Institutional Investors Group on Climate Change Investment-grade climate policy: the next phase for Europe

Transcription

1 Institutional Investors Group on Climate Change Investment-grade climate policy: the next phase for Europe IIGCC s response to the European Commission Green Paper A 2030 framework for climate and energy policies

2 Investment-grade climate policy: the next phase for Europe IIGCC s response to the European Commission Green Paper A 2030 framework for climate and energy policies 1 Institutional Investors Group on Climate Change (IIGCC), June 2013 Summary The Institutional Investors Group on Climate Change (IIGCC) represents over 80 investors with 7.5 trillion of assets, including many of Europe s largest pension funds, insurers and asset managers a major source of capital for low carbon infrastructure. We support the EU Commission s vision for a single energy market, and its Roadmap for low carbon energy. To make this vision investable, investors need a stable, reliable, cost-effective, coherent and long-term energy and climate policy framework. We are concerned that these conditions do not exist, blocking the realisation of the vision, with implications for economic growth, competitiveness and energy security. Early action to unlock large scale investment in low carbon infrastructure will bring benefits in terms of long-term energy price stability, carbon emissions and energy security, but also drive short-term European growth and job creation. Climate and energy policy We support a 40% greenhouse gas (GHG) emission reduction target by 2030, but would welcome longer-term targets beyond 2030 which deepen confidence that the Roadmap vision will be realised. To invest against this target we have a strong preference for a stable, reliable, and economically meaningful carbon price signal delivered by market instruments. However, we are concerned that efforts to create such a signal have, to date, been unsuccessful and that there is no consensus about how this will be achieved. The framework has been powerful in driving deployment of renewables to date. But there are growing concerns about the cost, fragmentation and instability of this approach. The current emphasis on member state subsidies is not well aligned with Europe s single energy market vision. We would prefer much greater weight to be placed on a reliable, economically meaningful, pan-european carbon price signal. The EU Emission Trading Scheme (ETS) has the potential to provide this signal, but only if it is modified by removing the structural surplus of carbon allowances, and by introducing a mechanism to reduce price volatility in order to provide investors with the predictability they require. 1 European Commission (2013) Green Paper A 2030 framework for climate and energy policies. COM(2013) 169, 27/03/

3 We believe that immature low carbon technologies (e.g. offshore wind) may offer significant environmental and economic benefits over the medium term, and the EU should continue to support their development as well as supporting the construction of Carbon Capture and Storage (CCS) demonstration projects to assess their potential viability. It is important that any new instruments introduced to support renewables, CCS, and energy efficiency are designed to work with the ETS, or if not, that the allocation of allowances is adjusted to take account of their effects. The EU should take stronger steps to discourage retroactive changes to subsidy regimes including the introduction of new taxes which have the equivalent impact. We call on the Commission to consider what action it could take under the Renewable Energy Directive, or otherwise, to prevent any further such changes. Removing barriers to capital deployment Bank de-risking and Basel III bank capital adequacy requirements mean institutional investors will need to play a bigger role in supplying capital for low carbon infrastructure in Europe. There is a need to support the rapid development of their capability to do this. Europe should increase the ability of institutional investors to provide long-term capital to infrastructure, by encouraging a healthy capital ecosystem in which differing risk and return appetites are met, and by creating more relevant holding vehicles such as Real Estate Investment Trusts and Master Limited Partnerships, which allow more liquid and tax-efficient investment and pooling of capital by larger pension funds and insurance companies in direct investments. The EU should ensure that Solvency 2 type capital requirements are not barriers to insurance and pension fund investment in infrastructure, and ensure new barriers to investment in energy related infrastructure are not imposed by implementation of the Transmission System Operator unbundling rules in the Third Energy Package. Achieving 2030 targets requires that substantial investment decisions be made before This will not happen unless Europe moves rapidly to set its post-2020 framework. Substantial progress is needed by early 2014 before the rotation of the Commission and the Parliament, and rapid completion of the necessary directives is required early in the new parliamentary term. Acknowledgements IIGCC would like to thank the IIGCC Policy programme members for their contributions and input to this statement. A special thanks to Craig Mackenzie, Scottish Widows Investment Partnership, lead author of this publication, and to the following members for their active input: Vicki Bakhshi, F&C Asset Management; Victoria Barron and Michaela Zhirova, Hermes; Tatiana Bosteels, Hermes Real Estate; Steven Gray, Climate Change Capital; Edward Mason, Church of England Ethical Investment Advisory Group; Narina Mnatsakanian, Mn Services; Tom Murley, Hg Capital; Meryam Omi, LGIM; David Russell, USS IM; Ian Simm and Lisa Beauvilain, Impax Asset Management; Erik Jan Stork, APG Asset Management; Pieter van Stijn, PGGM; Jens-Christian Stougaard, PensionDanmark; Faith Ward and Chris Knight, Environment Agency Pension Fund; Helen Wildsmith, CCLA; Helene Winch and Daniel Ingram, BTPS. Contact For more information contact Stephanie Pfeifer at spfeifer@iigcc.org or visit 3

