Tinkering with climate policies will backfire, investors warn

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Institutional investors have warned European countries that repeated policy changes across the continent are discouraging investment in low-carbon technologies.

A paper released last week (30 September) by the Institutional Investors Group on Climate Change (IIGCC) identifies changing legal frameworks as the biggest obstacle to private investment in technologies needed to create the shift to a low-carbon economy.

90% of asset managers surveyed for the paper by international law firm Norton Rose said that changing policy and so-called retrospective legislation, without providing guarantees for existing investments, halt investment in renewable energy.

For instance, Spain's decision to reduce its feed-in tariffs for solar installations has alarmed investors who are concerned about indications that Madrid is now considering a retroactive reduction of tariffs, the paper says.

In addition, 55% of the interviewees identified permitting and planning problems and 45% singled out grid access and infrastructure issues as barriers to investment.

The survey also suggested that the EU's emissions trading scheme (EU ETS) is not yet capable of shifting investment towards less carbon-intensive products. Less than 10% of respondents said the EU's flagship climate instrument provides long-term price signals.

"Investment should only happen if the business case is airtight," said Ole Beier Sørensen, head of strategy and research at Danish pension fund ATP and chairman of the IIGCC, at the launch of the research in Brussels. He added that the scale of investment required is "so great that it doesn't really make sense to come up with a number".

The investors also called on the EU to set out steps to 2030, considering that investments in renewable energy tend to be long-term.

Michael Starbaek Christensen, deputy chief of staff for Climate Action Commissioner Connie Hedegaard, said that the EU executive would start the debate on 2030 targets in the context of its 2050 roadmap to a low-carbon economy.   

The UN Framework Conference on Climate Change (UNFCCC) estimates that some 85% of the capital needed to put the world on a low-carbon path will have to come from the private sector.

When it comes to investing in clean technologies in developing countries, though, public funding will continue to dominate, the experts said.

"Getting private money to poor countries will remain a challenge," said Tom Murley, head of renewable energy at private equity firm HgCapital. Private investors will demand a return, which means that the poorest countries will continue to rely on aid, he added.

Emerging economies like China, India and Brazil are more likely to attract private investors, the experts said. The low-carbon strategies of China and India in fact create a more attractive framework for low-carbon investment, although currency and in China's case lack of transparency continue to pose problems, they said.

David Russell, co?head of responsible investment at the Universities Superannuation Scheme (USS), argued that the current uncertainty over whether the EU will raise its emissions reduction target to 30% by 2020 is "hindering the  predictability  of  carbon  prices  and  therefore  investment  decision?making  across  assets affected by climate policy". 

"Whilst a unilateral move by  the EU  to a more ambitious short?term emission  reduction  target would  have  positive  implications  for  the  carbon  price  and  stronger incentives  for  companies  and  investors  to  shift  into  less  carbon  intensive  investments,  it  is essential  that  there  is  a  better  understanding  of  the  implication  of  such  a move  before  the decision is taken," he said.

Rob  Lake,  head  of  sustainability  at  APG  Asset  Management, stated that only "EU-driven frameworks that are clear and long term and are supported by a broad package of policies and market?based mechanisms, will be able to deliver the confidence needed  to attract  investment into a  low-carbon economy."

Europe has historically been at the forefront of investment in low-carbon technology, but its lead has in recent years been challenged.

In 2009, China invested $34.6 billion and the US $18.6bn in clean energy technologies and infrastructure, according to data by Pew Charitable Trusts. In the EU, investment was led by Spain, with the lion's share of its $10.4bn going to solar energy, and the UK, with its $11.2bn investment driven by large offshore deals.  

Estimates of how much Europe will have to spend to move to a low-carbon track vary, but €1 trillion is often cited as the minimum required capital expenditure that Europe's power sector will have to fork up to replace outdated infrastructure.

The European Commission is currently working on an infrastructure package, scheduled to be presented in November. The document is set to outline the required investments in gas and electricity networks, smart grids and CO2 transport to prepare for the commercial-scale application of carbon capture and storage (CCS) technology.

  • Nov. 2010: Commission to release energy infrastructure priorities for 2020 and 2030.

 

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