In a comprehensive report prepared by Climate Policy Initiative and Climate Strategies, the impact of the EU ETS on the three steps companies typically follow in the investment process (capturing investors’ attention, providing clarity for decision-making and create an enabling environment for low-carbon projects) has been evaluated using more than 800 interviews with manufacturing companies.

The study finds that the EU ETS commitment to reduce emissions by 20 percent by 2020 makes climate policy relevant to investors, although they do not consider the 2020 target high enough to trigger a shift to low-carbon technologies. The policy instrument and the policy objective of the EU ETS must be realigned, as “the resulting trajectory from the current cap reduction schedule results in emission reductions of only 51% by 2050 for total EU emissions, well below the commitment of 80-95% formulated by the EU and Member States”.

Moreover, the study finds that companies with higher expectations of the future stringency of permit allocation are more likely to invest in low-carbon innovation. Regarding the role of CDM, the study concludes that their availability reduces “opportunities for low-carbon investments” and concludes suggesting the introduction of alternative financial support mechanisms to phase out the use of offsets (CDM/JI). To reduce carbon price uncertainty, the option of a price floor is analysed, but the study concludes that “it is better to strengthen emission targets than to use a price floor if the stringency of EU ETS is perceived to be insufficient by policymakers”. Nevertheless, the EU ETS has been successful in contributing to the financial viability of low-carbon projects, although on average surveyed companies focus more on other factors. For instance, they require that energy efficiency investments pay back in less than four years, suggesting the need for additional policies that extend the investment horizon.

The executive summary of the report can be downloaded at http://www.climatepolicyinitiative.org./files/attachments/88.pdf.

Climate Policy News

• This news is extracted from the Climate Policy News : a CMCC weekly column that summarises the latest news on international climate change agreements, the updates on the carbon market and the energy and technology updates in the realm of climate change. Go to the web page and see all previous issues since March 2007.
• This week: Delayed review of energy-efficiency target; Study evaluates impact of EU ETS on investors; Post-2012 CDM fund by World Bank; the carbon market this week – Download the January 31 – February 6, 2011 Newsletter [pdf 117 kb]