4 1 About us IIGCC represents over 80 investors with 7.5 trillion of assets, including many of Europe s largest pension funds, insurers and asset managers. We are already major source of capital for investment in infrastructure in Europe, both directly through project finance and direct ownership of assets, and indirectly through our investments in the debt and equity of utilities, developers and other infrastructure-related companies. Our members allocations to infrastructure, especially low carbon infrastructure, could be higher if the EU had adequate policy and regulatory frameworks. We are concerned about the risks climate change poses for the long-term value of our investments, and hence our ability to meet our obligations to our pensioners, policyholders and other stakeholders. Consequently, we are strong supporters of the EU s climate policy ambition as set out in the Energy Roadmap to Support for the EU vision for energy and climate Europe s long-term growth and competitiveness depends on having an efficient, secure, and cost-effective energy system. Concerns about the grave threats associated with climate change mean that this system must also have much lower carbon emissions than the one it replaces. In the Third Energy Package and the Energy Roadmap 2050, the EU outlines a compelling vision to achieve this: replacing its ageing energy infrastructure, fragmented across 27 member states, with an efficient, integrated, low carbon energy system. We strongly support this vision and the economic benefits it will bring. More widely, Europe s leadership on climate policy has played an important role in motivating the modest global agreements on carbon reductions to date. The EU remains important to achieving the more ambitious global deal that we need. For these reasons, we support a 40% target for greenhouse gas (GHG) emission reductions by 2030 on 1990 levels. A binding long-term target is important for building investor confidence in policy direction. 3 Investment requirements trillion capital required by To achieve the Roadmap vision requires substantial investment: approximately 1 trillion to , and around 7 trillion over the next 40 years. The investment includes new energy supply, storage, and transmission infrastructure, as well as energy efficiency, low carbon transport and other areas. Europe is looking to the private sector to provide most of this capital utility companies, developers, banks, and pension funds, insurers and other institutional investors. 2 EU Commission (2011) Energy Roadmap COM(2011) ECF, 2010 Roadmap 2050 Practical Guide to a Prosperous, Low Carbon Europe. attachments/files/volume1_fullreport_presspack.pdf and broadly consistent with the IEA 2012 Energy Technology Perspectives. 4 EU Commission (2010) Energy 2020: A strategy for competitive, sustainable and secure energy. COM(2010) 639 4

