Climate Policy Uncertainty and Investment Risk

Our climate is changing – this is certain. Less certain, however, is the timing and magnitude of climate change and the cost of transition to a low-carbon world. Certainly, too, our climate is changing. Less certain, however, is the timing and magnitude of climate change, and the cost of transition to a low-carbon world. Therefore, many policies and programmes are still at a formative stage, and policy uncertainty is very high. This report identifies how climate change policy uncertainty may affect investment behaviour in the power sector. For power companies, where capital stock is intensive and long-lived, those risks rank among the biggest and can create an incentive to delay investment. Our analysis results show that the risk premiums of climate change uncertainty can add 40% of construction costs of the plant for power investors, and 10% of price surcharges for the electricity end-users. Climate Policy Uncertainty and Investment Risk tells what can be done in policy design to reduce these costs. Incorporating the results of quantitative analysis, this publication also shows the sensitivity of different power sector investment decisions to different risks. It compares the effects of climate policy uncertainty with energy market uncertainty, showing the relative importance of these sources of risk for different technologies in different market types. Drawing on extensive consultation with power companies and financial investors, it also assesses the implications for policy makers, allowing the key messages to be transferred into policy designs.