CBI proposes help for infrastructure investment

The CBI seems to have been very active lately and has published a report on what needs to be done to attract investment in infrastructure. (http://www.cbi.org.uk/media/1507874/cbi_-_an_offer_they_shouldn_t_refuse_-_attracting_investment_to_uk_infrastructure.pdf).

For me, this is all very sensible, and much of it has already been recognised in the waste sector judging by some of the noises coming out of UK Green Investments, the precursor to the Green Investment Bank.

The CBI recommends a split finance model which might take the form of some sort of post-construction refinancing guarantees that would enable banks to finance the construction phase and institutional investors to then come in on the (lower risk) operational phase. Personally I think this sort of approach seems quite sensible but some infrastructure operators who corporately finance their projects might consider this an unfair intervention in financial markets if done using government backing.

The other issue for waste infrastructure assets is that, in the greater scheme of things, they aren't very big. For institutional investors they just don't have the scale to be attractive and would therefore have to be packaged up and aggregated in some way.

The other big issue for me in the report is 'credit enhancing', i.e. some form of government first-loss guarantee/debt. But the government (in the form of the GIB) doesn't want to be idiot in the room taking more of the risk without a commensurate reward.

Overall, there are big macroeconomic problems coming from the capital adequacy regulations being placed on the banking sector. These are forcing it to retrench and are a significant cause of ongoing depressed economic conditions. In this context, I can't see a simple solution which the government could take without putting public funds at risk and losing the advantages of privately financing new infrastructure projects.

CBI supports landfill tax escalator

The CBI recently published a report looking at the case for environmental taxes (http://www.cbi.org.uk/media/1529404/cbi_-_solving_a_taxing_puzzle.pdf), which sets out some principles which it feels environmental taxes should follow.

The report rightly suggests that the landfill tax escalator is an example of an environmental tax which has been implemented well, but it doesn't delve into some of the more interesting questions I would have about whether the tax is set at the right levels.

Landfill tax was originally conceived as a 'pigouvian' tax which corrected for the environmental damage caused by landfill and was set at a rate of £7/tonne back in 1995. It now stands at £64/tonne and will rise to £80/t in 2014.

My personal back of an envelope estimate of an optimal landfill tax would be in the range of £30/tonne. This is based on CO2 emissions from mixed waste at landfill of less than 500g CO2e/tonne processed combined with a carbon price of around £30/tonne (I can't remember the exact government policy assumptions but they are in this sort of range) + disamenity impacts, for which I have taken the original HM Treasury estimate of £7/tonne and inflated it based on a doubling of property prices in real terms since 1995.

We are obviously in a world which has moved well away from these sorts of optimal figures. This is because we must conform to European waste legislation, which doesn't recognise the low cost advantages of landfill in the UK. An optimal waste management portfolio for the UK would have higher levels of landfill than in other EU Member States, but this is not allowed under the command and control target-driven approach to reducing landfill in Europe.