5 Following the financial crisis, private sector banks and governments are likely to play a more limited role in providing infrastructure finance than in the past. As infrastructure requires long-term patient capital, it is better suited to pension funds, insurance companies and other long-term investors than the short-term focused capital markets. Thus, institutional investors such as IIGCC s members are critical to implementing the Roadmap. 3.2 Investors require competitive returns IIGCC s members are obligated to invest capital to generate investment returns to provide long-term financial security for millions of pensioners, life insurance policyholders, and other savers. Investments in low carbon infrastructure must therefore provide a return that is attractive relative to both the risks inherent in the sector and other global infrastructure investment opportunities. We believe that European low carbon infrastructure can deliver competitive risk adjusted returns provided that it has the right policy framework. 3.3 Investors require a stable, long-term policy environment The scale of energy infrastructure projects and the long periods of time over which they repay their capital investment 20 years or more in some cases means that investors require a policy environment that is predictable and stable over the long-term. Without such stability, pension trustees and insurance investment professionals have great difficulty in allocating capital to the sector and assessing the risks. 3.4 The consequences of uncertainty Today Europe offers an unhelpful combination of much-repeated commitments to aggressive but distant decarbonisation aspirations (e.g. the 2050 Roadmap), together with an absence of effective, reliable, long-term policy instruments to achieve them. The former deters investment in carbon intensive assets. The latter deters investment in low carbon assets. If this uncertainty continues, the cost of capital for Europe s energy sector will be higher than need be and major investment decisions will be deferred 5, missing the opportunity to contribute to much needed economic growth. Ultimately, if uncertainty is too great, the sector may simply become un-investable. The risk is that much of the required 7 trillion of capital will not be deployed, and Europe s vision of an efficient, integrated, low carbon energy system the engine of future growth, employment and competitiveness will not be realised. Support for research, development and deployment (RD&D) is also crucial to drive innovation and drive down costs in the long-term. 4 Attracting institutional investor capital In order to successfully invest in low carbon energy infrastructure, investors have a number of requirements. Some of the requirements relate to carbon pricing and support for the low carbon transition, which are addressed in Section 5. Other requirements concern the wider regulatory environment for long-term investment in the energy sector, which are addressed first. 5 There are strong economic reasons for thinking that uncertainty creates incentives for deferred decisions Blythe and Yang (2007) Climate Policy Uncertainty and Investment Risk Climate_Policy_Uncertainty.pdf 5

6 We welcome the European Commission s Green Paper on Long-term Financing of the European Economy 6 and agree with much of the analysis within it. We support a coordinated policy approach to addressing the barriers to long-term investment which in turn will unlock the investment required in long term energy related infrastructure. 4.1 Accelerating institutional investors capital deployment Half of the finance for European renewables in the last decade has come from the banks through long-dated, non-recourse bank lending. However, new banking regulation (Basel III and CRD IV 7 ) and balance sheet de-risking mean that banks are much more constrained in their ability to provide project finance in this sector. We believe that institutional investors, including IIGCC members, could provide an important supply of private, stable, long-term capital. There is a good fit between the time horizons and inflation-linked income needs of institutional investors and the long-term returns produced by low carbon infrastructure projects. But for this to happen, there is an urgent need to develop new risk-sharing models, and to remove barriers to long-term investment. The EU Commission, together with the EIB and national institutions such as KfW and the newly formed UK Green Investment Bank, have an important role to play in catalysing this development. 4.2 Building a diverse ecosystem of investors The substantial capital required to finance Europe s low carbon ambition requires a healthy investor ecosystem - one that provides finance across the range of project stages and risk profiles (development, construction and operation), over different durations, meeting the needs of large and small institutional investors alike. We urge the Commission to consider gaps in this ecosystem and foster the development of a stronger finance ecosystem. 4.3 A wider range of investment structures The historic unlisted infrastructure fund model (limited life and using leveraged structures) is attractive to many investors, but not all. The traditional model will continue to play a role, especially during the risky development and construction stages which are still not fully understood by many investors. However, for an increasing number of pension funds and insurance companies, there is an appetite for direct investments and for lower-geared, longer dated structures, some of which are coming to market. We need to encourage the development of all of these. Direct investment is possible for the largest investors who can maintain their own teams, but not for many smaller investors. In markets where pension funds have greater scale, they have been able to build internal capacity notably Australia and Canada and used their scale to make cost efficient, direct, long-term, low carbon investments. 8 It would be helpful to develop new models that allow pension schemes to pool assets to invest in infrastructure assets alongside the existing infrastructure fund models, which are also evolving. The UK Pensions Infrastructure Platform (PIP), which is now being established, may provide a model. Under the PIP, several UK pensions, who are initially pooling 2 billion of capital, will invest in core operating UK infrastructure assets, seeking long-term inflation-linked returns with low leverage. 6 European Commission (2013) Green Paper on Long-term Financing of the European Economy. Brussels, COM (2013) 150 Final. 7 The fourth EU Capital Requirements Directive and Regulation which implements Basel III in Europe. 8 Climate Policy Initiative (2013) The Challenge of Institutional Investment in Low Carbon Energy. 6

