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November 06, 2009
Current Government Policies Are not Enough to Ward Off Climate Change
    by Robert Kropp

Report from Deutsche Bank Climate Change Advisors warns that global emissions reduction targets are insufficient to meet the requirements established by climate science, but finds that aggressive policies and incentives can succeed.

In order to limit global temperature increases to 2 degrees Celsius, the concentration of greenhouse gas (GHG) emissions will have to be stabilized at 450 parts per million (ppm) of CO2 equivalent by 2020, according to a recent study by the International Energy Agency (IEA).

However, a new report from the Deutsche Bank Climate Change Advisors (DBCCA) has found that despite a projected slowdown of economic growth in developing countries, "there is still enough growth in Business-as-Usual from 2007 2020 to leave a 13 to 15 gigaton (Gt) overshoot in emissions over and above the 44 to 46 Gt needed to hit the 450 ppm pathway."

The DBCCA report, entitled G lobal Climate Change Policy Tracker: An Investor's Assessment, concluded that even with a combination of the most aggressive mandates and emissions targets that are currently in place, there is still an overshoot of five to seven Gt from the 450 ppm pathway. spoke with Mark Fulton, who is the Global Head of Climate Change Investment Research and Strategy at DBCCA, about the scientific findings that underpin the assessment of the report as it relates to climate change and opportunities for investors.

"We found 270 climate emissions policies and mandates covering 109 countries, states, and provinces," Fulton said. "We worked with the Columbia'>">Columbia Climate Center to classify them, and the Climate Center developed the abatement numbers. We then used our research to rate the policy regimes."

The DBCCA report focuses on the 17 countries that are participants in the Major Economies Forum on Energy and Climate (MEF). The 17 economies account for over 75% of current global GHG emissions. Using the modeling of the impacts of targets conducted by the Columbia Climate Center, the report then analyzed each mandated target to assess its risk level and to develop an investor risk assessment of country policy regimes.

Because policy regimes contain a number of often interrelated factors, the report divides the targets of policies into two areas. Emissions targets seek to reduce GHG emissions by a specific level on an annual basis. Mandated renewable, industry, and sector targets establish a proportion of renewable energy usage and increased energy efficiency.

"If the mandates included in the report are fulfilled, they would lead to greater reductions than the emissions targets would," Fulton said. "Many countries, including China, have aggressive mandates, even if they have not set emissions targets."

In fact, of the 17 MEP economies studied in the report, China is one of six that received a low risk rating. The others are Australia, Brazil, France, German, and Japan. "China is particularly notable within this group due to the large size of 2008 clean energy investment as a proportion of GDP," according to the report.

The US, along with 10 of the 11 remaining countries, was assessed as having moderate risk for investors. Only Italy received a rating of higher risk.

"The best results are predicated on a slower economic growth in emerging countries from 2015 onward," Fulton said. "If growth does not slow down we will see another seven Gt. You double your problem. Even if you manage to achieve everything, which is debatable, then you still have a problem the size of the US economy."

"What makes us nervous about the American environment is that policies seem to be a bit stop and start," Fulton continued. "The renewable projects are heavily dependent on the stimulus packages. What happens in 2011, when the money from the stimulus is no longer there?"

The report identified energy efficiency as a potential area for significant levels of climate change mitigation, observing that "recent studies have shown that energy efficiency can deliver significant emissions reductions." In fact, up to 60% of the reductions by 2020 can result from energy efficiency measures, according to the IEA. And when combined with action on avoidance of deforestation, the goal of 450 ppm is within reach.

"In the end, mandates targeting efficiency will save money," Fulton said. DBCCA refers to a report from McKinsey & Co. concluding, according to the DBCCA, that investments in a wide range of efficiency measures are net present value (NPV) positive.

Carbon pricing is also addressed as a potentially significant vehicle for industry compliance with emissions targets. While the greater price stability inherent in carbon taxes may reduce risk, thereby encouraging greater investment in renewable energy, proponents of a cap-and-trade system argue that it provides for the most efficient means of mitigation.

"Carbon markets are very important in the long run," said Fulton, "But they will take quite a few years to come up with a carbon price that investors can rely upon."

Arguing that "free allocations of carbon credits tend to create market distortions," the report calls for the auctioning of allowances, "so that prices are determined on the basis of fundamental supply and demand." The proceeds from auctioning of allowances should then be used to provide financial incentives for investment in renewable energy and other clean technologies. "Interventions that reduce risk for clean technology projects, such as feed-in tariffs or loan guarantees, are particularly attractive," according to the report.

"Feed-in tariffs can be very effective," Fulton said. The report defines feed-in tariffs as "a premium price paid to an electricity generator to feed renewable energy onto the grid." They are commonly used in Europe, where the European Environment Agency (EEA) describes them as "The price per unit of electricity that a utility or supplier has to pay for renewable electricity from private generators. The government regulates the tariff rate."

According to the EEA, "The feed-in law system has given a great impetus to renewable energy developments, in particular wind energy."

The report concludes that increased government action is required to attract the capital needed to mobilize industries engaged in climate change mitigation. Transparent and long-term policies will help attract the private investment that is needed.

"Investors want transparency, longevity, and certainty, TLC," Fulton concluded. "The current mandates and standards are substantial, and there's plenty for investors to do now. We need investors to become galvanized. There's much opportunity out there now, and there will be more."


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