Low-carbon Investment Research Articles

Rushing the Impatient: Allowance Reserves and the Time Profile of Low-Carbon Investments

Postponing the issue date of allowances in a cap-and-trade scheme, by e.g. a reserve mechanism, impacts the time profile of low-carbon investments. If the postponement constrains intertemporal arbitrage, short-term investments increase but long-term investments are deterred. This effect aggravates the shortage of long-term investments at least partially attributed to firms’ impatience. The cancellation of allowances agreed for Phase IV of the EU ETS is suitable to counteract the negative effects of cap-neutral postponement on long-term investments—by making the reserve redundant. All effects crucially depend on how firms form expectations about future allowance prices.

A comparison of low carbon investment needs between China and Europe in stringent climate policy scenarios

The radical change in recent global climate governance calls for China and Europe to ramp up their efforts in leading the world to reach the long-term climate goals. By analyzing the results from the state-of-the-art global integrated assessment model, MESSAGEix-GLOBIOM, this paper aims to understand the future levels of financial investment needed for building and maintaining energy-related infrastructure in the two regions for fulfilling stringent targets consistent with ‘well below 2 °C’. The results indicate that a rapid upscaling and structural change of these investments towards decarbonization are necessitated by the climate stringent scenarios. China and Europe need to increase their low carbon investments by 65% and 38% in a scenario reaching the 2° target relative to their respective reference scenarios which assume no such target from 2016–2050. In a more stringent climate policy scenario of the 1.5° target, these investment needs will increase by 149% and 79% for China and Europe respectively. Among all the energy sectors, energy efficiency, renewable electricity generation and electricity transmission and distribution are the three largest investing targets for the two regions. However, those investments will not likely be realized without strong policy incentives. Implications for green finance and multilateral cooperation initiatives are discussed in the context of the scenario results.

Measuring whether municipal climate networks make a difference: the case of utility-scale solar PV investment in large global cities

ABSTRACTWith cities being responsible for up to 70% of energy-related carbon emissions, municipal governments worldwide are becoming increasingly aware of their responsibility to act. Many large cities have committed to mitigation by becoming member of a municipal climate network, such as the C40 or the Compact of Mayors. However, there is no consistent assessment of whether membership of such networks translates into measurable outcomes. To fill this gap, we propose the use of novel outcome variables, combining financial data with geospatial information. As a starting point, this paper compares utility-scale investment in photovoltaics (PV) within the administrative boundaries of large global cities, combining the Bloomberg New Energy Finance database with information from Google Maps. We analyse 512 global cities with a population of above 1 million, and consider the impact of 5 networks and 2 reporting platforms. The results suggest that membership of the C40 network has a positive effect on utility-scale solar PV investment, while no such evidence is found for any of the other networks or reporting platforms under study. Based on our findings, we recommend that municipal climate networks increase their efforts to trigger city regulation that is conducive to solar PV investment. More generally, measuring early indicators, such as low-carbon investment, can help municipal climate networks in their role as ‘commitment brokers’ for climate action on the ever-more important city level.Key policy insightsCities have considerable policy space to foster utility-scale solar PV investment within their administrative boundaries.While some large global cities exhibited significant growth in utility-scale solar PV, many others with good solar potential did not have a single project by the end of 2016.Outside of China (where city boundaries often include rural areas), Tokyo tops the list with utility-scale solar PV projects by far, followed by San Diego and Rome.Membership of the C40 network appears to make a positive difference to PV investment, unlike other networks or reporting platforms.Outcome measures like low-carbon investment can be used more generally to assess the climate action performance of cities.

Determinants of energy futures—a scenario discovery method applied to cost and carbon emission futures for South American electricity infrastructure

Energy policy and investment are commonly informed by a small number of scenarios, modelled with proprietary models and closed data-sets. It limits what levels of insight that can be derived from it. This paper overcomes these critical concerns by exploring a large number of scenarios with an open-data and open-source model to address regional mitigation policy. Focusing on South America, we translate an ensemble of long-term electricity supply scenarios into policy insights and use post-processing methods to present a systematic mapping of solution outputs to model inputs. We find demand levels, the cost of capital and the level of CO2-limits to be significant determinants of total investment cost. Low-carbon pathways are associated with low demand and low cost of capital. When cost of capital increases a shift away from wind and hydropower to natural gas and solar PV is seen. We further show that appropriate concessionary finance together with energy efficiency measures are critical—at a continental level—to unlock economic, low-carbon investment.

