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Climate Policy with the Chequebook An Economic Analysis of Climate Investment Support

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  • Karol Kempa and Ulf Moslener

Abstract

Across the globe, climate policy is increasingly using investment support instruments, such as grants, concessional loans, and guarantees - whereas carbon prices are losing importance. This development substantially increases the risk of inefficient public spending. In this paper, we examine the ability of finance instruments to effectively and efficiently address market failures related to clean energy investments. We characterise these market imperfections - emission externalities, knowledge spillovers and capital market imperfections - and identify their negative impacts on the investor-relevant risk-return characteristics. We argue that finance instruments are able to address the effects of these market failures. However, a carbon price is superior in internalising the emission externalities. With respect to the latter two inefficiencies, investment support instruments can effectively compensate the market failures if designed appropriately. We further provide policy recommendations on the choice of finance instruments to address the various market failures and guidance on how to use these instruments avoiding inefficient government spending.

Suggested Citation

  • Karol Kempa and Ulf Moslener, 2017. "Climate Policy with the Chequebook An Economic Analysis of Climate Investment Support," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 1).
    • Handle: RePEc:aen:eeepjl:eeep6-1-kempa
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    Cited by:

    1. Tao, Hu & Zhuang, Shan & Xue, Rui & Cao, Wei & Tian, Jinfang & Shan, Yuli, 2022. "Environmental Finance: An Interdisciplinary Review," Technological Forecasting and Social Change, Elsevier, vol. 179(C).
    2. von Schickfus, Marie-Theres & Garnitz, Johanna & Rathje, Ann-Christin & Wohlrabe, Klaus, 2021. "Herausforderung Klimaschutz: Jahresmonitor der Stiftung Familienunternehmen," Studien, Stiftung Familienunternehmen / Foundation for Family Businesses, number 250023.
    3. Haonan Zhang, 2023. "Leveraging policy instruments and financial incentives to reduce embodied carbon in energy retrofits," Papers 2304.03403, arXiv.org.
    4. Kerr, N. & Winskel, M., 2020. "Household investment in home energy retrofit: A review of the evidence on effective public policy design for privately owned homes," Renewable and Sustainable Energy Reviews, Elsevier, vol. 123(C).
    5. Christian Haas & Karol Kempa, 2023. "Low-Carbon Investment and Credit Rationing," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 86(1), pages 109-145, October.
    6. Sarah Hafner & Olivia James & Aled Jones, 2019. "A Scoping Review of Barriers to Investment in Climate Change Solutions," Sustainability, MDPI, vol. 11(11), pages 1-19, June.
    7. P. P. Stoll & W. P. Pauw & F. Tohme & C. Grüning, 2021. "Mobilizing private adaptation finance: lessons learned from the Green Climate Fund," Climatic Change, Springer, vol. 167(3), pages 1-19, August.
    8. Rana, Anber & Sadiq, Rehan & Alam, M. Shahria & Karunathilake, Hirushie & Hewage, Kasun, 2021. "Evaluation of financial incentives for green buildings in Canadian landscape," Renewable and Sustainable Energy Reviews, Elsevier, vol. 135(C).

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    JEL classification:

    • F0 - International Economics - - General

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