7 Another barrier to large-scale institutional investment into the low carbon sector is the lack of public instruments for investment. Most pension fund and insurance capital is allocated to liquid, listed investments, and always will be. Most infrastructure investment to date has been through unlisted private equity and debt vehicles, where investors are required to commit to investments for years with little control over when investments are realised. Although some of our members can make illiquid investments, many institutional investors are required to invest in listed debt and equity. A much deeper pool of capital could be accessed if listed vehicles were available on a more widespread basis. In the United States, discussion is underway about modifying regulations to allow Real Estate Investment Trusts (REITs) and Master Limited Partnerships (MLPs) to invest in some forms of renewable energy, allowing the liquidity and tax advantages of these structures to be utilised for low carbon investment. Both investment structures have been tried and tested in the US for conventional hydrocarbon-based energy, and have played an important role in financing the booming energy sector. 9 Similarly, infrastructure project bonds could provide an attractive instrument, particularly if they can be structured to offer a strong credit rating (e.g. single A). This will require instruments that provide credit enhancement and remove construction risk. The EU-EIB Project Bonds Guarantee Facility is a welcome example of the kind of support that will be needed. 4.4 Removing barriers to investment Solvency 2 Many IIGCC members are European insurance companies and pension schemes that see the benefits of investing in long-term European energy infrastructure. However, the Solvency 2 legislation proposed by the Commission and the European Insurance and Occupational Pensions Authority (EIOPA) has created uncertainty about whether the new regulations will make it prohibitively expensive for European-based insurers and pension schemes to do this by restricting their ability to invest in some infrastructure bonds and possibly raising the capital costs of infrastructure investment. The current proposals stipulate that investors will need to reserve large amounts of capital against unlisted investments, including infrastructure. These rulings take no account of the fact that infrastructure assets are often low risk assets with liability matching characteristics such as inflation linked long-term payments. Due to the low risk, investors are willing to invest at relatively low margins compared to other asset classes, so that the return on any reserved capital required by proposed legislation will not be sufficient for investments to occur unless margins rise significantly. We welcome the recent announcements from the Commission that solvency type funding requirements will not be included in the upcoming review of the IORP directive 10 and we continue to caution about plans for any future requirements. 4.5 Removing barriers to investment TSO Unbundling We support the broad intent of the Transmission System Operator (TSO) unbundling provisions in the EU s Third Energy Package. It is important to introduce more competition and prevent conflicts of interests between generators and TSOs. However, we are concerned that the provisions have not considered the role of portfolio investors, who provide capital to both sides, but are not materially conflicted and do not affect competition. As drafted, the unbundling requirements, in effect, require us to choose between investing in equity in the generation sector or in the 9 According to Bloomberg, in 2012 there were over 75 listed MLPs in the United States, each with a market capitalization in excess of 500 million. Bloomberg Best and Worst Investments of 2012, Dec 12, According to JP Morgan s website the market capitalization of all US MLPs exceeds $200 billion. 10 Directive 2003/41/EC of the European Parliament and of the Council on the activities and supervision of institutions for occupational retirement provision. 7