Holders of Last Resort: The Role of Index Funds and Index Providers in Divestment and Climate Change

This paper demonstrates that index funds and index providers have agency and thus responsibility for the companies contained within their financial products. As a growing number of institutional asset owners are divesting from coal assets, index funds are becoming the holders of last resort. The common wisdom has it that index funds cannot sell out of individual stock holdings. They have a “voice” but no ability to “exit.” This paper investigates the relationship between index providers and index funds and finds the traditional understanding that index investors cannot sell to be false. Instead an increasing prevalence of index investors switching both indices and index providers is noted. Such changes provide investors with the opportunity to exclude specific stocks. This paper therefore suggests a number of solutions for index funds to reduce the carbon intensity of their funds, such as switching the indices their funds employ, discontinuing niche ETFs that are carbon intensive, reducing fees on low-carbon investments, or making use of their financial clout as index providers’ biggest customers to advocate for selective index amendments. Adding the threat of exit will increase the power of voice. Doing so will ensure, that rather than functioning as insulators from sustainability pressures, they act as conductors.

Treaty on Sustainable Investment for Climate Change Mitigation and Adaptation: Aligning International Investment Law with the Urgent Need for Climate Change Action

The climate change mitigation and adaptation objectives set by the Paris Agreement under the United Nations Framework Convention on Climate Change (UNFCCC) and the broader Sustainable Development Goals (SDGs) under the Agenda 2030 create a need for an unprecedented shift from carbon-intensive to low-carbon investment projects. Investment and the legal regimes that govern it—including international investment law—are critical to this shift. To accelerate it, the authors propose the Treaty on Sustainable Investment for Climate Change Mitigation and Adaptation. One of the winners of the Stockholm Treaty Lab competition, the treaty has three building blocks: (1) encouraging Sustainable Investments; (2) discouraging Unsustainable Investments and eliminating new Unsustainable Investments; and (3) ensuring a just transition to sustainable and low-carbon economies and societies. It allows states to indicate, in schedules to the annexes of the treaty, which sectors will be defined as Sustainable or Unsustainable Investments. It protects and signals policy support for Sustainable Investments, while denying treaty-based procedural rights to Unsustainable Investments and committing states to agree on modalities and timelines for phasing out incentives for Unsustainable Investments, such as fossil fuel subsidies. It includes investor obligations and provides access to justice to individuals and communities through an accountability mechanism.

Asian Low-Carbon Energy Investment Outlook

Asian Low-Carbon Energy Investment Outlook

Disentangling the drivers of carbon prices in China's ETS pilots — An EEMD approach

Excessive price fluctuations would affect the effectiveness of Emission Trading Scheme (ETS) and low-carbon investment. Therefore, the drivers of carbon prices need to be disentangled to analyze the price formation process, which is important for both policy makers and investors. By applying the Ensemble Empirical Mode Decomposition (EEMD) method, we decompose the historical carbon price data of the five ETS pilots in China into five groups of the independent Intrinsic Mode Function (IMF) sequences and the residue, respectively. Then, the IMFs and the residue in each pilot are reconstructed into a high frequency component, a low frequency component and a trend component, thus disentangling the effects of short-term market fluctuations, significant events, and the long-term trend. The main findings are as follows. First, the IMF with a period around one year is the most influential factor, which reflects that pilots are characterized by the yearly cycle. Second, significant events have greater impacts than short-term market fluctuations, and are the dominant driver in Shanghai and Beijing pilots. Third, the long-term trend plays a decisive role in Shenzhen, Guangdong and Hubei pilots. The price stabilization mechanism is critical to avoid a severe imbalance between demand and supply in the long run.

Energy Supply and Decarbonisation Beyond Brexit: Politics and Policy

Energy Supply and Decarbonisation Beyond Brexit: Politics and Policy

UK Electricity Market Reform and the Energy Transition:Emerging Lessons

The 2013 Electricity Market Reform (EMR) was a response to the twin problems of securing efficient finance for a new generation of low carbon investments, and delivering reliability along with a growing share of renewables in its energy-only market. Four EMR instruments combined to revolutionize the sector; stimulating unprecedented technological and structural change. Competitive auctions for both firm capacity and renewable energy have seen prices far lower than predicted and the entry of unexpected new technologies. A carbon price floor displaced coal, whose share fell from 46% in 1995 to 7% in 2017, halving CO2. Renewables grew from under 4% in 2008 to 22% by 2017, projected at 30+% by 2020 despite a political ban on onshore wind. Neither the technological nor regulatory transitions are complete, and the results to date highlight other challenges, notably to transmission pricing and locational signals. EMR is a step forwards, not backwards; but it is not the end of the stor

Evolutionary Game Theoretic Analysis of Low Carbon Investment in Supply Chains under Governmental Subsidies.

