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October 30, 2008
Climate Change Report Finds Silver Lining for Investors in Renewable Energy
    by Robert Kropp

Deutsche Bank report on Climate Change emphasizes necessity of carbon pricing, while finding in the economic crisis opportunities for investment in clean technologies.

In a press conference convened to call attention to Deutsche Asset Management's publication entitled "Investing in Climate Change 2009", Mark Fulton, Global Head of Climate Change Investment Research for Deutsche Bank Group, underscored not only the necessity but the opportunities presented by the growth of a green economy. Asserting that "If you believe the science, to back off the necessity of addressing climate change is not an option," Fulton said, "Climate change investment can be part of the solution to the current economic crisis."

An update of its report issued one year ago, Deutsche Bank's publication addresses two major developments since that time. The first major issue is the increased urgency of dealing with climate change immediately. The updating of the Arctic ice core history depicts "the extraordinarily high and previously unseen levels of carbon that we are now facing," according to the report.

In his introduction, Kevin Parker, Global Head of Deutsche Asset Management, warns, "We are careening towards the tipping point," after which "a series of macro-climatic shifts will set up a self-sustaining cycle of rapid global warming. Without significant and immediate action, this tipping point stands no more than 15 to 20 years away."

The second major development in the last year has been the unraveling of the global economy. What the report calls "the more pronounced credit crisis correction" that has prevailed since May, 2008, has led to the loss of ground against the market by climate change sectors. Renewable stocks were aggressively sold off in September, and "weaker energy prices led them lower as the regulatory support in the US for the Production Tax Credit and the Investment Tax Credit wavered."

As a result of the economic crisis, efforts by the European Union to cut greenhouse gases by 20 percent by the end of the next decade have met with resistance. Countries in Central and Eastern Europe have called for a more gradual implementation of the EU's plan to require heavy polluters such as the coal industry to buy permits to pollute in cap-and-trade carbon emissions auctions.

In the US, the Republican Presidential campaign in particular has called for increased offshore drilling and even drilling in the Arctic National Wildlife Refuge. While both major candidates support carbon emissions trading, Barack Obama has called for a cap-and-trade system in which permits are priced to have the same effect as a carbon tax. John McCain prefers that permits to emit greenhouse gases be given to heavy polluters free of cost.

Fulton of Deutsche Bank said, "It is very important that carbon pricing be established. It would be a huge mistake if it were abandoned." Not only would carbon pricing—either through a carbon tax or a carbon cap-and-trade system—lead to a reduction in the emission of greenhouse gases, but in combination with other regulatory instruments such as research and development subsidies it could help governments invest in emerging technologies.

Fulton said, "Establishing a carbon price is the essential backstop for the transition to clean technologies." With a carbon price established, "The opportunities for investors in a weak economic environment are many," he continued.

"An important response by governments to an economic recession is fiscal stimulus," said Fulton. "More deficit spending will be required to address current economic conditions. But government spending can be a source of economic growth, if you can attract investment."

A particular opportunity for government spending in the current economic environment is the building of a climate-proof infrastructure, according to Fulton. "There are opportunities to address the upgrading of the power grid, issues with water and agriculture, and modernizing of the building and transport industries," he said.

"Investment in these areas will also create many so-called green-collar jobs. Therefore, the effort to climate-proof the infrastructure will also help people in their daily lives, by providing jobs," Fulton continued.

From the perspective of a potential investor, the Deutsche Bank report noted, climate change technologies must be commercially viable in order to be adopted at scale. According to the report, " the most sustainable breakeven point for renewables is when they are commercially viable without subsidies, but with a carbon price regime as a de-risking backstop."

"The need for energy security now a top priority in most areas of the world," said Fulton. "The need can only be met through a long-term plentiful supply of low-emission energy sources; that is, through renewable energy." Of the factors converging to drive the commercial breakeven of the renewables that will lead to energy security, the maintenance of government incentives received a valuable boost when the US Congress included Energy Improvement and Extension Act of 2008 in the Economic Stability Act.

The Act extends production tax credits for the solar industry for eight years, wind energy for one year, and for the first time includes tax credits—for two years—for geothermal.

Other factors that will lead to the commercial breakeven of the renewables include carbon pricing, increases in the cost of fossil fuels, and a decline in the cost of renewables. The current credit crisis may contribute to a decline in the cost of renewable energy. According to Fulton, "Recent volatility in public equity markets has led to a downward correction in the previously high valuation of solar stocks in particular," making those stocks a more attractive investment opportunity.

Because the crisis of climate change will not go away, there is a sense of inevitability in the report and in Fulton's description of the report that government incentives will encourage investment in renewable energy, thereby speeding the arrival of its commercial breakeven. However, "Clean technologies are becoming broader and deeper over time," noted the report. "It is important to understand their stage of development for investment purposes."


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