8 transmission sector across the whole of Europe. If, as seems likely, investors prefer to invest in the lower risk transmission sector, this will potentially deny the generation sector access to our investment capital. We welcome Commission s interpretive note on unbundling. 11 This indicates that the Commission will allow investors to invest in both categories of infrastructure. However, we still have concerns the delay in achieving clarity and the hiatus in investment this is causing. Having raised the unbundling issue with officials from across Directorates as early as January 2012, we are surprised about the length of time it has taken for the issue to rise up the agenda. This has already led to an avoidable hiatus in investment in some markets due to the uncertainty in interpreting the provisions. And now, while the Commission s statement on unbundling is welcome, it does not end this hiatus. The fact that the statement has no legal status, and merely indicates a staff view of the principles the Commission expects to employ, means that investors will still need to await the accumulation of precedents from its future rulings before we have confidence to invest in more than one category of energy infrastructure. 12 We expect this uncertainty to delay investment further. 5 Investor needs from energy and climate policy In order to invest in low carbon energy infrastructure, investors have a number of requirements. 5.1 A carbon price signal The structural oversupply of permits in the ETS means there is no meaningful carbon price signal now, nor is there likely to be one for the rest of Phase III. To enable key priorities such as the shift from coal to gas, or to enable mature renewables (onshore wind, solar PV) to compete without subsidy, investors need a reliable, long-term carbon price signal. 13 We have publicly supported the proposal to backload allowances in Phase III. In our response to the Commission s consultation on structural reform of the ETS we have also supported the proposal to permanently remove the structural surplus of allowances. We are open-minded about the best mechanism. Bringing forward the review of the Linear Reduction Factor for EU carbon emissions is attractive, because it would also increase the longer-term visibility of the emissions trajectory to 2030 which we desire. 5.2 A more stable carbon price signal The price of carbon in the ETS has been extremely volatile and unpredictable. This uncertainty greatly reduces the value of the scheme as a price signal for investments in low carbon assets. The greater the uncertainty, the higher the carbon price needs to be to mobilise capital, the higher the cost of capital for low carbon projects, and the stronger the economic case for delaying investment decisions SWD(2013) Council of the European Union, Making the Internal Energy Market Work, Draft note 6212/3/13 REV 3 ENER April, Analysts advise us that below 25, the ETS has little or no economic effect on investment decision-making. 14 Studies show that the economic cost of uncertainty can be very high. Blyth, William et al. (2007) Investment risks under uncertain climate change policy. Energy Policy 35 (2007) uploads/2013/03/blyth-investment-under-uncertainty.pdf 8

9 Attempts to fix the ETS by tightening the cap or retiring allowances may have the desired effect in the short-term, they do not solve the problem. The current low price follows a price collapse in Phase II and a concerted effort to adjust the scheme precisely to prevent a price collapse in Phase III. This failed completely, underlining the radical price uncertainty that exists in the scheme. Ultimately, the only way to address this problem reliably is to implement a mechanism to introduce flexibility in allowance allocation so that it can respond to unexpected events. We urge the Commission to review the approaches other cap and trade schemes have taken to address this issue, and to consult on alternative mechanisms. Such mechanisms do require market intervention; but it is better to have a transparent mechanism to make predictable adjustments to a market following agreed principles, rather than to have periods of extreme prices followed by extended uncertainty about whether any ad hoc intervention will take place. This is the current situation. 5.3 Longer time horizons We are concerned that we are unlikely to have certainty about the post-2020 framework until 2015 or beyond. This is yesterday from an infrastructure investment perspective. Energy infrastructure projects require several years to plan and operate for decades. The shorter the time horizon over which there is policy certainty, the stronger the incentive for investors to defer investment. The longer we have to wait before the post-2020 policy framework is finalised, the stronger the economic incentive to defer investment decisions, which impacts on short-term economic growth and long-term risks for energy security. 15 Investors need a longer time horizon over which future policy is predictable. 15 years would be preferable. We would welcome even longer-term targets, particularly for 2040, which would further clarify the roadmap towards the 2050 objectives. The current short time horizon is not a one-off problem. If the EU continues with its episodic approach to target revision it will happen again. As we move into the second half of the next target period, the time horizon will again become too short, and investors will start to defer their investments. If the Commission is not able to set a target for 2040, we urge the Commission to review long-term targets more regularly, ensuring investors always have a target 15 years ahead, rather than leaving it till the mid-2020s to set the post 2030 target. 5.4 No more retroactive changes to support mechanisms There is an alarming growth in the number of member states who have implemented or are considering unplanned changes to their renewables support mechanism. In some cases these have a retroactive effect, weakening or eliminating the economic returns of existing investment projects. Retroactive changes destroy investor confidence in future projects in the countries concerned, and undermine credibility more generally across Europe as well as causing investors loss of income or wasted due diligence costs. A number of IIGCC members have low carbon investment assets at risk as a result of recent changes. Retroactive changes have caused many investors to put on hold, in some cases indefinitely, their review of low carbon investment opportunities in Europe. Investors accept that rapidly declining costs of installing new capacity justify some progressive changes to tariff structures. Investors also realise that tariffs supporting renewable energy are expensive and unsustainable in times of austerity. However, these changes should affect new projects, not existing investments. 15 Ibid (2007) 9