With the rapid development of global industry and economy, excessive carbon dioxide emission has emerged as a critical issue in both developed and developing countries. Using an evolutionary game framework in which game players can adjust their strategies constantly, this paper investigates how to optimize the strategy of low carbon investment for suppliers and manufacturers in supply chains, and discuss the impacts of various factors on evolutionarily stable strategies. Additionally, we examine an incentive mechanism based on governmental subsidies to eliminate free riding and motivate co-investment. Furthermore, a case study and numerical examples are provided for illustration and simulation purposes, leading to several countermeasures and suggestions. Our analytical results show that the strategic choice of low carbon investment is correlated with profit growth coefficients, investment costs and profits from free riding. Investment costs have more significant impacts than other factors on evolutionarily stable strategies, while profit growth coefficients are more important at initial stages in the evolutionary process. The incentive mechanism based on governmental subsidies is an effective solution to motivate co-investment, and governments should take some measures to improve the assess accuracy and supervisory efficiency of investment strategy.

Combining carbon mitigation and climate adaptation goals for buildings exposed to hurricane risks

As climate risks increase, there is a challenge of combining the goals of carbon mitigation and climate adaptation into building designs. These two goals are often misaligned because adaptation measures use additional materials and equipment, which can increase greenhouse gas (GHG) emissions. This phenomenon means that building design involves tradeoffs between enhanced structural resilience and reduced GHG emissions. This paper seeks to identify the optimal investment allocation mechanisms between carbon mitigation and climate adaptation measures for the design of buildings in hurricane-prone regions. A dynamic decision-making model is developed to maximize individual investors’ expected payoffs over a building's lifetime. The model is based on the damage evaluation of non-stationary hurricane occurrence and building emission performance under different mitigation scenarios. The results reveal a transition from long-advocated low-carbon investments to risk-oriented portfolios for building retrofits. A case study on Anne Arundel County, MD, for which a “60-40” resilience/abatement portfolio is recommended, shows the value of enhancing structural resilience. Discretion on the accuracy of insurance premium discounts is needed to support risk mitigation efforts. Meanwhile, subsidies for emission abatements are recommended to accommodate existing emission trading schemes and building property values.

Energy investment needs for fulfilling the Paris Agreement and achieving the Sustainable Development Goals

Low-carbon investments are necessary for driving the energy system transformation that is called for by both the Paris Agreement and Sustainable Development Goals. Improving understanding of the scale and nature of these investments under diverging technology and policy futures is therefore of great importance to decision makers. Here, using six global modelling frameworks, we show that the pronounced reallocation of the investment portfolio required to transform the energy system will not be initiated by the current suite of countries’ Nationally Determined Contributions. Charting a course toward ‘well below 2 °C’ instead sees low-carbon investments overtaking fossil investments globally by around 2025 or before and growing thereafter. Pursuing the 1.5 °C target demands a marked upscaling in low-carbon capital beyond that of a 2 °C-consistent future. Actions consistent with an energy transformation would increase the costs of achieving the goals of energy access and food security, but reduce the costs of achieving air-quality goals. The scale and nature of energy investments under diverging technology and policy futures is of great importance to decision makers. Here, a multi-model study projects investment needs under countries’ nationally determined contributions and in pathways consistent with achieving the 2 °C and 1.5 °C targets as well as certain SDGs.

Emission allowance allocation mechanism design: a low-carbon operations perspective

Governments around the world are seeking an effective mechanism to cope with air pollution and climate change. The allocation of emission allowances, which is a key mechanism in the cap-and-trade system, is an important and intricate puzzle faced by environmental agencies. In this paper, we build a Stackelberg model to explore the emission allowance allocation mechanism design from an operations perspective. We demonstrate the feasibility and effectiveness of a linear emission allowance allocation mechanism. The results show that the emission allowance allocated by the government should always be insufficient to satisfy the ex-post emission demand at the industry level, even with low-carbon investment. To analyze the impacts on firms’ decision-makings, we explore a scenario in which two firms in the same industry sell a homogenous product to the market. The optimal low-carbon investment and production decisions are significantly affected by these market and carbon-related factors. Numerical examples are presented to further demonstrate the results that our paper has derived and investigate the optimal operational decisions of the two firms. Several meaningful management insights on allocation mechanism design and low-carbon operations of firms are obtained.

