IHDP Open Meeting 2009 Interview with Mark Fulton

Global head of Climate Change Investment Research
DB Climate Change Advisors
Deutsche Asset Management, New York, USA

By Sarah  Mekjian / IHDP Secretariat

“The conference really reminded me that the financial markets that are addressing climate change investment are forged by a social consensus where scientists and political economists play a fundamental role in shaping public opinion.”

Bonn, 30 April 2009

SM / IHDP:
The financial crisis is currently on everyone’s lips. In the face of this crisis, as you illustrated in your keynote, investment levels in general have sunk, and especially levels of green investment...

MF:
I wouldn’t say that green or climate change investing has suffered disproportionately. Investing and investment markets in general have been under stress for the past year both in equity and debt markets. I would say that the green theme has got caught up in that.

SM / IHDP:
So you would say that green investment is a victim of the same stressors that have been plaguing other forms of investment.

MF:
Yes. But the key thing to remember is that this is short-term. With many of the investors that we talk to as well as the companies involved, I see a lot of long-term underlying demand for green products and services. Over the past year or 18 months, this has been held back by financial constraints – but once the recovery begins, green is going to be big in our view.

SM / IHDP:
Could it be that this crisis is actually just the opportunity we need to bring about change?

MF:
Yes, I think now this is a fairly common theme both amongst politicians and economists. We originally started talking about it last October. At that point it was fairly obvious that large fiscal stimuli would be used in which governments would step in as spenders of last resort. Why not give this stimulus to sectors that have a long-term benefit and thereby achieve some of these goals that governments have set out to achieve in terms of global challenges such as climate change? What has been very encouraging is that this idea has been echoed through financial markets and governments. In the stimulus packages that have come out around the world, we have seen some fairly substantive measures dealing with the key infrastructure themes that could be termed green, in areas such as renewable energy, public transport, the power grid and…

SM / IHDP:
Energy efficiency…

MF:
Right, particularly in buildings. We did an analysis of the stimulus packages where we saw numbers of over 200 billion dollars globally. Some have even estimated those numbers are up to 400 or 500 billion dollars. Such stimulus packages have addressed quite a few of the green areas I mentioned. We have spent a lot of time looking at the US stimulus package, for example, and I think the package has definitely engaged those four sectors I just described. Additionally, recent changes to tax credits around renewables and loan guarantee programs could be very beneficial to project finance and to the scaling up of renewable energy technologies in the medium-term.

SM / IHDP:
Throughout the IHDP Open Meeting 2009, there has been a real sense of urgency communicated. In the last plenary, Prof. Roberto Guimarães stated that we know enough, but what we really need is to implement what we know and act. Of course, this position has received some criticism, as many believe that we do not really know enough. If you take biofuels, for example, there have been situations in which we have acted too rashly on the knowledge we thought we had. How do we balance these two very different positions in terms of investment?

MF:
I think that’s a fair question. When we say that we know enough, I think a lot of us are saying that we know enough to accept the science. We know that you need a good policy environment, so we are concentrating on that, whether in terms of carbon markets, traditional regulation or innovation policy. I think that is, to some extent, what we talk about when we say we know we need to act and we need to act now. When it comes to specific technologies, nothing is ever perfect from the start. We are going to see some things succeed and some things fail and some things that need to be reevaluated as we go along. Taking the biofuels story, for instance, I think what is happening there is that people realize they need to look at the type of biofuels that are being proposed. Are they sustainable? What impact do they have on the environment? I think that is natural in any large endeavor. When it comes to what is really being geared up in electricity markets, wind, for example, is not particularly controversial. We know its advantages and we know it has some drawbacks to do with…

SM / IHDP:
Migratory birds…

MF:
Yes, there are some drawbacks around birds – but people are working on that.  And I think the general view is that we know what we are dealing with here and that is something that we need to continue to deploy because we know it can make a big impact. Wind is improving, it is pretty well proven and has been approaching grid parity in the electricity systems of many regions. This is, of course, dependent on the underlying energy prices, but there is a large opportunity in deploying wind. When it comes to solar, we’ve got proven technologies in PV. I think one exciting technology beginning to be proved at demonstration scale is that of solar thermal plugs, which, in my opinion, have the potential to offer utility scale power.

