EU uncertainty damages low-carbon investment

European asset managers controlling €5trn in funds have warned that uncertainties over future greenhouse gas reduction targets and vacillation over member state support measures for renewables are already damaging investment in low-carbon technology

Asset managers are growing wary of investing in low carbon technology due to continuing climate policy uncertainty in the European Union and the UK – just when a step change in investment is needed to meet greenhouse gas emissions reduction targets and to ensure the sector can compete internationally.

A report by the Institutional Investors Group on Climate Change (IIGCC), a lobby group for investor awareness representing European funds worth €5trn, revealed alarmingly low levels of business confidence in the ability of EU and member state climate policy to support sustained growth in the low-carbon technology sector. The report, which includes a business confidence survey and legal research, identifies a large number of barriers to investment.

And it is uncertainty over the more immediately relevant European policy framework rather than continuing lack of a global climate treaty after the Kyoto Protocol first commitment period expires in 2012 that is doing the most damage, it concludes.

Some 85% of the infrastructure investment needed to transform the EU’s carbon-intensive energy infrastructure will have to come from the private sector, particularly given public spending cuts. So any sustained loss of confidence will have far-reaching impacts on meeting EU 20/20/20 energy and climate targets (ENDS Report, December 2008) and the UK’s ability to meet its first three five-year carbon budgets out to 2022.

Renewables funding cuts

One of the most damaging aspects of policy change has been the sudden and unexpected reduction of renewables support in some member states, such as Spain, where it has severely dented confidence in the sector.

But the report’s findings will make uncomfortable reading in the UK too. A major review of climate policy and electricity markets is under way (ENDS Report, August 2010), with proposals due in the autumn. Potential changes to feed-in tariffs, which are fuelling a boom in solar PV (ENDS Report, August 2010, p 17 & p 18), are fuelling fears of a Spanish-style cut in support. There are also deep concerns over the wider potential impact of spending cuts on investment.

Energy and climate secretary Chris Huhne has gone out of his way to reassure the renewables sector that it remains a priority and that there will be no damaging retrospective policy changes to FITs (ENDS Report, September 2010).

Despite this, on 30 September, the heads of 63 member companies of the Micropower Council, which supports the renewable micro-generation sector, put their names to a letter to business secretary Vince Cable and Treasury chief secretary Danny Alexander. This warned in apocalyptic terms that rumoured retrospective changes to feed-in tariffs in the forthcoming comprehensive spending review could lead to an exodus from the industry.

Gaynor Hartnell, chief executive of the Renewable Energy Association, believes retrospective change to existing projects would be disastrous but unlikely. She told ENDS there is still some concern among wind developers over possible reductions in support for onshore wind after 2013, though offshore wind is secure until 2014 at least. Uncertainty has all but paralysed new biomass projects.

Other key barriers to investment in clean energy cited included permitting and planning problems (55%), particularly over onshore wind in the UK, and inadequate grid infrastructure (45%).

Poor incentives

But the most damning finding from the survey overall, carried out for IIGCC by international law firm Norton Rose, revealed that less than 10% of respondents believed the EU emissions trading scheme (EU ETS) had provided a strong enough price incentive for a fundamental switch away from carbon-intensive investment. Not one respondent considered the scheme had provided the crucial certainty necessary through a long-term, sustained price signal.

While most agree there is an urgent need to raise the EU’s economy-wide emissions reduction target from 20% to 30% by 2020 relative to 1990 to tighten caps within the EU ETS after 2012, the research also showed a lack of awareness among respondents as to how this would affect their business. IIGCC calls for more detail on the business impacts of moving to 30% to allow better preparation.

The report calls for the EU to tighten emission allowance caps to strengthen carbon price signals, and for an end to uncertainty with a quick decision on whether it moves to a 30% target. There should be more clarity on the longer term role of the EU ETS up to 2050 in meeting emissions reduction targets. And it says the details of the scheme need to be established up to 2030 to match the investment cycles of capital-intensive low-carbon and renewable assets.

The recommendations come as the European Commission’s climate action and transport directorates have announced work on climate targets out to 2030 has started (ENDS Report, August 2010).

To ensure a better framework for investors in the EU, it calls for clear emissions reduction targets in the short, medium and long term to 2050, a clearly defined EU ETS and carbon price over the long term, and stable, long term support for renewables. It also calls for efficiency targets for buildings, and for a more integrated climate and energy policy.

The IIGCC’s findings echo sentiment in the carbon offset market, which is in turmoil over the future status of international credits from industrial gas mitigation projects (ENDS Report, September 2010).

But not all indicators are so negative. Despite uncertainties and the recession, the Manufacturing Advisory Service reports that 56% of small to medium sized UK manufacturing companies are already investing in low-carbon technology, and another 34% are planning to do so over the next three years. Over 40% are now targeting business in low-carbon markets, it says.  

And a recent report by HSBC bank (ENDS Report, September 2010) has predicted the global low-carbon technology market could triple to $2.2trn a year by 2020, despite post-Kyoto uncertainty, though it adds the strongest growth will occur in China.

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