Thursday, October 29, 2009

Deutsche Bank Global Climate Change Policy Tracker

Oct 26: Deutsche Bank has released a report it calls, Global Climate Change Policy Tracker: An Investor's Assessment (Climate Tracker), that provides investors with an analysis of climate change policies and assigns a risk rating to 109 countries, states and regions based on key government mandates and supporting policy frameworks. The report was produced by DBCCA [Deutsche Bank Climate Change Advisors], working with the Columbia Climate Center at the Earth Institute, Columbia University.

The "Climate Tracker" is the first publicly-available analysis of its kind. It incorporates results of a model prepared by Columbia Climate Center researchers that estimates the impacts on carbon emissions of each of 270 major climate policies, and aggregates them at country, regional and global levels. The "Climate Tracker" provides a risk rating of countries and regions based on their relative attractiveness to investors. It is designed to help investors identify the best risk-adjusted returns in climate change investment opportunities around the world.

Highlights of the research include the following: (1) Even if current and select proposed policies were to make their maximum possible impact, emissions in 2020 would still exceed the amount needed to limit the average world temperature increase to 2 degrees C. To meet such a goal, emissions would need to be reduced further, by an amount equivalent to the current annual emissions of the U.S. economy. (2) More capital is required to mobilize climate change industries, and more action by government is required to attract capital. Investors are most attracted to countries and regions with comprehensive, integrated government plans that are supported by strong incentives, such as feed-in tariffs. (3) Governments must create transparent, long-term, and certain policies to attract capital. While the carbon markets may offer long term solutions, at present investors are driven by on-the-ground mandates and incentives. (4) Energy efficiency could help deliver significant reductions in emissions. Since efficiency provides savings in the long-term, it is essential that governments tackle market failures to encourage capital deployment in this area.

An opening editorial by two DB executives indicates, "This quantitative picture of what is currently being done or proposed provides a reference for policies to be discussed in the upcoming negotiations in Copenhagen. We believe that as a comprehensive exercise at both a policy and country level, this is the only publicly available study of its kind."

The editorial continues, "What investors want is Transparency, Longevity and Certainty – “TLC” – in policy regimes to mobilize capital. As a starting point, we have made what we believe is a unique aggregate risk rating of countries based on key mandates and supporting policy frameworks. While actual capital flows do not follow our rating for every country over the past few years, we believe that investors will become increasingly concerned about regulatory risk and thus countries that deploy a
transparent, long-lived, comprehensive and consistent set of policies will attract global capital. We find that the Major Economies Forum [MEF] on Energy and Climate countries with a lower-risk rating include: Australia, Brazil, China, France,
Germany and Japan.

"A lower-risk rating relies on a comprehensive and integrated government plan, supported by strong incentives, among them feed-in tariffs. We believe that appropriately-designed and budgeted feed-in tariffs have demonstrated their ability to deliver renewable energy at scale. Many major emitters such as the US do not have enough “TLC” in their policy frameworks. Importantly, recent studies have shown that energy efficiency can deliver significant emissions reductions. Since efficiency provides economic savings in the long-term, it is essential that governments incentivize deployment of capital in this area."

DB reports that, "Among the MEF countries, China, Germany, France and Australia all have lower risk profiles for climate change investments. This is because they have strong incentives in place, along with a consistent approach, demonstrated through well-considered plans. All other countries in the MEF are moderate risk, with the exception of Italy, which has struggled to develop a coherent set of policies that would enable it to achieve its targets.

"Notably, the US, UK and Canada are moderate risk as they rely on a more volatile market incentive approach and in the case of the US, have suffered from a stop-start approach in some areas, such as the production tax credit (PTC). However,
when we correlate our ratings against actual capital flows over the past decade, these countries have been strong in absolute dollar terms. This reflects in the large size of their capital and energy markets overall, and in the US and Canada the existence of encouraging state level opportunities."

DB indicates, "The results for the world overall in the context of the forthcoming Copenhagen negotiations provide indeed a sobering picture. The Columbia Climate Center of the Earth Institute, Columbia University has derived a measure of the Business-as-Usual trajectory, which is based on the energy mix and policy regime as of 2007, and shows emissions rising from 47 Gt in 2007 to 59 Gt CO2 equivalents in 2020. Even with the recent economic downturn and a projected slowdown from 2014 – 2020 in emerging market growth, there is still enough growth in Business-as-Usual (BAU) 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 chosen for this analysis, as outlined by the OECD World Environment Outlook, which scientists hope would limit temperature increases to 2 degrees C. Then the key question was: How far would current announced mandates and emissions targets reduce this excess? We found that even the maximum combination of the most aggressive current mandates and emissions targets, including some proposals such as the American Clean Energy Security Act (ACES), still leaves a 5 to 73 Gt emissions overshoot from a 450 ppm pathway by 2020. If growth does not slow down after 2014, as the IEA assumes and as we have used in our modeling, then this could add another 7 Gt to the task.

"But all is not lost. The world can still get on the right pathway. The IEA has conducted a study of energy technology deployment needed to get from their reference scenario to the 450 ppm pathway in the energy sector. Their analysis indicates that up to 60% of the solution in 2020 can come from energy efficiency – both at power plants, and in end use. Adding this to action on land-use through avoided deforestation creates the possibility of getting close to the 450 ppm scenario. This represents an opportunity to invest to create jobs and growth, and not just a cost. However, it requires a strong deal at Copenhagen, but most importantly, strong follow-through at a sector and industry policy level to create Transparency, Longevity and Certainty."

Access links to an Executive Summary [36-pages], a Detailed Summary of Targets by Region & Country [38-pages], and Detailed Analysis of Targets by Region & Country [378-pages, with extensive links and references] (
click here).

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