University of Warwick: International
Climate Policy after Copenhagen
Scaling up the institutional response
to climate change
Ingrid Holmes
24th February 2010
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Contents
• The investment challenge – and the impact of the
credit crunch
• The impact of Copenhagen
• Accelerating low carbon investment
• Benchmarks for success
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Scale of the global challenge
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And in numbers …
•
Global emissions need to peak by 2015 and then decline by 5% per year
•
BAU estimates are of 2-3% emission increases per year … due to
investment in ‘the wrong assets’
•
IEA estimates that in the region of $1.7tr/year in investment is needed to
2030 to put the world on a path to avoid the worst impacts of climate
change
•
This could come from government spending, but given the recession,
practically most of it must come from the private sector
•
Challenging yes … but the UK pensions industry alone has £1.5tr under
management
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UK infrastructure investment (£bn)
2010-2015
2016-2020 2021-2025
Total
Energy efficiency
115
115
115
345
Power generation
28.3
49.8
28.3
106.4
Power networks
26.5
24
13.9
64.4
Heat
13
39.8
0
52.8
Waste
15
15
0
30
Transport
52.5
33.5
17
103
RD&D
12.5
12.5
12.5
37.5
3
5
0
8
265.8
294.6
186.7
747.1
International
Total
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Global clean energy investment ($bn)
Growth: 70%
58%
52%
$148bn
5%
-6%
>4x increase from
low level 2004 to
2007
$155bn
$145bn
$98bn
Largely stalled in H2
2008
$62bn
$36bn
Flat in 2009 – fall in
1st half, sharp
recovery in 2nd
2004
2005
2006
2007
2008
2009
Note: Totals include global new financial sector investment - adjusted for reinvested equity, as well as estimates for corporate and
government R&D, and residential scale projects. Total values include estimates for undisclosed deals.
Source: Bloomberg New Energy Finance (2010)
and Bank of America Merrill Lynch
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Contents
• The investment challenge – and the impact of the
credit crunch
• The impact of Copenhagen
• Accelerating low carbon investment
• Benchmarks for success
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Climate change is a result of
investment failure
•
•
•
•
Investment has been negatively impacted as a result of the credit crunch
But the scale of investment required was orders of magnitude out even
before the credit crunch … or Copenhagen
A firm and ambitious agreement Copenhagen would have helped build
global confidence in growing demand for low carbon goods/services …
… But it wasn’t the be all and end all
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Copenhagen take outs …
•
•
•
•
•
National and regional effort still both important
Developing countries, particularly China, want evidence on how to deliver
decarbonisation
Developed countries needs to show how it can be done at scale –
providing workable frameworks and models, including how public private
partnerships might work
We need to look again at our institutions and how we deliver
transformational change in our economies
But also how the fast-start finance can be effectively delivered
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Contents
• The investment challenge – and the impact of the
credit crunch
• The impact of Copenhagen
• Accelerating low carbon investment
• Benchmarks for success
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Getting the wider investment community
on board is key
“Despite the growing recognition of the far-reaching impacts climate change
will have on the global economy, only a handful of asset managers are
integrating climate risks and opportunities throughout their investment
practices …. The investment community is overly focused on short-term
performance and ignoring longer-term business trends such as climaterelate risks and opportunities”
Mindy S. Lubber, President of Ceres and Director of the Investor Network on
Climate Risk January 2010
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Policy is not enough
•
Investors discounting medium term EUA price by 30-60%
•
Policy failure to hit EU renewables targets still major influence on large
investors; corporate and institutional
•
Three year analyst time horizon makes carbon liabilities (e.g. investment in
unabated coal and lignite) “invisible” to institutional investors
•
Major IPOs in EU coal and oil companies (e.g. coal company largest FTSE
IPO in 2008) do not consider climate policy a material risk to value; tar
sands are an asset to BP and Shell
•
Collapse in Cleantech VC funding in US and EU shows fears of market
growth
Much of the “green” investment to 2008 was driven by oil price
expectations and energy security concerns not climate policy
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Shaping investment choices: risk and
reward
•
•
•
High carbon investment – known technology, stable revenues from market
– Reward is currently driven by oil/fossil price
– Risk can be increased by highlighting impact of carbon policy on asset
returns – and threat of regulation
Low carbon investment - less known technology, policy-driven revenues
– Reward can be raised through subsidies, grants, carbon price support
– Risk can be lowered by policies: political risk lowered through
regulation and locking-in policy; price risk by regulation and contracts
for differences
– Risk can be lowered by financing through public investment and/or
govt guarantees
Currently we tend to rely heavily on increasing “rewards” – and this
can deliver high rents; is it efficient/right to pay investors for their
perception of political risk?
