NEW ENERGY IS THE SMART PLAY & THE U.S. ISN’T PLAYING SMART

The Green Economy: The Race is On
April 22, 2010 (Deutsche Bank Climate Change Advisors)

THE POINT
With U.S. energy and climate legislation now apparently trapped in a web of politics, xenophobia and Old Energy interests, New Energy developers and manufacturers around the rest of the world are likely rubbing their hands with glee and gearing up for action.

Nevermind, there is only $10 trillion at stake. That's how much the world’s asset owners have invested in the fight against global climate change.

The news about the growth of the New Energy economy internationally is actually good. Most governments around the world are doing everything they can to back that $10 trillion bet with smart policies, legislation and regulation that make the most of the money. Investors with the biggest money are making the biggest investments.

Somehow, the conservative side of the U.S. Congress hasn’t figured out how such smart policies mean better energy security, economic rejuvenation and green gigajobs. Senator Lindsey Graham (R-SC), the one conservative that did, has reportedly thrown up his hands in frustration and taken his bipartisanship home.

The Green Economy: The Race is On, from Deutsche Bank Climate Change Advisors (DBCCA), describes the budding New Energy economy around the world, the many insights about effective policy that are emerging and how quickly the U.S. is falling far behind the countries that are taking the initiative. It follows on two previous DBCCA reports that describe in detail the most effective polices (see LOOKING FOR THE BIGGEST NEW ENERGY BANG FOR THE BUCK) and where in the climate change fight the smart money is going (see THE BEST BETS ARE ON THINGS THAT BEAT CLIMATE CHANGE).

All 3 reports emphasize the need for U.S. leaders to find their way to the right policies that will drive the flourishing of a U.S. New Energy economy. The key to the design of those policies is a 3-letter strategy: TLC.

Legislation and regulation will vary from country to country. What works in a command-and-control economy like China may be almost impossible to implement in a contentious free market economy. What works in a wind-rich place like Denmark may be anathema in a sun-drenched place like North Africa. But every economy with any resources will benefit from policies that maximize TLC: Transparency, Longevity and Certainty. The big and smart money follows policies with TLC.

click to enlarge

The new DBCCA paper re-emphasizes that (1) business has and will support climate change-fighting New Energy and Energy Efficiency technologies, products and services, (2) countries around the world are continuing to evolve policies that are accelerating the development of those technologies, products and services; and (3) because the U.S. is not applying the best policies, its New Energy economy is losing investors and its New Energy capacity is falling behind.

Washington's attention at this moment is largely focused on what, for good reason, is now being called Wall Street reform. The environmentally-oriented left is dissatisfied with the compromise energy and climate legislation because it is too soft. The fossil fools and pro-nuclear radioactivists on the right contend the compromise energy and climate legislation does not provide enough for the same Old Energy.

It seems very like the darkest hours of the fight for health insurance reform. The administration’s goals seem to be slipping away. Only this time it appears the politics of the situation dictate not pressing forward. Better support for the New Energies – with (1) a national Renewable Electricity Standard (RES) requiring all U.S. regulated utilities to obtain a portion of their power from New Energy sources by a specified year and (2) the beginning of a price on greenhouse gas emissions (GhGs) – seems all but unachievable.

Anybody really set one of those Green jobs that looked so within reach in January 2008 should probably be thinking about getting their passport in order and applying for a Chinese visa.

But that IS how it seemed in the darkest hours of the fight for health insurance reform.

click to enlarge

THE DETAILS
The details of the energy and climate legislation that was scheduled to be presented today have not yet been made public but were rumored to have included an RES and a limited Cap&Trade system. The RES would have been the first national U.S. New Energy standard. The Cap&Trade would have been the first nationwide effort to price GhGs. The 2 taken together are widely thought to be the most important policy moves the U.S. could make in moving toward the New Energy economy of the future.

Now for the good news. Unlike the conservative-driven U.S. federal policies, most governments around the world have set New Energy goals and a pricing mechanism on GhGs in response to solid science and their own long-term economic and security interests.

Drivers of national policy expected to be unaltered by changing short-term circumstances include:
(1) A widespread international clamor for climate change action from scientific and activist organizations;
(2) Action by governments in pursuit of economic advantages and jobs; and
(3) Evidence of the changing climate in scientific reports and the daily news.

click to enlarge

Evidence of mainstream investors' sustained commitment to buying in on the fight against climate change:
(1) Ceres Investor Network on Climate Risk (INCR) now has 90 members with $10 trillion in assets;
(2) Based in the U.S. are 80 of the 90, controlling $9 trillion of the assets; and
(3) Membership has increased 9 times over since the INCR was formed in 2003.

The United Nations-established Principles for Responsible Investing (NUPRI) requires that the investments favorably affect the environment and/or the climate. It has 718 signatories with $21 trillion in Assets under management (AuM) and has grown 11 times over since it was formed in 2006.

