Policy Uncertainty, Investment and Commitment Periods

Executive Summary

The role of commitment periods in the climate challenge

Today’s investment decisions in key sectors such as energy, forestry, or transport have significant impacts on the levels of greenhouse gas (GHG) emissions over the coming decades. Given the economic and environmental long-term implications of capital investment and retirement, a climate mitigation regime should aim to encourage capital investment in climate-friendly technologies.

Key Points:

1. Commitment Periods:

   • Commitment periods are crucial for guiding long-term investments.
   • They help mitigate the risks associated with policy uncertainty and ensure smoother economic costs.

2. Advantages of Longer Commitment Periods:

   • Economic Flexibility: Longer periods allow better accommodation of short-term emissions variability and smoother economic costs.
   • Investment Incentives: They provide stronger incentives for long-term investment decisions.
   • Administrative Costs: Longer periods reduce administrative burdens.
   • Environmental Signal: They offer a clearer long-term environmental signal.
   • Negotiation Costs: Longer periods lower the negotiation costs.

3. Advantages of Shorter Commitment Periods:

   • Flexibility: Shorter periods offer greater long-term flexibility.
   • Short-Term Signal: They provide a stronger short-term signal.
   • Political Flexibility: Shorter periods offer more political flexibility.
   • Target Consistency: They reduce the likelihood of overly stringent or lax targets.
   • Monitoring and Compliance: Shorter periods may make monitoring, verification, and compliance easier.

4. Setting Commitment Periods:

   • Options: Various options exist, including "rolling" commitment periods and the "Gateway" proposal.
   • Timing: Decisions on commitment period length need to consider timing and types of commitments.
   • Participation: Questions around participation and monitoring and compliance need to be addressed.

5. Conclusions:

   • The choice of commitment period depends on various factors, including the need for flexibility, clarity, and practical implementation.
   • Collaboration among stakeholders is essential to effectively set and implement commitment periods.

References

• [List of references]

Glossary

• [List of terms and definitions]

Figures

• Figure 1: The impact of climate policy uncertainty on investment decisions.
• Figure 2: The trade-off between long and short commitment periods.
• Figure 3: Illustration of the Australian gateway mechanism: The Federal Proposal.
• Figure 4: Timing issues related to the decision on commitment period length.