Green investment going East

The $7 billion venture announced by US aluminium giant Alcoa to pursue clean energy and other opportunities in China should not come as a surprise.

China is offering the best opportunities for investors in low-carbon technologies and it's not just because of the size of its economy: Despite its refusal to sign a legally binding cap on its emissions – at least without the US doing the same – China is getting a jump on its biggest economic rival because of the strength of its domestic policy-making.

This has implications not just for international corporates, but also for Australia's own policy decision-making, which some would prefer to benchmark with the pace of international negotiations. That approach ignores the pace of domestic policy-making in some of Australia's key trading partners and elsewhere. If you follow the flow of investment dollars – and there has been about $260 billion in clean energy alone in the past year – it is clear that Australia's failure to implement coherent climate and energy policies represents a significant sovereign risk.

A recent report by HSBC analysed the policies of 10 key countries, including Australia, and concluded that China was far and away the most attractive destination for low-carbon investments, followed by other emerging economies (and heavy emitters) such as India, South Korea and South Africa.

HSBC says it expects 2011 to be a big year for China. Most interest will centre on the next five-year plan that will be finalised in March and will flesh out measures to promote the country's seven new “emerging strategic industries”, the so-called Magic 7, which includes energy conservation, environmental protection, new energy technologies and electric vehicles, as well as bio-technology and high-end manufacturing (high-speed rail).

China expects the “Magic 7” to account for 15 per cent of GDP by 2020, compared to 3 per cent now. The growth in these industries will be supported by its commitment to cut its carbon intensity by 40-45 per cent by 2020, a renewed impetus on energy efficiency, a boost to high speed rail, a doubling in renewable energy capacity and a five-fold increase in nuclear. “Although we do not expect a national carbon cap-and-trade system to be introduced yet, we do expect city, provincial and sectoral pilot schemes to get underway,” HSBC says.

India's Planning Commission, HSBC notes, will this year release its strategy on how to meet its voluntary target to reduce emissions by 20-25 per cent below 2005 levels by 2020. The country has already implemented a renewable energy certificate trading system, just like Australia, and will seek to lift the share of renewable power by 1 per cent per year. It also has created a “Green Bank” which will be charged with managing the estimated $1 billion a year in annual revenue that will come from the $1 a tonne tax on coal announced in last year's budget. And it will be introducing an energy trading scheme this year, to boost industrial facility, introduce fuel efficiency standards, and provide incentives to electric vehicle manufacturers.

South Korea, meanwhile, is expected to continue its 'green growth' momentum, with the government injecting another $1 billion in funds to develop new and renewable energy sources, which it hopes will be able to provide $40 billion in exports in the sector by 2015. It aims to replace all incandescent bulbs with LED lights by 2013, offer tax incentives for electric vehicles, and has set emission reduction targets for 374 companies that must be achieved by September this year. Most significantly, the government is expected to introduce legislation for an emissions trading scheme that could be launched in 2013.

HSBC also anticipates a “pivotal year” for climate policy in South Africa, which will host the next climate change summit in Durban in November and December. The government is due to release a white paper in the middle of the year that will contain draft proposals for a carbon tax. A green paper released in December suggested could this begin at $US11 a tonne, before being ramped up to $US29 a tonne. South Africa already has a carbon energy tax on new vehicles (introduced in September) and will extend this to vans in March. The government is also expected to begin signing power purchase agreement on 20 gigawatts of renewable energy developments and 4 gigawattas of co-generation plants that have already been identified.

This contrasts with a broadly neutral stance in the EU, where cuts in renewable energy subsidies have slowed the pace of investment, and which is unlikely to lift its emissions reduction targets to the mooted 30 per cent from 20 per cent while international talks remain in limbo. Still, the EU is expected to introduce a raft of efficiency measures relating to energy and heating systems in buildings, stringent new emissions standards for cars, and its ETS will be expanded from next year.

HSBC gives the US a negative policy position, because there is no chance of any climate legislation this year in the Republican-dominated Congress; just a 50-50 chance of a new energy bill and where the Obama administration is battling to protect the EPA's powers to regulate emissions. The extension of treasury grants will keep alive support for wind and solar investments and HSBC sees continued momentum in energy efficiency measures, but it expects that the focus will return to states such as California, which will introduce a multi-sector cap-and-trade program in 12 months time, and Massachusetts, which will detail its plans to cut greenhouse gas emissions by 25 per cent below 1990 levels by 2020.

Japan has delayed its plans to introduce emission trading by 2013 under pressure from some business lobby groups, but the government still intends to introduce an “environmental tax” on fossil fuels, such as imported coal, from October this year, and will promote investment in renewables by requiring utilities to buy electricity generated from renewable energy sources at relatively high fixed prices from 2012. The Japanese government also plans to introduce policies to ensure that 40 per cent of houses are “energy efficient” by 2015 and that 50 per cent of the car market is taken by “next generation” vehicles (read electric and hybrid) by 2020.

Which brings us back to Australia: HSBC's take is for continuing uncertainty over Australia's strategy to regulate carbon this year, which translates into negative ratings for carbon markets and climate strategy. HSBC has also downgraded its momentum score for renewables from positive to neutral, despite the fact that the enhanced renewable energy target came into force on January 1.

This translates into a paltry flow of investment dollars into the clean energy market in Australia – although this seems not to worry the government, which prefers to rejoice in the billions coming into LNG projects. Just how this feeds into the popular policy debate in Australia will be interesting. The first taste should come early next month, when Professor Ross Garnaut delivers the first of eight scheduled updates of his climate change review. The first update to be delivered on February 3, at the Monash Sustainability Institute in Melbourne, will be on “weighing the costs and benefits of climate change action.” Further updates will be produced every fortnight, or until a final update of his review is delivered at the end of May. The debate is about to get serious again.