There are, indeed, several technologies that have been demonstrated and are being scaled up, although the cost is still often high. There may also be some environmental impacts that need to be fully assessed around these new technologies. For example, there is a question in solar about water and land use, but the latter, for instance, can be minimized if panels are placed in the desert or semi-desert. With combined heat and power as a distributed generation model -- which is a very popular technology in Europe -- we are not talking about rocket science, just high degrees of efficiency that can be improved. Take the energy efficiency market itself. It is often very simple stuff that just needs to be applied and needs the world to deploy it. We’ll always be looking to see if there is something we missed and refining accordingly. When we go to scale on a technology, it will have to be tested. I think most believe that some of the technologies being scaled at the moment are pretty reasonable and pretty well-tested and that’s what we mean by, “let’s get on with it”.

SM / IHDP:
So what needs to change, in your opinion, to bring the private sector on board and enhance communication? What do scientists need to do? What incentives are needed?

MF:
Well, we’ve always worked on the model that the scientists would persuade society and governments, and then governments would act to price the externality, and then markets would act on that. But while there is a set of socially responsible investors out there, who, after talking to scientists, decide they are prepared to invest in something for socially responsible reasons, we think the largest amount of capital will be deployed because there is an economic return. The economic return will have to initially be created by government policy, and then, as these industries reach scale, it’s likely that they will compete against existing fossil fuel sources in their own right at some point. But in the initial phase of new industries, it’s standard economic theory that you would incentivize them and you would bring them to scale before they bring their costs down.

SM / IHDP:
Do you think we are almost there? Many countries are establishing national carbon trading schemes or have voluntarily ones in place.

MF:
I think there’s a very long way to go in carbon markets.  I think it’s encouraging to note that things are moving but we need to see more action in carbon markets and we are hoping to see a lot more come out of the US political system and ultimately out of the Copenhagen process at some point. What I would also say, is that certainly in the initial stages, policy theory shows that you need to combine carbon markets with traditional mandates, standards and specific incentives for proven technologies that need scaling. You also need innovation policy to spur exciting new discoveries which could create new industries, jobs and also generate cost reductions along the way. So you need all of that in play. When you look around the world, what you’ve really got at the moment is traditional mandates and some innovation policy. Certain countries and regulators have or are moving towards carbon markets, but the challenge will be to make that carbon market become more of the price signal in the long run.

SM / IHDP:
Bringing it back to the IHDP Open Meeting 2009, what role do you see such meetings playing in raising awareness and driving the implementation we need?

MF:
Well we are very supportive of the discussion. We think it’s very important. We believe that public awareness and public education still remains extremely important. We publish our research in the public sphere because we believe that the financial markets are only going to be successful within the overall society that meetings like this address. IHDP addresses the forces in play in society and in government that we in the financial markets will end up interacting with. That’s why we keep saying this is a public private partnership. Obviously meetings like this are important because they bring different stakeholders together. Maybe you don’t see so many people from the finance sector here but there are a lot of people out there who are really interested in this. So again, you can talk about social capital but I think, from our standpoint, with properly constructed policy pricing the externality, this is a major economic force for capital markets. That’s been our position. We want to play the role within that ambit that is necessary to solve this problem.

SM / IHDP:
What did you take away from the IHDP Open Meeting 2009?

MF:
If you are in financial markets, what you are basically saying is that efficient pricing of the externality and efficient broader policy and regulation will indeed cause capital to be deployed. That’s really what financial markets need to do -- get the proper price and policy signals. But those price signals and that policy have to be enacted by politicians. Politicians, in turn, have to get elected and they have to operate within civil society. The conference really reminded me that the financial markets that are addressing climate change investment are forged by a social consensus where scientists and political economists play a fundamental role in shaping public opinion.

SM / IHDP:
Thank you very much.

MF:
It was a pleasure.

Photo Copyright Mike Le Gray 2009.

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