Constructing efficient portfolios of low-carbon technologies

Abstract

To foster the development, multiple sources of uncertainty associated with benefits and costs of innovation portfolios from low carbon investment need to be considered. We apply Modern Portfolio Theory to construct efficient portfolios of different low-carbon technology fields. The empirical framework is applied to four countries (i.e., Germany, the United Kingdom, Italy, and France) for six low-carbon technology fields (i.e., renewable energy, smart grid, energy efficiency, sustainable transport, carbon capture and storage, and nuclear power) categorized based on priority areas of the EU's 2008 Strategic Energy Technology Plan. The four main findings are: (1) the highest priority technology fields with the minimum risk portfolio are nuclear power in Germany, renewable energy in the United Kingdom, and energy efficiency in Italy and France, (2) the highest priority technology field with the maximum risk portfolio is sustainable transport in Germany, the United Kingdom, and France, and smart grid in Italy, (3) sustainable transport declines in priority as risk decreases in the portfolios of Germany, the United Kingdom, and France, while smart grid declines in priority as risk decreases in the portfolio in Italy, and (4) the presence of negative correlations over time among expected Return on Investments across energy technology fields improves using the Modern Portfolio Theory framework as risk diversification strategy. Our analysis provides efficient portfolios of low-carbon technologies, which can help shape the overall strategy and coordinate each country's comparative advantage by proposing new laws and policies, monitoring existing ones, and managing budget.