10 We ask the EU Commission to consider urgently what steps it can take under the Renewable Energy Directive, or otherwise, to prevent any further retroactive changes to renewables subsidies. The Commission should also draw up guidance on a set of key principles and design elements for an effective low carbon financial support regime. Best practice principles should be established for protecting individual investors at a national level: this would include a clear principle that rights are grandfathered to existing projects; and clear objectives and a roadmap for the future of such price support mechanisms. Where policy commitments are soft rather than hard, they must be made known to investors in advance so that they can be factored into investment analysis. 16 It may also be appropriate for the Commission to introduce requirements to stress-test the affordability and sustainability of member state support mechanisms. Generally, we suspect pan-european instruments will be more stable, and for this reason and the reasons set out below these may be a preferable approach Ensure policies do not drive energy market fragmentation As a result of the EU Renewables Target, member states have each taken their own approach to supporting renewables in order to achieve their mandatory targets. This creates new barriers to an integrated market in energy. The failure of the ETS to generate a reliable carbon price signal is now also creating pressure for some member states to create their own carbon tax systems, potentially undermining the price in the ETS still further, and creating new barriers to energy sector integration. We support the creation of the single market in energy, as a means to increase the efficiency and stability of the European energy sector. This is one reason why we support the pan-european ETS (with the modifications described above) to be the central instrument to level the playing field for investment in low carbon infrastructure in Europe. Where additional support instruments are needed, as the Commission has proposed, 18 these support mechanisms should be either pan-european or member state policies that operate within a strict framework which aligns them with the Single European market, and with the ETS. In line with this, we urge the Commission to explore ways to assist member states in designing instruments to support low carbon technologies in ways that avoid placing new barriers to the single market or undermining the ETS. 5.6 A more cost-effective approach to decarbonisation The Renewables Target has, until recently, been effective at driving investment in low carbon energy deployment. The considerable additional demand Europe has generated for these technologies has helped move them down the cost-curve, with global benefits. However, there are growing concerns about the affordability of this approach and its impact in undermining the ETS, which economists consider to provide a much more cost effective approach than currently. 19 The issue is partly that, in the context of a cap and trade scheme like the ETS, technologyspecific subsidies can mean that more expensive abatement options displace cheaper alternative 16 IIGCC position paper on EU Climate and energy policy, IIGCC-Position-Paper-on-EU-Climate-and-Energy-Policy.pdf 17 In other word, we support Option 4, or possibly Option 3 articulated in EU Commission Communication on Renewable Energy: a major player in the European energy market (2012) 18 We support Option 4 (or 3) in the EU Commission Communication on Renewable Energy: a major player in the European energy market (2012) 19 Goulder, L. H., & Parry, I. W. H. (2008). Instrument Choice in Environmental Policy. Review of Environmental Economics and Policy, 2(2),

