Climate change: Towards clean energy investment and supporting disclosure

Director, OECD Directorate for Financial and Enterprise Affairs

He’s lifting the lid ©REUTERS/Paul Darrow

Achieving the transition to a low-carbon economy to meet the 2ºC target requires shifting investment away from carbon-intensive options and towards low-carbon, climate-resilient infrastructure assets and technology. Over US$90 trillion will be needed in the next 15 years to meet global infrastructure needs across transport, energy and water systems, irrespective of climate change, according to the Global Commission on Climate and the Economy. But as the commission estimates, making these infrastructure investments “low-carbon” will impose additional costs of only 4.5% relative to business-as-usual, with benefits such as reduced local air pollution, improved energy security and lower traffic congestion. 

The current period of economic stagnation presents an opportunity to shift the balance of investment towards low-carbon options such as clean energy and away from industries characterised by excess capacity. Clean energy investment, however, faces strong obstacles: clean energy returns are still low versus the cost of raising equity and even of debt, particularly in emerging markets, as highlighted by recent analysis of 10 000 of the world’s largest companies in the OECD Business and Finance Outlook 2015.

The good news is that the cost of electricity generation from renewable energy sources against fossil fuels is going down in several countries. The price of solar crystalline silicon photovoltaic (PV) cells, for instance, has dropped by 80% since 2008, and by 99% since 1977. According to the International Energy Agency (IEA), new utility-scale solar PV can be contracted at a levellised cost of electricity (LCOE) of $80-100/Megawatt-hours, with the best cases at $60/MWh that can already displace peaking gas generation in some countries.

These developments have been accommodated by strong policy support over the past decade, which has seen investment in renewable energy increase sixfold over the past decade. Annual investment in renewable electricity generation reached $270 billion in 2014. It would need to increase to $400 billion in 2030 to deliver a peak in global energy-related emissions by 2020, according to the IEA.

While the required renewable energy investment gap is reducing with respect to the 2ºC target, this is not the case, however, for low-carbon technologies such as carbon capture and storage, electricity storage and smart grids. These are all severely lacking in investment, especially in research, development and demonstration (RD&D). Even relatively mature renewable electricity generation technologies still face barriers. These obstacles are associated with high upfront capital expenditures, market and policy failures such as ineffective carbon pricing, poor business environments such as regulatory uncertainty, and lack of appropriate financing vehicles.

The OECD has long-standing expertise in helping policy makers strengthen the domestic business environment for infrastructure investment, especially in clean energy, as highlighted in the OECD Policy Guidance for Investment in Clean Energy Infrastructure. Key areas for policy makers to consider include: applying proven investment policy principles such as non-discrimination; transparency and investor safeguards; providing predictable and targeted policy support to clean energy and reforming fossil fuel subsidies; and ensuring a fairer playing field between independent power producers of clean energy and incumbent fossil fuel-producing utilities; and addressing outstanding barriers to international trade and investment. For instance, policy makers should address the issue of local-content requirements in solar PV and wind energy that have become more prevalent since the financial crisis started, as these requirements can increase costs for downstream power producers and make it harder for this highly global and innovative sector to draw full benefit from global value chains.

Improving disclosure
Measuring performance is also essential for assessing outcomes and, in regard to fighting climate change, corporate climate change disclosure is particularly critical. Disclosure helps to rank and compare the performance of various companies, to develop environmental, social and governance metrics, and to manage risks more effectively. Joint research conducted by the OECD and the Climate Disclosure Standards Board shows that out of G20 countries, only 15 mandate corporate disclosures on climate change by large companies and main emitters of greenhouse gases.

Furthermore, most of these mandatory schemes only require companies to report on emissions that are produced within national boundaries, even though the bulk of greenhouse gas emissions is often produced throughout companies’ supply chains, in other sectors or countries. Moreover, proper scrutiny is an issue, since few mandatory schemes require or recommend data to be third-party verified, and even fewer schemes ask companies to report on risks from climate change impacts and on strategies to address those risks. Also, these schemes use a range of different calculation methodologies, thresholds and reporting systems, which makes the use and comparison of data all the more difficult.

Clearly, if we are to check progress on addressing climate change, governments and stakeholders must collaborate more closely to improve and streamline corporate reporting standards and climate change disclosure. With better disclosure, we can turn lip service on low-carbon investment into measurable action.

References

IEA (2015), Medium-Term Renewable Energy Market Report, OECD/IEA Publishing.

IEA (2015), World Energy Outlook Special Report: Energy and Climate Change, OECD/IEA Publishing.

OECD (2015), Policy Guidance for Investment in Clean Energy Infrastructure: Expanding Access to Clean Energy for Green Growth and Development, OECD Publishing.

OECD (2015), Overcoming Barriers to International Investment in Clean Energy, Green Finance and Investment, OECD Publishing.

OECD (2015), OECD Business and Finance Outlook 2015, OECD Publishing.

OECD/CDSB (2015), “Climate change disclosure in G20 countries: Stocktaking of corporate reporting schemes”, OECD Publishing.

©OECD Observer No 304 November 2015




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