Climate Policy Initiative and Climate Strategies Study Finds EU Emissions Trading Scheme Supports Low-carbon Investment but Impact Can Be Strengthened

BERLIN, February 1, 2011 /PRNewswire/ --

Climate Policy Initiative (CPI) and Climate Strategies announced the results of a study on the impact of the EU ETS on low-carbon investment. EU ETS captures companies' attention, contributes to clarity for strategic decision-making, and is part of the enabling environment for low-carbon investments. The study suggests improvements such as increasing stringency, limiting CDM use, changes in international financial reporting standards, and complementary policies.

Capturing Companies' Attention

First, the policy framework must capture the attention of the relevant decision makers in an organization. The study finds that:

    
    - companies with higher expectations of the future stringency of permit
      allocation are more likely to invest in low-carbon innovation (based on
      interviews with 800 manufacturing companies).
    - for low-carbon investment and innovation activities, the
      relevance attributed to long-term climate policy targets and to EU ETS 
      is highly correlated, suggesting that they are mutually reinforcing 
      (based on a survey of power generators).

Providing Clarity for Decision Making

By defining an emission trajectory beyond 2020, the EU ETS provides guidance for the assessment of low-carbon opportunities. However, some factors complicate decision-making:

    
    - with the Clean Development Mechanism, European installations can exceed
      the ETS cap by up to 1.5 billion tones of CO2 over the next decade, 
      thus reducing opportunities for low-carbon investments. In addition, 
      the ambiguity around the availability of CDM credits creates 
      uncertainties for investments.
    - current International Financial Reporting Standards (IFRS) do not
      provide a true and fair view of carbon costs and opportunities; when
      allowances are allocated for free, costs of emissions they cover are 
      not reported. The study reviews options to ensure costs and exposure to 
      carbon are reflected in financial reports.

Creating Enabling Environment for Low-Carbon Investment

The carbon price created with the EU ETS contributes to the financial viability of low-carbon projects; however, further components are often required to enable their implementation.

    
    - on average, the surveyed companies require that energy efficiency
      investments pay back in less than four years, suggesting the need for
      additional policies that extend the investment horizon.
    - power technology companies consider technology-specific policies such
      as feed-in tariffs as the most important factors for both sales and R&D
      investments.
    - for power generators access to fuel and public perception that impact
      permitting process are important factors for investment decisions.

"While the EU ETS provides a robust and clear framework for low-carbon investment choices," said Karsten Neuhoff, project lead and director of CPI Berlin, "the upcoming Roadmap 2050 discussions offer an opportunity to accelerate low-carbon investment."

The analytical project included participants from CPI, London School of Economics, DIW Berlin, ETH-Zurich, ISI-Fraunhofer, Universidad Carlos III de Madrid, and University of Nurnberg. The studies are available at http://www.climatestrategies.org and http://www.climatepolicyinitiative.org.

About CPI

Climate Policy is a research and policy effectiveness advisory service whose mission is to assess, diagnose and support nations' efforts to achieve low-carbon growth. An independent, not-for-profit research organization with long-term support from George Soros, CPI has headquarters offices in San Francisco and regional offices in Berlin, Beijing, Rio de Janeiro and Venice.

About Climate Strategies

Climate Strategies is an international research organisation which aims to assist governments in solving the collective action problem of climate change. It connects leading applied research on international climate change issues to the policy process and to public debate, raising the quality and coherence of advice provided on policy formation.