Uncertain climate

Climate Policy Uncertainty and Investment Risk
OECD Observer

The UN Climate Change Conference in Bali in early December 2007 may have raised new hopes of progress, but as everyone knows, dealing with climate change will require more than just political goodwill. Providing for abundant, affordable, clean energy will require considerable investment in new power generation–more than US$11 trillion to 2030, based on an estimate in the IEA’s World Energy Outlook 2006.

This investment will need to be timely, respond to market signals, promote the development and deployment of affordable new technologies and provide a reduced carbon footprint. Yet there are many other places where investors can put their capital. How can we be sure that adequate investment will be made into powering and protecting the planet?

The first report from a four-year study by the IEA, Climate Policy Uncertainty and Investment Risk, looks at the power sector and identifies how the uncertainty of climate change policy may affect investment, notably in electricity generation. For power companies, whose capital stock is intensive and long-lived, those risks can delay investment.

The report shows that the risk premiums of climate change uncertainty can add 40% of construction costs of a plant for power investors, and add 10% of price surcharges for the electricity end-users. Satisfying our energy needs with low or near-zero net emissions of greenhouse gases, the report warns, will require an almost complete turnaround in the world’s energy infrastructure.

The dilemma is how to ensure that policies are effective for seemingly different issues, both supplying energy profitably and curtailing climate change. Climate Policy Uncertainty and Investment Risk calls on governments to improve climate policy mechanisms with policies that create a more secure environment for power investors and users alike.

See also the article Infrastructure: Mind the gap.

ISBN 9789264030145

©OECD Observer No 264/265, December 2007-January 2008

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