Investment-grade climate change policy: financing the transition to the low-carbon economy

• Investor Group on Climate Change

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Report cover: Investment-grade climate change policy

24 October 2011Climate change policy has advanced rapidly over the past five years, with many countries having adopted greenhouse gas emission and renewable energy targets, implemented policy measures such as energy efficiency, technology and vehicle performance standards, and provided financial signals such as carbon prices and incentives to encourage private investment in clean energy. The private sector has responded to these incentives and measures, and substantial amounts of private capital are now being invested in cleaner and renewable energy, energy efficiency and decarbonisation.

Despite the progress, the reality is that the rate at which private sector capital is being deployed into activities such as renewable energy generation and reducing industrial and fugitive emissions is simply not fast enough to avoid unmanageable risks of climate change. In its 2010 World Energy Outlook, the International Energy Agency (IEA) forecast that US$13.5 trillion (or some US$500 billion per year) in clean energy investment and spending, in addition to the commitments that have already been made by governments, will be needed between 2010 and 20351. In contrast, the United Nations Environment Programme’s (UNEP’s) analysis of global trends in renewable energy (see Box 1.1) estimated that global investment in renewable power and fuels was US$211 billion in 2010.

The gap between the level of capital investment required and the actual level of investment is creating a clean energy investment gap which is causing countries to miss opportunities to realise benefits such as improved energy security, the creation of new employment opportunities and the stimulation of innovation. This gap reflects factors such as the relative immaturity of climate change policy frameworks in many countries, the limitations in the design and implementation of many climate change policies, competing political and economic priorities which result in climate change being seen as a lower priority issue, and the reality that, in many countries, investment incentives continue to be weighted in favour of fossil fuels over energy efficiency and renewable energy. It also, at least in part, reflects the lack of attention paid to the needs and interests of institutional investors when designing and implementing climate change policy.