Climate Policy Uncertainty and Investment Risk

Climate Policy Uncertainty and Investment Risk You do not have access to this content

International Energy Agency

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09 May 2007
9789264030152 (PDF) ;9789264030145(print)

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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. Therefore, many policies and programmes are still at a formative stage, and policy uncertainty is very high. 


This book 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. This book is a useful tool for governments to improve climate policy mechanisms and create more certainty for power investors.

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Table of Contents

 Executive Summary
 Approach to Quantifying Uncertainty
 Risk Premiums
 Use and Interpretation of Results
 1. Introduction
 -Climate Change Uncertainties
 2. Approach to Quantifying Uncertainty
 -Relevance to Policy Makers
 -How Do We Represent Uncertainty?
 -How Does the Model Work
 -Interpretation of Options Value
 -Modelling Prices
 -Limits of the Modelling Approach
 3. Investment Threshholds
 -CO2 Price Risk
 -CO2 and Fuel Price Risk
 -Policy Options
 4. Company Perspectives on Managing Risks
 -Importance of Marketing Structure
 -Climate Change Policy Risks in the New World
 -Technical and Other Risks
 -Managing Risk
 5. Implications for Policy Makers
 -Implications for Energy Projections
 -Creating Policy Uncertainty
 Appendix 1. Technology Assumptions and Result Summary
 Appendix 2. Technology Interaction Effects
 Appendix 3. Companies Consulted During the Study

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