More evidence there is good news in the New Energy economy:
(1) 56 orgainizations with $2.1 trillion AuM signed a March 2010 letter to the U.S. Securities Exchange Commission (SEC) calling for a requirement of climate risk disclosure to investors. This supports the SEC’s initiative to obtain similar rules.
(2) The Carbon Disclosure Project (CDP), representing 475 institutional investors with $55 trillion in AuM, is slowly working toward documenting emissions data on 2,000 companies in 30 countries as a basis for an international GhG-capping and pricing regimen.

click to enlarge

Obstacle: U.S. high net worth investors (HNWIs) and ultra-high net worth investors (UHNWIs) are behind the curve on climate change-fighting investments. Global HNWUIs invest 12% of their portfolios in the fight against climate change while U.S. HNWIs have put 5% in the fight. Global UHNWIs are in for 14% while the U.S. UHNWIs are in for only 7%.

Middle East investors lead the fight and Europe is just behind them. Latin America and Asia are at about the global average.

Those with the biggest money are making the biggest investments.

click to enlarge

From a financial standpoint, the disappointment widely declaimed over the December 2009 UN climate summit in Copenhagen was wholly misplaced. It seems to have significantly raised awareness and provoked renewed government action. Governments have established new policies putting more pressure on and providing more incentives for private, national and regional action.

Documentation of Copenhagen’s success:
(1) 154 new climate policies were established in the October 2009 thru January 2010 awareness-inducing Copenhagen period.
(2) A world-record number of climate policies were created in the January 2010 post-Copenhagen glow.
(3) The Copenhagen Accords got 121 formal responses for action.

The primary types of actions have been (1) emissions targets, (2) mandates for New Energy, (3) incentives to move toward the mandates, and (4) spending directly aimed at counteracting climate change. Of 510 tracked policies since 2008, 54% have been incentives, 29% have been mandates, and 17% have been emissions targets.

click to enlarge

There were 27 feed-in tariffs announced between October 2009 and January 2010, included in the incentives category.

The policies in Germany and China best reflect the Transparency, Longevity and Consistency (TLC) qualities. Especially noteworthy in Germany are (1) a long-standing price on GhGs and (2) a feed-in tariff. China stands out for its commitment (1) to New Energy and Energy Efficiency mandates and (2) to an energy intensity reduction.

Though many states have such policies and are developing more, the U.S. has none of them. Growth in the U.S. has so far relied on waxing and waning financial incentives which, though so far serviceable, fail to provide either the longevity or certainty developers require to commit and build aggressively. Many current U.S. federal incentives expire as soon as 2011.

click to enlarge

Growth driven by TLC policies:
(1) Since 2008, China has installed 30 gigawatts more New Energy capacity than the U.S. and has increased its New Energy capacity 81% while the U.S. has increased its capacity 74%.
(2) The biggest installers of solar capacity in the period have been Germany (5.4 gigawatts), Spain (3.3 gigawatts) and Japan (2 gigawatts).
(3) China doubled its installed wind capacity to 25 gigawatts from 2008 to 2009 and has targeted 30 gigawatts for 2020, a mark it is likely to revise upward very soon.

A policy to watch: The UK micro-generation feed-in tariff.

click to enlarge

Investment in the off-year of 2009:
(1) Only Asian investment in the climate change fight grew, with an increase from the previous year of 29%. European investment fell 13% and U.S. investment fell 30%.
(2) In total numbers, Europe and Asia had the most investment.
(3) China 2009 investment in the climate change fight was bigger than the U.S. investment for the first time.
(4) As a percent of GDP, both Brazil and China 2009 invest 3 times more than the U.S. in the climate change fight. From 2000 to 2009, Germany’s percent of GDP investment in the climate change fight was 2 to 3 times bigger than the U.S. investment.

It took devastation of an as-yet unimagined horror at Pearl Harbor for the U.S. to take on its fair share of the fight against fascism in World War II. Will it take more devastation for the U.S. to get involved in the fight against global climate change? Will it then be too late?

click to enlarge

QUOTES
- From the DBCCA paper: “Active support from businesses and investors for government to tackle climate change and incentivize clean technology continues to grow rapidly, both globally and in the U.S. Asset owners representing more than $10 trillion have publicly signaled their support. At the same time, governments around the world are stepping up the pace of legislation and regulation to encourage the development of a low carbon economy, ensure energy security and help create new jobs. The key to success is to attract large scale private investment into climate change industries…”

click to enlarge

- From the DBCCA paper: “Climate change and clean technology investment as a secular trend driven by the underlying science and government policy as well as energy security and green job creation. Investor interest in climate change has been shaped by major events, reports and educational milestones. General market trends also influence investor sentiment toward climate change sectors…A significant number of mainstream investors have “turned a corner” on how they put responsibility into practivce, with the number of investors embracing action on climate change significantly increasing. The key findings [in the paper] show signs of a growing culture of active ownership and collaboration among investors.”