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

BERLIN Feb. 1, 2011

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.

Karsten Neuhoff

London School of Economics Madrid

About CPI

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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.

SOURCE Climate Policy Initiative

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