11 ways to reduce emissions, raising overall costs without reducing emissions overall. 20 In addition, there is a danger that member state-specific subsidies can drive sub-optimal prioritisation of technologies. Deployment is more optimal in Spain for solar, and in Scotland for wind, than for either in Germany, where the framework has driven most of the deployment. 21 Europe s competitiveness and future growth depends on a cost-effective energy system. Political support for decarbonisation depends on making the transition in an affordable way. So we support making the ETS central to climate policy in future. Economic analysis indicates this would be the most cost-effective approach. Other benefits include better alignment with a single market in energy; the generation of auction revenues to support technologies and regions that need special transitional support; 22 and emphasising the principle that polluters should pay for the harm they do. 5.7 On-going support for less mature low carbon technologies By 2020, mature, appropriately located, renewable power projects should be able to compete without subsidy, as long as conventional fuels are paying a reasonable charge for the social and economic costs of their pollution via the ETS. 23 This is a welcome milestone, and partly the result of the extensive support these technologies have received from EU member states in their early stages of development. Some important low carbon technologies are not yet mature and will require support beyond 2020 (e.g. offshore wind); Carbon Capture and Storage (CCS) requires support to test whether it can become cost-effective at commercial scale. The Commission should take steps to ensure less mature technologies receive the support they need. This will reduce the long-term costs of the transition to low carbon technology, and bring the additional benefit of possible technological leadership. We support the Commission s proposals that instruments operate on a pan-european basis, and that they complement the ETS, rather than competing with it. 24 The CCS certificates system proposed in the recent Commission discussion paper provides an interesting example of a possible complementary policy design Support for action on energy efficiency IIGCC s members have supported improvements in energy efficiency in various ways, including encouraging action by companies in which we invest, and investing in energy efficiency technology and service companies. A key focus relates to the investments members have in commercial real estate. IIGCC has recently proposed a number of policy recommendations to strengthen the regulatory framework for energy efficiency in real estate. 26 Here we consider the most significant issues relevant to the post-2020 climate policy agenda. Buildings account for 40% of the energy consumption in the EU. Our experience confirms that large cost-effective carbon reductions are available in the building and infrastructure sectors. 20 Frankhauser et al Combining multiple climate policy instruments: how not to do it 21 The additional costs of geographically sub-optimal renewables deployment has been estimated to be over 180bn by Abbosh, 2009, Accenture 22 Vivid Economics. (2012). Carbon taxation and fiscal consolidation: The potential of carbon pricing to reduce Europe s fiscal deficits. Report prepared for the European Climate Foundation and Green Budget Europe. 23 We suspect European voters will be more supportive of a European climate policy that focuses on making polluters pay a reasonable price for the harm they do, than one that focuses on offering special subsidies to particular industries. 24 See Fig 1 above, for an illustrative example. This point is also made by Grubb, M (2012) Strengthening the EU. ETS goo.gl/1uapw 25 EU Commission (2013) Communication on the Future of Carbon Capture and Storage in Europe, IIGCC (2012) Enhancing the Real Estate Sustainability Policy Framework 11

12 However, action on energy efficiency can be insensitive to price, therefore additional policy support is required in addition to the ETS. We have welcomed the Energy Efficiency, Energy Performance of Buildings and Eco-Design directives; we think they are driving valuable change. We encourage building on and improving these existing frameworks rather than creating additional unrelated mechanisms. We have concerns that policy drivers of energy efficiency in Europe are unnecessarily fragmented and would like to see a more harmonised European approach. Individual mandatory member state targets may lead to fragmentation, so we would prefer to see a pan-european target, backed by clearly defined member state energy efficiency roadmaps and harmonised, mandatory instruments. Relating to the energy efficiency standards of new buildings and refurbishments, these may include, for example, a standardisation of design-based Energy Performance Certificates methodologies and definitions across member states and the parallel introduction of mandatory requirements for Display Energy Certificates, which reflect the buildings actual operational performance. It is also important that anticipated improvements to energy efficiency within ETS sectors are taken into account in the allocation of allowances. Improving energy efficiency in the built environment has significant macro-economic implications for job creation and growth by Energy efficiency investments could generate considerable financial savings to government and society, stimulate economic activity and job creation and deliver substantial health benefits Competitiveness and Growth in Europe The argument is sometimes made the Europe s economic difficulties mean that now is not the time to embark on a costly exercise in building new low carbon energy infrastructure. Against this, is the argument that the reason for Europe s low growth is a failure to restart investment, not energy costs. 28 Enabling the 1 trillion of investment in energy infrastructure required by the low carbon transition by 2020 could be a useful net contributor to short-term growth, with strong multiplier effects across the economy. 29 Furthermore, the infrastructure delivered by this investment will be much less dependent on fuel costs 30 than that being used by our international competitors, and could eventually provide a source of lasting competitive advantage for Europe. However, there are legitimate concerns about the impacts of carbon prices and higher energy prices on energy intensive companies in Europe and around carbon leakage. The move to a more integrated and cost effective system of support for low carbon investment proposed above will help to reduce the impact of the transition in the energy sector. We support the need for a detailed review of this issue and of necessary adjustments to existing support mechanisms. 27 IEA (2012) Spreading the net: the multiple benefits of energy efficiency improvements insights/ee_improvements.pdf 28 Gross fixed capital formation in the euro area fell to 18.7% of GDP in 2010, the lowest level in more than 40 years. See Zhengelis (2012) in 29 Spencer et al. (2011) Exiting the crisis in the right direction: A sustainable and shared prosperity plan for Europe goo.gl/lr445 and see Griffiths-Jones et al. (2012) Shifting Europe from austerity to Growth IEA (2012) Energy Technology Perspectives 12

