EUROPE - The Institutional Investors Group on Climate Change (IIGCC) has proposed a number of measures to boost the effectiveness of carbon markets and raise money from the private sector to fund climate change mitigation.

In its report on carbon markets, the IIGCC, which represents around €4trn of assets, noted that while carbon markets reached $110bn in 2008, investors need stronger price signals from emission trading schemes (ETS) to give them the confidence to make long-term investments in low-carbon solutions.

The group, whose 52 members include pension funds such as ATP and the Universities Superannuation Scheme (USS), highlighted a need for clarity on long-term policy post-2012 to reduce price volatility, while caps on ETS should be consistent with agreed targets but ambitious enough to create scarcity and demand.

As the IIGCC warned,"carbon markets have not delivered the scale of investment needed and at the pace required to avoid dangerous climate change".

It suggested this is partly because of the lack of long-term price signals, however it added uncertainty around the nature and level of national commitments and the likely reform of the rules and structure of the Clean Development Mechanism (CDM) are all "undermining investor confidence".

David Russell, co-head of responsible investment at USS, said: "As carbon trading schemes continue to evolve on a regional or national basis, it will be important to ensure that each scheme's allowances and credits are compatible across multiple markets. This measure would pave the way for a single global carbon market, which in turn would allow emissions reductions to be achieved at the lowest possible cost, increase liquidity and create a truly global carbon price."

Meanwhile, in a second report on sources of finance outside of carbon markets, the IIGCC argued "carbon markets and the CDM will not deliver the financial flows necessary to meet all climate change mitigation and adaptation needs. It is therefore important to explore other sources of finance".

The organisation claimed "strong, stable, transparent, coherent and credible long-term national policies are the key for catalysing private sector investment", while an international system registering, overseeing and reviewing national climate change action plans would provide investors with greater confidence.

It highlighted that an attractive environment for foreign investment is "critical" to stimulating climate-related investment in emerging markets by private sector institutions from developed countries, and warned governance, transparency, trustworthy legal systems and appropriate tax regimes are all important elements.

Rob Lake, head of sustainability at APG Asset Management, said: "A coordinated approach among governments would help counter the development of a complex patchwork of policies which risks preventing the international deployment of private capital, innovation and entrepreneurialism on the scale and with the urgency required."

The report also considered proposals for 'climate bonds' guaranteed by OECD countries, but warned the willingness of institutional investors to invest in these will be determined by the risk-return characteristics, as they need to be liquid with competitive yields, while also producing "credible evidence" that tangible climate change benefits will be delivered.

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