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Investors guardedly welcome UK carbon budget, call for policy certainty

18 May 2011

While the UK government’s fourth carbon budget has been largely welcomed by investors in the clean energy space, critics have warned that adequate policies need to be put in place to reach its ambitious target of cutting dangerous emissions all but in half.

The carbon budget imposes a limit of the greenhouse gas emissions in the four years after 2023 that aims to slash the country’s greenhouse gas emissions 50 per cent below 1990 levels. UK Energy Secretary Chris Huhne, who negotiated the budget amid controversy over allegations of driving ban contraventions launched by his estranged wife, based his proposals on advice issued by the Independent Committee on Climate Change (CCC). The package of policy measures necessary to achieve the low carbon industrial transformation Huhne seeks is yet to be revealed by the end of the year, however.

With reports that Chancellor George Osborne had attempted to block Huhne’s carbon budget proposals, investors in the clean energy sector have identified the impact the new budget will have on the sector and its potential to lead to growth. Concerns over future reneging on the new regime have not, however, been overlooked.

Ole Beier Sørensen, chairman of the Institutional Investors Group on Climate Change (IIGCC) and chief of research and strategy at Danish pension fund ATP, said, ‘The new carbon budget set by the UK government demonstrates determination, is ambitious in scope and sends a signal to the UK public, financial markets as well as the wider international community. We hope that the ambition shown by the UK government sets a benchmark and has a wider impact at international level.’

Since the coalition government’s entire raft of measures in the carbon budget package will come under threat in 2014 if it conflicts with wider European Union (EU) targets, the proposals for the carbon budget are not yet set in stone. Investors as well as critics from all camps have highlighted that the policy details on how the budget will be achieved are a notable omission from Huhne’s rhetoric.

‘The suggestion that the UK could review, and potentially weaken, its own commitments depending on progress elsewhere needs to be clarified to ensure certainty for investors beyond 2014,’ said Sørensen.

‘Policy details outlining how the government will stimulate the financing necessary to green the UK economy and bring about these reductions is now the important next step. Turning these targets into a reality will rest on these details.’

Huhne said the coalition government will push for a Europe-wide move to a 30 per cent emissions reduction target, but if the UK’s own commitments differ from the agreed EU trajectory, they will forcibly be revised to align with it. This leaves the carbon budget measures in jeopardy for over two years even if they do pass through domestic consultation stage and bat away cross-party interjections. Investor caution has been echoed by the low carbon energy industry, which – as promising as the new targets sound – is aware of the concrete measures that need to be implemented for the goals to be realised.

Oliver Rix, director at energy consultancy Redpoint Energy, said, ‘The government has set itself – and indeed its successors – a very challenging goal, albeit with some shorter term respite as a result of the recession. The CCC’s analysis, in common with others, shows the need for significant progress in the buildings sector but is heavily reliant on power generation decarbonisation. The CCC’s own ambition here has increased significantly in the last 12 months – from 100 grams of carbon dioxide per kWh to less than 50 grams per kWh by 2030.

‘Achieving this is critically dependent on clarity from the government on its Electricity Market Reform proposals, in order to provide a clear framework for investors. We would note that the concept of a 2014 review for the traded sector introduces an element of uncertainty by implying that the UK’s commitment is linked to the pace of overall EU decarbonisation.’

If implemented properly, the government’s carbon budget proposal as set out by Huhne would require significant levels of investment to put the UK on course to cut emissions by at least 80 per cent by 2050. Although Huhne said his carbon budget package includes measures to minimise costs of the low-carbon transition to industries exposed to international competition, Rix is skeptical. In addition to the uncertainty that surrounds the implementation of policy measures that would catalyse the carbon budget’s proposals, there is the added burden it presents to energy consumers.

Rix said, ‘While there are scenarios under which the 2030 target could be met at relatively low cost to consumers, there are large practical barriers to the uptake of many abatement measures. In addition, the government is constrained by its obligation to meet the EU 2020 renewables target, and this in turn implies higher bills than a lowest cost decarbonisation pathway otherwise would.’

Copyright © 2011 NewNet


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