TODAY’S STUDY: NO WAY TO SUGAR-COAT IT – CLIMATE CHANGE FIGHTERS AND FREELOADERS (AND TWO THOUGHTS ABOUT THE FUTURE)

“We may be just around the corner from heaven or a mile from hell…” Jackson Browne

There is no way to sugar-coat it. The fight to stop the worst impacts of climate change is being lost because some of the biggest spewers have NOT joined in.

As detailed in the study highlighted below, Germany, China and the UK have instituted policies that are turning the tide on the climate change-inducing greenhouse gas emissions (GhGs) their fossil fuel consumers emit.

The US, Russia, Spain and Canada still have not put effective policies in place or, worse still, have reversed policies that could have helped.

The result is a break-even standoff: Emissions reductions by the fighters are just balancing emissions from the freeloaders. And the world as a whole continues to fall short of the target it needs to hit to remain on track to prevent a 2 degree C global average temperature rise.

Failing that target, the community of nations must expect to see the worst impacts of global climate change, impacts that can be expected to make this year’s hurricanes, tornadoes, floods, droughts, deep freezes and heat waves seem like a stroll in an air-conditioned Disney World.

There is good news but it is the bad news and promises that more good news will bring more bad news: A more rapid deterioration has been waylaid by the slowing of GhG-generating commercial and personal behaviors due to the economic slowdown. It can therefore be expected that as the global economy recovers, the situation will deteriorate more rapidly.

Two comforting thoughts emerge from the bleak report below.

First, the struggle to identify effective policies has turned the community of nations into a socio-economic laboratory running experiments in better mechanisms. The feed-in tariff, invented in the U.S. and refined in Germany, has been refined to the point that failures like the one in Spain in 2008 are predictable and therefore avoidable. The cap-and-trade concept has had ample opportunity to demonstrate its potential and its limits so that should the world’s larger economies ever turn to it, they will know how to use it. Streamlined siting processes for New Energy and the new transmission it needs are becoming more common and more successful.

Here’s the best news, which once again falls into the can’t-tell-the-good-news-from-the-bad category: The horrible Fukushima nuclear meltdown has provoked a budding renaissance in New Energy activity. In the wake of the catastrophe, momentum is gathering for the good.

A New Energy economy is beginning to emerge. Wind is now cost competitive with traditional forms of grid supply and takes a lot less time to build. Many call solar the fastest growing business sector in the world. Together they constituted more than $130 billion dollars in value in 2010 and they are growing faster than ever.

There is only one question remaining. When the generation now carrying book bags looks to see who did what at this crucial turning point, are they going to find that the community of nations quit on them or that it turned with vehemence and determination to this good earth’s sun, wind, deep heat and flowing waters?

“People you’ve got the power over what we do,
You can sit there and watch or you can pull us through…”
Jackson Browne

Global Climate Change Policy Tracker; Winners and Losers
Mark Fulton, et. al., July 2011 (Deutsche Bank Climate Change Advisors)

Executive Summary

During 2010 and to date in 2011 the leaders in climate policy continued to maintain their position, while others have lagged behind or moved backwards.

• Countries such as Germany, China and increasingly the UK continue to develop strong domestic policies that contribute to global climate change mitigation,

• Whilst others, such as the US, Russia, Spain and Canada (Ontario) either fail to initiate, or in some cases, even reverse or threaten to reverse, crucial climate policy initiatives.

• Thus, some policy regimes have succeeded while others have failed, and the key for investors is to identify the winning policy structures which reduce uncertainty. Within this context, we continue to develop our “best-in-class‟ climate policy framework, with emphasis on policies directed at clean energy technologies and efficiency.

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Countries with more "TLC" – transparency, longevity and certainty - in their climate policy frameworks will attract more investment and will build new, clean industries, technologies and jobs faster than their policy lagging counterparts. This is particularly evident in countries such as Germany and China, who have emerged as global leaders in low carbon technologies and investment in recent years. In stark contrast, a politically divided US Congress and vast budget deficit has resulted in very little significant regulation at the Federal level, with substantial implications for emerging clean technology industries in the US.