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New institutions are needed
•
Transformational change in an economy has rarely been achieved through
allowing ‘the market to deliver’
•
Delivery of sewer systems, railways, oil and gas infrastructure all required
significant public involvement
•
A strong institutional response in low carbon markets will open up policy
opportunities and bring in new investors
•
Green Infrastructure Banks
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Bespoke challenges for the low carbon
transition
•
Need to shift investment focus on a huge scale
– A ‘pulse’ capital investment needed in the shift away from fossil fuels
•
Rapid redeployment needed to hit targets
– Challenging carbon timescales at a time of technology uncertainty
compounded by high capital cost requirements
•
Strategic assets are often ‘sub-investment’ grade
– E.g. carbon capture and storage, deep offshore wind, gasification
– A generic low carbon response will not overcome market risks
associated with differing technologies
•
High levels of political risk and price volatility – greater certainty needed
– Long-lived high cost assets which need to make a return over 15
years+, dynamic national and international policy environment, fossil
fuel volatility and carbon price volatility and discounting
•
Much investment needed in new markets and business models
– E.g. Efficiency, forests, smart and super grids
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The imperatives
•
•
•
•
•
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As for developing countries, investors need Governments to move beyond
rhetoric and high level targets – and deliver a coherent routemap for
change and the institutions to deliver
This requires more effective communication between the policy and
investor communities – challenges of language
Scale, pace and effective management of uncertainty (especially political
risk) needed
This translates to ‘Investment grade policy’ plus ‘skin in the game’ from
Government
In the UK – this means a combination of effective 2050 electricity market
reform and the delivery of a Green Infrastructure Bank (GIB) to work
alongside the private sector
Having a GIB unlocks new policy options – particularly to deliver lowest
cost technologies – rather than those that are easiest to finance
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Why a bank not ad hoc mechanisms?
•
Low Carbon Transition will require 20-30 year intervention to drive new
investment and innovation
•
History of public-private partnerships shows value of building a cadre of
expertise aligned with government goals to get best value and ensure
investment made in alignment with public goals
•
Need for specialised financial policy advice to Government – especially on
innovative areas
•
Industry want to see some Government “skin in the game” to show
commitment
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GIB functions
Works with, rather than crowding out private sector finance
Four main functions:
•
An expert facilitator of low carbon public-private partnerships e.g.
community energy
•
An aggregator of low carbon projects for bond financing e.g. energy
efficiency
•
De-risking strategically significant project finance (guarantees; debt finance)
e.g. deep offshore wind
•
An innovator of new financing instruments e.g. development capital for
SMEs and specialised investment guarantees
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Objectives and governance
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Establish with the objective of supporting the transition to a low carbon
economy
•
Wholly owned Government Corporation with an independent board (offbalance sheet)
•
Equity provided by consolidation of existing programmes, ETS Auction
revenues, green taxes
•
Debt raised through non-recourse long-dated policy-backed bonds with an
implicit Government guarantee (bring in institutional investors)
•
Retail bonds also an option
•
Tasked to do specific strategic investments to deliver decarbonisation e.g.
CCS demos
•
Delivering Fast-start funding
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Possible products
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Debt – up to 50% of project finance
•
Debt – first loss
•
Investment guarantees
•
SME ‘Valley of death’ VC funding
•
PPP/equity stakes on innovation (e.g. CCS)
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Contents
• The investment challenge – and the impact of the
credit crunch
• The impact of Copenhagen
• Accelerating low carbon investment
• Benchmarks for success
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Three Phases for Low Carbon Finance?
Financial Recovery
2014?
Scaling-Up
2018?
Mainstreaming
2025?
Different Policy Issues at Each Stage
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Benchmarking
•
Fully aligning Government financial interests with the private sector will
deliver confidence and manage political risk
•
•
•
•
Statutory focus on climate change
Adequate scale
Leveraging private finance – and a dynamic remit
Professional skills and innovation
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