How will Scotland finance the net-zero target?

The Climate Change (Emissions Reduction Targets) (Scotland) Act 2019 set fresh targets to reduce Scotland’s emissions of greenhouse gases to net-zero by 2045 (being 5 years ahead of the UK government target) and with interim targets for reductions of at least 75% by 2030 and 90% by 2040.

Given its significant role in greenhouse gases production a large proportion of the targeted reduction will be focused on housing. Areas identified as requiring improvement and investment include property condition, energy efficiency and higher levels of insulation, fuel use and elimination of gas as a fuel source, the use of fuel pumps and other technology as well as the provision of electric vehicle charging points. Occupier behaviour is also key.

When delivering new housing stock these factors can increasingly be modelled in through the planning and design process. However, in practice most of the homes Scotland will have in 2045 have already been built, with many of them comprising tenement flats and pre-1919 detached housing as well as large amounts of post-war terraced housing. Much of that housing, about 60% of the total stock, is also privately owned, complicating the arrangements for its retrofitting.

Two major challenges are, first, to identify how best to incentivise private owners to undertake the necessary works to their homes to bring it up to scratch and, secondly, how to finance the cost of the relevant works. Obviously, most of these issues are inter-linked.

We do not know how much it will cost to retrofit Scotland’s housing stock. Various sums have been suggested, but based on a pool of about 2.5 million homes and an arbitrary cost per home of £20,000, the total bill could be in the region of £50 billion or £2 billion per annum. That is likely however to be an under-estimate.

Where is all that cash going to come from?

I would suggest that we need a package of incentives and funding solutions for individual owners and occupiers to encourage investment in their homes. These could include:-

  1. The provision of grants and soft loans to individual owners, repayable on sale of their home.
  2. Tax breaks (income, local or inheritance) to owner occupiers carrying out qualifying works.
  3. Penalties applied, via tax on the sale of homes, for owner occupiers who fail to invest in climate change mitigation measures.

Equally importantly we need to educate, develop and encourage buy-in to the climate change agenda.

We also need to consider how the Government will itself finance such incentives and funding solutions, given the long-term impact of the Covid19 pandemic on public finances and other pressures for government support, including the increased delivery of new-build market and affordable housing.

I would suggest we need a radical solution. This may lie with the Scottish Government raising long-dated finance via the capital markets to finance the provision of finance support to homeowners, both private and public. The green bond market has grown exponentially over the last few years. It covers any type of bond instrument where the proceeds will be exclusively applied to eligible environmental and/or social projects. Green bonds are used for projects with environment benefits, social bonds are used to finance projects providing a positive social outcome, and sustainability bonds are used for a combination of green and social projects. The retrofitting of Scotland’s housing stock for the purpose of a net-zero target is an obvious match.

The use of such a bond structure could be used to spread the cost of the required investment over a much longer period than the investment phase, thereby mitigating the overall financial impact.

2045 seems a long time way but we need to be actioning how best to facilitate the requirement investment. The net-zero target is great but only if it can be delivered.


Chris Dun