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This climate policy inertia has existed for some time in the US now, with activity on this front largely taking place at the state level. We have long argued that the states must continue to press ahead with climate legislation, but a negative effect of this trend is a patchwork of inconsistent state policies. The net effect is that while Congress stumbles, the US stands to fall behind.

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At the start of 2011 the world witnessed the Fukushima nuclear disaster in Japan. We believe that the dual impact of this and the oil price shock as a result of unrest in the Middle East are likely to mark 2011 as a key inflection point in the global energy mix and as catalysts for a transition toward cleaner, sustainable and more secure energy supplies. In the wake of the nuclear disaster there was a dramatic reassessment of nuclear energy policy and safety around the world from China to Europe to the US. In March the German Chancellor Angela Merkel ordered that all old nuclear reactors built pre-1980 be temporarily taken offline, in April Merkel announced a six-point plan that stated the country would accelerate the fundamental conversion of their energy supply towards greater penetration of clean energy, and in June the German parliament approved plans to phase out nuclear reactors by 2022. Similarly, Switzerland and Italy have abandoned plans to build and replace nuclear plants.

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In this study we track the policy momentum of mandates, emission targets and supporting policies in the Clean Energy Ministerial (CEM) countries and key US states, which represent ~80% of global GHG emissions. There has been an increase in activity around a variety of supporting policy incentives throughout 2010, although the use of feed-in tariffs to support renewable energy continues to overwhelmingly dominate in European markets (20 out of 27 EU member states use FiTs). We tracked 390 climate policies which are binding or accountable up to April 2011. 104 of these are new to the database since March 2010 when we last published. Policy momentum is still positive, but shows signs of slowing down in recent months as many economies have by now developed and implemented their domestic climate policies. In addition to this slowdown, we have seen some negative revisions and fine-tuning of polices, particularly in FiT markets, largely driven by budget concerns over the recent financial crisis, as well as cost reductions in renewable energy technologies as they achieve greater scale (particularly solar). In most cases these have left investors with long-term TLC.

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However, retroactivity is the most harmful change to a policy and Spain did enforce this. Meanwhile the outlook in Ontario in Canada has deteriorated with projects failing to get connected to the grid, fear of some revocation of projects starting development and importantly an uncertain political outlook towards the FiT that needs clarification post election. These trends are leading to the establishment of winners and losers at the policy level.

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In terms of the impact on carbon abatement, 364 policies are modeled globally, 41 of which are new since 2010. In total the maximum potential abatement of modeled policy initiatives, assuming that these are implemented, will reduce global emissions by nearly 11Gt to global emissions of 49 Gt/y in 2020. This is still ~5Gt higher than the 44 Gt/y target for stabilization in 2020 (the 450ppm pathway). Compared to our March 2010 model run, this is almost 1Gt better in terms of reduction, but unfortunately the Business-as-Usual emissions for 2020 also rose by 1Gt so the net result of a 5Gt gap is the same. The message is thus clear: policy at the current level still will not achieve the reductions necessary to stabilize global emissions at 2 degrees.

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In the absence of an international agreement, the continued push for new initiatives to address climate change further supports what we have always asserted: that fighting climate change is not just a matter for international agreements but rather a collection of regional, national and (in some cases) sub-national initiatives. The solution lies in a bottom-up approach with national governments establishing policy frameworks that foster the investment, job and wealth creation that will emerge with the development of a global low carbon economy.

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Indeed, the policy frameworks in place do require significant investment in order to be fulfilled, from both public and private capital sources, even if new policy impact is slowing. Thus, private investors have a strong role to play in mitigating climate change by investing across asset classes, including infrastructure and private equity. But that means understanding who has the policies and political will in place to get there.