Changing Dynamics of Financial Risk Related to Investments in Low Carbon Technologies

Abstract

The Paris Agreement under the United Nations Framework Convention on Climate Change (UNFCCC) emphasizes the need to mitigate the impact of climate change. Mitigating strategy involves reducing the use of carbon-intensive technologies such as coal while promoting low carbon technologies. However, this strategy may lead to abrupt changes for the coal industry with limited time to respond. This article illustrates the perceptions of the financial sector toward policy goals, guidance, and instruments to encourage low carbon technologies as well as their impact on coal-based technologies. Although the industry’s intention to move toward low carbon is clear, the need for reliable and cost-effective power to drive the economy often results in policies that prioritize economical and proven technologies and leads to policy uncertainties which present new challenges and risks to investors and financial institutions alike. In the case of coal, on one hand the shift to low carbon technologies has led the financial sector to regard coal technology as increased investment risk or “stranded assets” for investors. On the other hand, a lack of financing has resulted in a lackluster low carbon industry with the financial sector questioning its long-term direction. As such, financing and sound policies are key in mitigating climate change while managing existing assets. To illustrate this shift, this chapter discusses policy goals and instruments, such as government subsidy, into the coal industry or coal-related industry. It also examines climate change-related policy goals, such as long-term energy goals to increase renewables, and promotion instruments, such as the feed-in tariff. In view of these changing policies, the chapter addresses new opportunities for the financial sector as well as new perspectives to recognize climate change as a means to reduce the risk for low carbon technologies. A holistic view is needed by considering the unique feature of these technologies and also the changing landscape of global policies toward mitigating climate change.