The need for credible INDC’s
I attended a session yesterday at which Lord Nicholas Stern spoke on the need for credibility in national actions towards meeting their INDC’s. He noted that large-scale action is needed to address climate change and credible INDC’s are needed to give investors certainty in the behaviour of governments and the international community.
Recent experience from my home country has demonstrated that government induced policy risk is the single greatest deterrent to green investment. After their election in September 2013, the new Australian government moved to repeal the carbon tax instituted by its predecessor, abolished the Climate Commission and defunded a range of renewable energy programmes. This rapid change in policy direction caused tremendous investor uncertainty resulting in a 70% drop in investment in renewable energy projects.
Certainty is important to green investment as these investments are typically in new, sometimes untested, technologies that have complex dependencies and require large investments with long-term returns. For investors to be willing to make these investments, they need confidence that government policy will not change in such a way as to undermine the value of their investment within a reasonable timeframe.
The reality is that, while we cannot give certainty, it is possible to take steps to reduce uncertainty to enhance investor confidence. Lord Stern noted that sound legal structures that encourage stakeholder engagement processes and effective market signalling before policy decisions are reversed is a key component of enhanced confidence and credibility. As an example, he pointed to China’s 5-year plans which, once accepted, become part of their legal structure and give the market confidence in government behaviour over a reasonable time period for long-run investments. While the Chinese example is certainly not translatable to countries like Australia, it is clear that structures must be found to give investor confidence in the credibility of INDC’s.