Securing funding for the work councils are doing to get to net zero is essential – whether it's to make homes cheaper and greener to heat or to build charging infrastructure to encourage widespread electric vehicle ownership.
We know that this supports good jobs and local growth, but the upfront funding challenge is enormous – UK Research and Innovation estimates that £20bn a year will be needed for local net zero delivery to 2050.
London Councils' Green Finance Guide already supports boroughs to navigate the existing funding landscape. But this isn't enough. We want to help shape a funding environment that delivers what communities need.
It will shock no-one to hear that councils are in a difficult position when it comes to their capacity and the resources available to invest in net zero. This is a significant barrier to progress, given the opportunities at our fingertips across the services we deliver, our role as place-makers and the trusted partnerships we have forged.
That's why London Councils has partnered with economists from Hertfordshire Business School at the University of Hertfordshire to explore and compare different funding options for local decarbonisation – based on the financial reality for boroughs today.
It will shock no-one to hear that councils are in a difficult position when it comes to their capacity and the resources available to invest in net zero. This is a significant barrier to progress, given the opportunities at our fingertips across the services we deliver, our role as place-makers and the trusted partnerships we have forged.
Growing demand and rising costs have seen budgets for non-statutory activities squeezed, with net zero initiatives currently falling into this category. London boroughs are facing a £500m funding shortfall in the coming financial year overall – and it's a similarly bleak picture outside the capital.
The University of Hertfordshire explored local capacity for borrowing and concluded that, for the vast majority of local authorities, any borrowing will be very limited, and should be reserved for statutory responsibilities. More generally, the local government finance framework lacks the flexibility needed to deal with long-term challenges like climate change. For example, councils have to balance their budgets every year, and there is an understandable reluctance to enter into higher debt service payments that could take money away from critical services.
National government, on the other hand, has a range of fiscal levers to choose from – including control over various taxes and tax rates. Considered from a purely financial point of view, national government is in a much stronger position to borrow at the sheer scale required to fund net zero, and can do so more efficiently.
In order to boost investment in the local interventions that are so vital to growing the economy, creating community benefit and lowering carbon emissions, national government has three main options. The first is selling gilts – UK government bonds. The second is financing through state investment banks – like the National Wealth Fund. Thirdly, tax policy could be updated with the intention of generating funds to invest in net zero programmes.
The University of Hertfordshire's analysis shows that if Government funded the entire £37bn that the Climate Change Committee say is needed to deliver net zero, the debt to GDP ratio would rise from around 99% in 2024 to maximum 112%. By contrast, the Office for Budget Responsibility estimate that inaction on climate change could result in a 32-percentage-point increase in the debt-to-GDP ratio, even if global temperature rises stay below 3°C.
The Government already provides some level of grant funding to local authorities to support the delivery of net zero ambitions. Given the current fiscal environment, it is crucial that we can maximise value for money from these sources. That means addressing the fragmented, ad hoc nature of the current grant ecosystem, and resource-intensive bidding and monitoring processes, which are holding back our collective ambitions.
Our new paper with the University of Hertfordshire shows how investing in council capacity can drive really meaningful outcomes that bring us closer to net zero and drive local growth - but councils cannot be expected to take on unsustainable amounts of debt to achieve this. Where borrowing is necessary, national government can do so on much more favourable terms, and should leverage that capability to support local net zero. If government grants are the name of the game, national government should deepen work with councils to organise these to reduce the costs and inefficiencies encountered in the current process of accessing and spending funds.
Equity models also offer huge opportunities to drive investment in net zero. As we explore potential delivery models in more detail, we want to work with government and other partners in this next phase of our research.
One thing is clear – we urgently need investment to drive decarbonisation, given the scale and pace of change needed. This is reflected in London boroughs' local climate action plans and in the Government's own national missions. The funding options available to local and national government all come with their own strengths and trade-offs – being clear about what they are will enable us to take informed, pragmatic decisions about the future of net zero funding.
Cllr Kieron Williams is executive member for climate change, transport & environment, London Councils
