Financing the Transition to a Low Carbon

Economy

Peter Young SKM Enviros

2nd February 2010Environment Business Australia Forum

Sydney

Aim of Presentation

• Set context for need and size of investment to achieve transition to a low carbon economy

• Introduce role of Aldersgate Group• Summarise impact of ‘Financing the

Transition’ and subsequent UK govt activities• Open up for Q&A session

Investment Drivers: Global Population in Billions+.....

...... Observed Global Temperatures and Carbon Dioxide + ...

...Future Carbon Dioxide Emissions to 2100 + .....

.....Global Energy Demand +...

.... Global Energy Inefficiency +....

..... Poor Urban Design...

Do the Maths

• Currently emit 6 tpa CO2 per capita (EU 8, Aus 19).

• Long term stability requires ~1 tpa at 9 billion population if equitably spread

• This represents 8 fold change in EU, 20 fold in Australia

• UK has mandatory targets of 80% (five fold reduction)

= Implications for the whole economy

Source: CCC Building a Low-Carbon Economy –The UK's Contribution to Tackling Climate Change

• Not only de-carbonising electricity generation

• But also to facilitate savings in other energy use emissions categories

• Will impact on all sectors of economy

Investment Needs

• Fiscal stimulus response to GFC aimed more at environment (eg US $150bn investment to create 5M green collar jobs by 2020 = 20%) replicated varyingly globally

• UK government calculated £200bn to 2020 to meet carbon targets

• UK low carbon infrastructure £264bn to 2020 (Dieter Helm et al)

Who is Aldersgate Group?

ALDERSGATEGROUP

• Founded in 2006 • A broad coalition of businesses, NGOs, Profession Bodies,

political figures and government agencies• Believe that high environmental standards are vital to

future economic growth and competitiveness• Engage actively with government and other key decision

makers – and as conduit of business led solutions

What we aim to do

ALDERSGATEGROUP

• Raise awareness in the UK and Europe of the wide ranging (economic and social) benefits of high environmental standards.

• Build political support for smarter environmental policymaking based on a thorough assessment of these wider benefits

• Develop a broad coalition of stakeholders to encourage policy makers to act early and strongly

Tactical IssuesExample: EU Car Emissions

ALDERSGATEGROUP

• UK: EU proposals would export 1000s of jobs and ‘drive European car makers to brink of extinction’

• Italy: ‘unprecedented high level’ of penalties• Germany: ‘hinder innovation, threaten jobs and fail to be an effective

instrument of climate protection’VS

• Stimulate innovation and reduce cost of compliance• US impact of similar proposals calculated to create 241,000 jobs and

reduce oil by 1.6m barrels per day• Remember catalytic converters – industry priced at £400-£600 but now

£30-£50 each and drove fuel efficiencies

Current Focus

ALDERSGATEGROUP

To achieve the required rate of decarbonisation and competitive advantage, early and better action in three critical areas in UK and EU:

1. Skills – ‘Mind the Gap – Skills for the Transition to a Low Carbon Economy’ published in November

2. Resource Efficiency – ‘Beyond Carbon – Towards a Resource Efficient Future’ published yesterday

3. Finance – ‘Financing the Transition – A Strategy to Deliver Carbon Targets’ – published in October

Lessons from Writing Report

• Amazing response from investors, there is enough capital if confident of returns

• ‘City’ and Government in UK don’t understand each other

• High consensus that action was needed and that this was an issue of national competitiveness as well as targets

Key Recommendations

• Policy risks are critical, requires surety in targets, bankability of policy decisions, and public guarantees/bonds linked to performance

• Climate bonds or other green investment vehicles will mobilise private capital at scale

• Institutional reform required, both in consolidating govt expertise and creating eg a new Green Investment Bank (GIB)

Response Since October

• Opposition announced interest in establishing new Green Savings vehicle and GIB.

• Govt created Infrastructure UK, bringing together PFI, TIFU and DECC teams under Paul Skinner (former chair, Rio Tinto)

• 100M euro UK addition to EIB fund• Detailed private meetings on how to construct

a GIB – key issue is public balance sheet

-100-110-120-130-140-150-160

43 2726252423222120

100

98

203040

-10-20

7

-40-50-60-70-80-90

0 1 10 11 12 13 14 15 16 17 18 192 65

-30

Cost of abatementEUR/tCO2e

Insulation improvements

Fuel efficient commercial vehicles

Lighting systemsAir Conditioning

Water heating

Fuel efficient vehicles

Sugarcanebiofuel

Nuclear

Livestock/soils

Forestation

Industrialnon-CO2

CCS EOR;New coal

Industrial feedstock substitution

Wind;lowpen.

Forestation

Celluloseethanol

CCS;new coal

Soil

Avoided deforestation

America

Industrial motorsystems

Coal-to-gas shiftCCS; coal

retrofit Waste

Industrial CCS

AbatementGtCO2e/yr

Avoiddeforestation

Asia

Stand-by losses

Co-firingbiomass

Smart transit

Small hydro

Industrial non-CO2

Airplane efficiency

Solar

Investment Programmes around Carbon Abatement Costs...

...and around Energy Generation

• Marine energy resource key opportunity• GIB/EIB to remove risk by offshore grid• Infrastructure Planning Commission • PE, pension funds and banks all making

constructive proposals• Could existing RBS, HSBC portfolios seed corn

a renewables development fund?

The Emerging Market – Investors are moving ( and Should Australia be in top 6?)

Analysis of 53 leading economies: Environmental Goods & Services economy in a global economy worth £3 trillion

Rank Country Market Value £bn % of total

1st US 629 21

2nd China 411 13

3rd Japan 191 6

4th India 190 6

5th Germany 127 4

6th UK 106 3

Conclusions• The Low Carbon Economy requires massive

mobilisation of capital (24% pa growth)• In spite of GFC the capital is there• Policy risk is a huge barrier to unlocking private

finance early enough• In the new low carbon economy new institutional

models are required• UK is benefitting from new collaboration on

financing – should Australia do the same?

Time for Q & As

Thank You!

Pjyoung@globalskm.com

For reports please seewww.aldersgategroup.org.uk