13 7 The need for urgency Forthcoming EU parliamentary elections and replacement of the current Commission may lead to pressure to defer action for several years. This would be a mistake. The Large Combustion Plant Directive, the Industrial Emissions Directive, and other member state policies mean that Europe will be retiring most of its fleet of coal-fired power stations (and German nuclear) over the next 15 years. The choice of replacement technology will have a major and perhaps decisive impact on Europe s ability to meet the targets set by the 2050 Roadmap at a reasonable cost. The lead-times for investment decisions in power generation projects mean that the key decisions are starting to be made now, and most will need to be made before the end of this decade. In addition, one useful way to restart growth in Europe is to increase investment in productive infrastructure. 31 Given the need for growth is urgent, the sooner this can begin the better. Large scale investment in Europe s energy infrastructure is necessary and urgent, but it is being blocked by policy uncertainty. The current Commission must produce draft legislation this year, so that the new Commission can move rapidly to draft the necessary directives in See Griffiths-Jones et al. (2012) Shifting Europe from austerity to Growth. 13

14 IIGCC Membership, June 2013 Amundi AP1 (First Swedish National Pension Fund) AP2 (Second Swedish National Pension Fund) AP3 (Third Swedish National Pension Fund) AP4 (Fourth Swedish National Pension Fund) APG Asset Management ATP Aviva Investors AXA Real Estate Baptist Union of Great Britain BBC Pension Trust Bedfordshire Pension Fund BlackRock BMS World Mission BNP Paribas Investment Partners BT Pension Scheme CB Richard Ellis CCLA Investment Management Central Finance Board of the Methodist Church CF Partners (UK) LLP Church Commissioners for England Church Investors Group South Africa Church of Sweden Climate Change Capital Co-operative Asset Management Corporation of London Pension Fund Dragon Capital Group Ltd. Earth Capital Partners Environment Agency Pension Fund Environmental Technologies Fund ERAFP Ethos Foundation F&C Management Ltd First State Investments Five Oceans Asset Management Generation Investment Management LLP Greater Manchester Pension Fund Grosvenor Fund Management Henderson Global Investors Hermes Hermes GPE LLP HgCapital HSBC Investments Impax Asset Management Insight Investment Joseph Rowntree Charitable Trust Kent County Council Pension Fund Kleinwort Benson Investors Legal & General Investment Management London Borough of Hounslow Pension Fund London Borough of Islington Pension Fund London Borough of Newham Pension Fund London Pensions Fund Authority Mayfair Capital Investment Management Merseyside Pension Fund Mercer Global Investments Europe Limited Mn Services Nordea Investment Funds Panahpur PensionDanmark PGGM Investments Pictet Asset Management SA PKA Platina Partners PRUPIM Railpen Investments Representative Body of the Church in Wales Robeco Sampension Sarasin & Partners LLP Scottish Widows Investment Partnership Servite Friars South Yorkshire Pensions Authority Temporis Capital The Church of England Pensions Board The Roman Catholic Diocese of Plymouth The Roman Catholic Diocese of Portsmouth The William Leech Foundation United Reformed Trust Ltd. Universities Superannuation Scheme West Midlands Metropolitan Authorities Pension Fund West Yorkshire Pension Fund WHEB Group Institutional Investors Group on Climate Change THE INVESTOR VOICE ON CLIMATE SOLUTIONS