incentives, which in many European countries we already have in place. That's starting from a different position, and they need to put in those basic incentives.
I suppose that's the area we found surprising when we did the analysis. We were expecting to find more, and we didn't.
Which areas should governments invest in to get the best results in light of your results?
We essentially built on some analysis which the London School of Economics had done. They looked at what makes a good stimulus: timeliness, long-term social return, positive lock-in, xyz. So which of the measures actually have a good impact. You can score that, and buildings efficiency comes number one, then renewables.
Compared to the actual spending to date, interestingly, buildings efficiency gets money but it is by no means the largest. At the moment, rail has got the largest component. That is largely due to a large allocation in China and some in the US. So this is looking at the green stimulus potential and then where money has been allocated to date.
So considering where the money should go and where it is actually going, which countries can expect the biggest returns to their stimulus packages?
The thing is that at this stage, all we have is a series of announcements. Countries have made decisions, they've passed laws, agreed budgets and so on. I think what that gets you then is how that is now going to be implemented. I think that is now the big test.
On this scoring system, the US comes out pretty well, because it had the largest allocation to buildings and then to renewables. So in terms of grading and effectiveness, it seems to be quite well positioned.
China is much more on the heavy infrastructure side, rail, grid, water. But I think that the US probably comes out better in this case.
The EU recovery plan is very heavily concentrated on infrastructure as well, with grids and CCS projects, and has been criticised for the absence of energy efficiency and renewables measures. Do you see any problems with that mix?
There are two things here. One is it complements what's happening at member-state level, so there's a lot more happening in buildings efficiency at member-state level.
Secondly, there's the European Investment Bank, which has its carbon package, six billion euros or something. But I think that's one of the areas where if there were further measures, the area that hasn't received as much attention is renewables.
So if there is scope from fiscal point of view, in terms of if there is money available, I think it would be most effective to put it in energy efficiency and renewables. But let's try and work with what we've got because it took a long time to agree this five billion, so let's make sure it's really spent on time, in a good way and really has an impact.
In the context of the global climate negotiations, what would you see as the most efficient mechanisms that the industrialised countries could use to help fund climate efforts in developing countries?
There is a whole series of proposals on the table. The carbon market is one mechanism, improving and making it more effective. The other area then is looking beyond carbon markets at some of the public finance mechanisms that you can use to mobilise private capital. And I think that is a very fruitful area for further work.
For example, within the European Commission's Communication on Copenhagen, there was a proposal for a European climate finance mechanism, where you've first got to raise the public funds, but then you securitise public funds to enable you to raise bonds on the capital markets.
The same mechanism has been tried very successfully already with immunisation. You actually dedicate future funding aid spending for immunisation and that money can then be used as the necessary backing to raise a bond on capital markets.
I think the key thing to all these mechanisms is how you use public finance at the margin to mobilise private capital. And that's the key, because over 80% of any investment that we are going to need for a successful low-carbon economy is going to have to come from the private sector: either from individuals, institutions or companies. So in a situation of economic downturn, you can expect that the balance will be different, you can expect more public spending. But you would expect at least over half to come from the private sector.
One of the key things in Copenhagen is that the negotiators are focusing very much on how much, which is important, but I suppose from our point of view, we are looking at how much more could that money then leverage. Because there is increasing interest in pension funds and asset managers and so on in investing in the low-carbon economy, they think this is a long-term opportunity.
In some cases, particularly in developing countries, the risk of investment is perhaps higher than they would accept. So how can public finance come in to actually take some of the risk off the table, through loan guarantees and other mechanisms.
China has surprisingly come up with a huge green stimulus, but seems reluctant to make commitments at international level to reducing its emissions on the scale that the EU or the US would like it to. How would you explain this?
There are a number of things going on. One is that the industrialised world is responsible for the bulk of historical emissions. We know that from an international negotiations point of view that until the industrialised world shows real commitment and action to reduce their emissions, the commitment in terms of taking on a cap from developing countries is going to be very limited.
Europe will probably meet its Kyoto target, the US hasn't taken on a target, so I think we're still in a case where there is a huge amount of confidence-building that still needs to be done in developing countries on the question of taking a cap.
Now, what you have alongside that is a growing awareness in most large developing countries that the pattern of development going forward needs to be different. You have the potential of discussions within China. China has adopted an energy-efficiency target and with the next twelve to five year plan, the discussions start this year to what extent that could be a plan for a low-carbon economy, it's going to be more efficient, to what extent China could be the manufacturing base for low-carbon technologies, etc.
India has launched its national action plan on climate change. And these are the things India will do regardless of what happens in the negotiations. The two things they are focusing on: energy efficiency and solar. These are things that will make a lot of sense whatever happens in India's development path and whatever happens in terms of climate negotiations. Mexico and South Africa are similar.
I think there are two discussions going on. One on the hard negotiations, there is still real confidence that needs to be built up through real commitments and also finance. And then on the ground, there are increasing signs of these countries realising that a low-carbon growth path is actually good for their national development trajectory.
In terms of India, I think India has stated at its emissions will never go above the average of the industrialised world. Their emissions are probably still less than two tonnes. In Europe, we are on average ten tonnes and the US around 20. So I think it's quite reasonable for them to say: we are still a very, very poor country, hundreds of millions of people do not have access to modern electricity, we are doing these things in our own country.
But I think it's reasonable to expect the industrialised to take those steps. And then come back with measures which enable and encourage developing countries to do more. As I said, because they are showing signs that they want to do more. So in many ways I think the developing countries are quite rational.
