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Maximizing the Impact of Climate Finance: Funding Projects or Pilot Projects?

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  • Matthew J. Kotchen

Abstract

This paper contributes to the understanding of how to maximize the impact of publicly provided climate finance to leverage the private sector. Agencies seeking to promote private investment in support of climate change mitigation and adaptation may have a choice between subsidizing projects or pilot projects. Pilots are either scaled down versions of full projects or an experimental phase that generates better information about whether a full project is likely to succeed or fail. Drawing on insights about the value of experimentation for entrepreneurship and raising private capital, the theoretical model developed herein provides guidance about when subsidizing projects or pilots is more efficient.

Suggested Citation

  • Matthew J. Kotchen, 2017. "Maximizing the Impact of Climate Finance: Funding Projects or Pilot Projects?," NBER Working Papers 23023, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:23023
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    References listed on IDEAS

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    1. Carolyn Fischer, 2017. "Environmental Protection for Sale: Strategic Green Industrial Policy and Climate Finance," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 66(3), pages 553-575, March.
    2. Ramana Nanda & Matthew Rhodes-Kropf, 2016. "Financing Entrepreneurial Experimentation," Innovation Policy and the Economy, University of Chicago Press, vol. 16(1), pages 1-23.
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    6. William R. Kerr & Ramana Nanda & Matthew Rhodes-Kropf, 2014. "Entrepreneurship as Experimentation," Journal of Economic Perspectives, American Economic Association, vol. 28(3), pages 25-48, Summer.
    7. Traeger, Christian P., 2014. "On option values in environmental and resource economics," Resource and Energy Economics, Elsevier, vol. 37(C), pages 242-252.
    8. Ferraro, Paul J., 2008. "Asymmetric information and contract design for payments for environmental services," Ecological Economics, Elsevier, vol. 65(4), pages 810-821, May.
    9. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
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    11. Fisher, Anthony C., 2000. "Investment under uncertainty and option value in environmental economics," Resource and Energy Economics, Elsevier, vol. 22(3), pages 197-204, July.
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    Citations

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    Cited by:

    1. Sarah Armitage & Noël Bakhtian & Adam Jaffe, 2024. "Innovation Market Failures and the Design of New Climate Policy Instruments," Environmental and Energy Policy and the Economy, University of Chicago Press, vol. 5(1), pages 4-48.
    2. Emanuele Campiglio & Alessandro Spiganti & Anthony Wiskich, 2023. "Clean Innovation, Heterogeneous Financing Costs, and the Optimal Climate Policy Mix," CAMA Working Papers 2023-25, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University, revised May 2024.
    3. Jesse M. Keenan & Anurag Gumber, 2019. "California climate adaptation trust fund: exploring the leveraging of cap-and-trade proceeds," Environment Systems and Decisions, Springer, vol. 39(4), pages 454-465, December.
    4. Yuan, Huaxi & Zou, Longhui & Feng, Yidai, 2023. "How to achieve emission reduction without hindering economic growth? The role of judicial quality," Ecological Economics, Elsevier, vol. 209(C).
    5. Christopher J. Blackburn & Mallory E. Flowers & Daniel C. Matisoff & Juan Moreno‐Cruz, 2020. "Do Pilot and Demonstration Projects Work? Evidence from a Green Building Program," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 39(4), pages 1100-1132, September.
    6. Caroline Flammer, 2019. "Green Bonds: Effectiveness and Implications for Public Policy," NBER Chapters, in: Environmental and Energy Policy and the Economy, volume 1, pages 95-128, National Bureau of Economic Research, Inc.
    7. Christopher J. Blackburn & Mallory E. Flowers & Daniel C. Matisoff & Juan Moreno-Cruz, 2018. "Do Pilot and Demonstration Projects Work?," CESifo Working Paper Series 7252, CESifo.
    8. Zejin Liu & Steven Van de Walle, 2022. "The role of demonstration projects as policy instruments in the development of nonprofit organizations: Beyond instrumentality," Public Administration & Development, Blackwell Publishing, vol. 42(4), pages 233-244, October.
    9. Vu Minh Ngo & Huan Huu Nguyen & Hiep Cong Pham & Long Hoang Nguyen, 2024. "Engage or retreat? Exploring the determinants of participation in Climate Finance public-private partnerships," Climatic Change, Springer, vol. 177(7), pages 1-30, July.
    10. Amadu, Festus O. & McNamara, Paul E. & Miller, Daniel C., 2020. "Yield effects of climate-smart agriculture aid investment in southern Malawi," Food Policy, Elsevier, vol. 92(C).
    11. Caroline Flammer, 2019. "Green Bonds: Effectiveness and Implications for Public Policy," NBER Working Papers 25950, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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