Quantifying barriers to decarbonization of the Russian economy: real options analysis of investment risks in low-carbon technologies

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ABSTRACTRussia has significant potential for reducing its carbon emissions. However, investment in new low-carbon technologies has significant risks. Ambiguous energy and climate policy in Russia, along with deterioration of the country's investment climate, create investment barriers that are well described in qualitative terms in the literature. This paper attempts to provide a quantitative analysis of these barriers. For this numerical experiment, we apply the RU-TIMES model. Using a real options methodology, we estimate the risk-adjusted cost of capital in the Russian energy sector (including energy production and consumption technologies represented in the TIMES framework) to be approximately 43% (including a risk-free interest rate) and demonstrate the high risk of investment into energy-efficient and low-carbon technologies. Any future low-carbon emissions pathway depends on the ability of the Russian government to reduce climate and energy policy uncertainties, and to reduce financial risks through improvements of the general investment climate.Key policy insightsThe high cost of capital investment into Russian energy production and consumption may prevent the adoption of new energy-efficient and low-carbon technologies.These investment risks, if not addressed, will delay Russia's low-carbon transition for the coming decades.Adopting a clear and unambiguous long-term climate and energy policy is important to reduce these risks and alleviate some of the barriers to the new technologies.The first step could be ratification of the Paris Agreement and adoption of a long-term emission target for the period up to 2050.