Time is running out for Europe to make a low-carbon economy attractive, argues Stephanie Pfeifer.
Stephanie Pfeifer is the chief executive of the British-based Institutional Investors Group on Climate Change.
Last year investment in low-carbon energy in Europe fell to $13.4bn, a 25% drop on 2011 levels, according to Bloomberg New Energy Finance. By the European Commission’s own projections, transitioning to a low-carbon economy requires investment of €1 trillion by 2020, increasing to perhaps €7 trillion in the next 40 years. The sums do not add up. It will be very difficult to meet targets for emissions reduction – 40% by 2030 – without significantly more money flowing into low-carbon energy and other low carbon assets.
This is why more than 80 European investors worth €7.5 trillion last week called on EU policymakers to make the vision of a low-carbon, single energy market investable by urgently tabling proposals for detailed climate and energy policy. The biggest drags on investment are policy uncertainty, short-term targets and retroactive changes to support for clean energy. Investors need to plan many years in advance to make investments in energy infrastructure which may endure for a generation. The uncertainty around future policy and disputes concerning EU-wide targets makes this sort of planning very difficult.
Achieving the 40% emissions reduction target by 2030 requires substantial investment decisions to be made before 2020, but this can only happen when a post-2020 climate and energy framework is in place. Investors are concerned this may not be the case until 2015, or even later. As a welcome first step to help restore confidence, we would like to see draft legislation before the replacement of the current Commission and Parliamentary elections next year. The longer investors have to wait for concrete policies, the stronger the economic pressure to defer investment decisions. While a 2030 framework is essential, much longer-term targets – 15 years or more ahead of time – would provide investors with greater certainty and help drive investment.
Meeting investment and emissions targets has also been made far more difficult by the absence of a strong and reliable carbon price signal. The Emissions Trading System is not doing its job and only the permanent removal of the structural surplus of carbon allowances can get the scheme back on track. Addressing the surplus issue is a vital first step but will not provide a lasting fix. A well-functioning carbon market needs a stable and meaningful carbon price, and this can only come about through the introduction of a transparent mechanism to introduce flexibility in allowance allocation.
With atmospheric C02 at a millennial high, and the world on track for warming of between 3.6 and 5.3 degrees, the physical impacts of climate change will disrupt societies and put the investments of millions of people at risk. Continuing to rely on carbon-intensive energy is not a smart strategy. But at present, Europe is in danger of missing out on billions in crucial low-carbon investment.
A low-carbon economy can drive growth, create jobs, tackle climate change and generate prosperity. To make this low-carbon vision a reality requires leadership. European policymakers must seize the opportunity to make Europe an attractive place for energy investment before it’s too late.