Funds Fueling Green Energy Run Dry

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"The United States, Australia and Japan can learn from the mistakes made in Europe. . .by insisting that industry buy carbon permits from the outset instead of getting them for free, and by creating a carbon bank."

Investment in wind, wave and solar power should be booming after the European Union adopted an ambitious goal last year to draw 20% of its energy from renewable sources by 2020 to help fight global warming.

But the credit crunch, economic recession, the spectacular fall in oil prices since last July and a record low European carbon price have cooled investors' ardor.

New Energy Finance, a consultancy, forecast zero investment growth in climate-related companies this year, after a spectacular growth rate of 60% in 2006 and 2007.

"The commercial lending market is holding back and, until that can be addressed, it's going to be a major constraint," says Christopher Knowles of the European Investment Bank.

Yet to achieve the EU's 2020 target, investment decisions need to be made soon on long-term projects to build a smart electricity grid, giant offshore wind farms and networks to bring renewable energy to Europe's industrial heartland.

How can the private investment logjam be broken?

One way could be to extend the public support system through which countries like Germany and Spain guarantee higher-than-market prices to generators of renewable energy. The system provides secure revenue to green power producers, making their projects as safe investments as municipal bonds.

Critics, however, say it inflates the cost to consumers and taxpayers. For example, the price guaranteed for photovoltaic energy is 20 times the cost of electricity from conventional power plants.

Another idea is to put a floor under the carbon price by creating a carbon central bank that could withdraw emissions allowances from the market if the price fell below a certain level and issue extra permits if it rose above a fixed ceiling.

Mark Lewis of Deutsche Bank, says that carbon prices are artificially low because firms have been selling off emissions permits they received for free to raise short-term cash that they can no longer borrow. "This sends the wrong price signal for investment and for changing consumer behavior," Lewis said.

A record low price of 9.5, or $12.17, a ton, recorded last week, makes it more economical to build new coal-fired power stations than to invest in renewable energy and smart infrastructure.

A carbon bank, like a monetary central bank, would be empowered to intervene if market forces were not achieving the desired policy objectives, and the mere threat of intervention might be enough to curb speculative peaks and troughs. However, a reform of the EU's Emissions Trading Scheme just adopted for the period 2013-2020 contains no such provision.

The United States, Australia and Japan can learn from the mistakes made in Europe, Lewis says, by insisting that industry buy carbon permits from the outset instead of getting them for free, and by creating a carbon bank.

But to Claude Turmes, a leading European Parliament member on climate issues, the money is too thinly spread to break the investment deadlock in renewable energy. The Luxembourg Greens lawmaker says it would be better to use the money to leverage credit from the EU-owned European Investment Bank at subsidized interest rates to build the infrastructure backbone needed to transport renewable energy.

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