Europe Could Do Better for Investors

Europe, widely regarded as the pace-setter in climate and energy policies, has failed, according to a new report, to provide a strong enough signal to encourage private investment to switch away from carbon-intensive technologies. France, the UK and Germany have become alarmed by the speed of transition taking place in key Asian markets, particularly China, which is able to effect change without a carbon price because it simply drives investment through government mandates and with finance from state-owned banks. Now in Australia with Norton Rose, Anthony Hobley produced research for the IIGCC report.

Avoiding Europe’s mistakes

Giles Parkinson in Climate Spectator (5 October 2010):

Europe is widely regarded as the pace-setter in climate and energy policies. It has had an emissions trading scheme for more than five years, it has championed the most ambitious emissions reduction targets, and individual countries have made enormous investments into renewable energy technology.

But a survey has found that, for all its policy initiatives, Europe has failed to provide a strong enough signal to encourage private investment to switch away from carbon-intensive technologies: investment has been deterred not just by a weak price signal from the emissions trading scheme, but by the mish-mash of complimentary policies across the region.

The failure of the EU ETS to deliver a meaningful price on carbon was initially due to a massive over-allocation of allowances, and then because of a slump in industrial production caused by the financial crisis. Now it is thought to lack ambition, particularly in light of the massive shift in capital in Asian countries such as China, South Korea and Japan.

The European carbon price is currently trading at around €15.40 ($A21.80), but even that is insufficient – a price close to €30 or more is considered necessary to drive the scale of change required.

The report, “Shifting private capital”, conducted on behalf of the Institutional Investors Group on Climate Change, which represents more than 50 pension funds and other asset managers responsible for some $8 trillion under of investments, suggests that this is only part of the problem: despite having a regional trading scheme, the EU policy on climate and energy is piecemeal, and unless the mix of policies on energy efficiency, renewable energy, grids and fossil fuel subsidies are crafted with a long term vision, then private capital will not come to the party.

And private capital is essential. The report notes that it will need to provide 85 per cent of the hundreds of billions of dollars required to cut greenhouse gas emissions at the scale required to achieve climate goals, but will only do so if low-carbon investments, projects and assets offer sufficiently attractive risk-adjusted returns.

The IIGCC report is designed to increase pressure on the EU to raise its unilateral greenhouse reduction targets, and to encourage it to develop some policy certainty in other areas, particularly on renewables, and to avoid the retrospective cuts in subsidies that are now occurring in Spain, for instance.

But it also has relevance to Australia, which is now embarking on a new process, via the climate committee, to evaluate what models and measures should be adopted to set Australia, belatedly, on its path to emission reductions.

Anthony Hobley, the head of the climate change practice at Norton Rose, which did much of the research for the IIGCC report, says it highlights the pitfalls of a piecemeal approach to legislation: not only is it ineffective, but it doesn’t produce the least cost solution. “This shows the importance of long term signals … so that investors can understand what the economic drivers are.”

EU countries such as France, the UK and Germany have become alarmed by the speed of transition taking place in key Asian markets, particularly China, which is able to effect change without a carbon price because it simply drives investment through government mandates and with finance from state-owned banks.

These three countries, aware that their technologies are in danger of being shunted out of the market by the sheer weight of Chinese capital, have called for a tougher emissions reduction target – a unilateral move to 30 per cent by 2020 from the current target of 20 per cent – to provide a stronger carbon price, greater investment and a quicker transition. This has been fiercely resisted by emissions-intensive industries, who warn of carbon leakage.

Australia will juggle the same considerations: How to provide the incentive for investment in low carbon technologies while offering a shield to those industries waiting for their international competitors to be subject to similar costs. You can see where this might be heading – an interim carbon tax followed by a trading scheme that is able to be adjusted to more ambitious emission reduction targets down the track, or an ETS with a floor price.

The greater challenge will be to square this proposal away with other legislative measures that encourage quick and effective investment in energy efficiency, and can provide the right sort of long-term signals for renewables, while at the same time allowing those subsidies to be eased as the carbon price ramps upwards.
 
The IIGCC wants the EU to make a decision soon on whether to unilaterally set a more ambitious emissions reduction target for 2020, and also wants the EU to set an ambitious medium-term target for 2030 or 2035.

It is also pushing for mid- and long-term targets for increased energy efficiency in the buildings sector; for better coordinated European climate and energy policy; infrastructure development that would facilitate cross-border trade in energy and the development of renewable energy; and the phasing out of fossil fuel subsidies.

The research found that 90 per cent of investment managers were deterred from investing in low carbon projects by the lack of long-term policies and by retrospective changes to member states’ climate change guidelines, while grid access and grid infrastructure issues were seen as a deterrent by 45 per cent.

Nearly two thirds of the fund managers said setting tougher targets and sending the carbon price higher would incentivise low-carbon investments, while 50 per cent saw a long-term and detailed roadmap out to 2030, even in the absence of international action, as one of the most important drivers for incentivising a shift in investment sentiment.

Source: www.climatespectator.com.au