What makes them believe in the low-carbon energy transition? Exploring corporate perceptions of the credibility of climate policy mixes

The credibility of climate policy has been identified as paramount factor for low-carbon investment and innovation and is thus key to achieving the decarbonization objectives set out in the Paris Agreement. Yet, despite its importance, we have only limited insights at present into how such policy credibility is formed. To address this gap, we explore whether and to what extent corporate perceptions of policy credibility depend on the current policy mix. We draw on the case of the German Energiewende and rely on data collected in 2014 in a survey of German manufacturers of renewable power generation technologies. We analyzed the answers of 390 companies using a linear regression model and found that corporate perceptions of policy credibility are mainly shaped by two characteristics of the policy mix: the coherence of policymaking and implementation, and the consistency of the policy mix. Changes in the design of the core demand-pull instrument (in Germany, the Renewable Energy Sources Act, EEG) and the nuclear phase-out policy are also important as are Germany’s targets for the expansion of renewable energies. These insights enable us to derive broader policy and research implications concerning climate policy credibility.

Potential Impediments to Long-Term and Low-Carbon Investment: The International Accounting Standards at Stake

This paper[i] aim to understand the role of today’s accounting requirements for financial intermediaries (banks and insurers), to be aware of their limitations and to underscore the need for reform in order to foster long-term and then low-carbon capital spending in Europe. The paper shows that International Financial Reporting Standards (IFRS) can affect long-term asset allocation of banks and insurance companies. International accounting standards do not differentiate between low and carbon intensive investment and do not take into account climate risks beforehand. To tackle these issues, we make some recommendations to promote long term and low-carbon investment. [i] This paper was elaborated as part of a partnership with the French Accounting Standards Setter (Autorite des Normes Comptables, ANC), the Foundation for the research of the Caisse des Depots (CDC) and BNP Paribas between June 2013 and December 2015.

Pricing and Low-Carbon Investment Decisions in an Emission Dependent Supply Chain under a Carbon Labelling Scheme

A low-carbon policy attracts the interests of businesses, consumers, and policy makers. The purpose of this paper is to investigate how a carbon labelling scheme could be integrated into operational decision-making for manufacturers and retailers. Three game theoretic models of a supply chain with one manufacturer and one retailer are built to investigate a manufacturer and retailer’s pricing and investment decision for products with different initial carbon footprints considering consumer environmental awareness. Through a systematic comparison and numerical analysis, the results show that a carbon labelling scheme can significantly reduce the overall carbon emission supply chain and have an initially negative impact on the manufacturer and retailer’s profits. However, in the medium–long run, manufacturers and retailers could yet achieve profitability through continuously investing in low-carbon technology.

Low-carbon investments from the perspective of electric utilities: The burden of the past

Within the Paris agreement, Europe has adopted ambitious climate targets. Achieving these targets through appropriate low-carbon investments is thus key. This study aims at providing new insight into this issue by considering the DNE21 + model, an optimization model that assesses global energy systems, and the Investment Preference Index model, a simulation model where decision-making is based on technology preferences from a utility's perspective. We evaluate the impact of a climate-policy scenario on the European electricity sector using these models with harmonized assumptions. The resulting investment choices provide insight into the effectiveness of a low-carbon investment policy. We find that various types of incentives are required before companies abandon their historical preferences and low-carbon technologies can flourish. Testing various options has revealed that a negative constraint on coal is more efficient than adding further positive incentives for low-carbon technologies (such as carbon pricing and support schemes). However, we also expect these preferences to shift over time.

Effectiveness of pilot carbon emissions trading systems in China

ABSTRACTChina is in the process of establishing a national emissions trading system (ETS). Evaluating the implementation effectiveness of the seven pilot ETSs in China is critical for designing this national system. This study administered a questionnaire survey to assess the behaviour of enterprises covered by the seven ETS pilots from the perspective of: the strictness of compliance measures; rules for monitoring, reporting and verification (MRV); the mitigation pressure felt by enterprises; and actual mitigation and trading activities. The results show that the pilot MRV and compliance rules have not yet been fully implemented. The main factors involved are the lack of compulsory force of the regulations and the lack of policy awareness within the affected enterprises. Most enterprises have a shortage of free allowances and thus believe that the ETSs have increased their production costs. Most enterprises have already established mitigation targets. Some of the covered enterprises are aware of their own internal emission reduction costs and most of these have used this as an important reference in trading. Many enterprises have accounted for carbon prices in their long-term investment. The proportion of enterprises that have participated in trading is fairly high; however, reluctance to sell is quite pervasive in the market, and enterprises are mostly motivated to trade simply in order to achieve compliance. Few enterprises are willing to manage their allowances in a market-oriented manner. Different free allowance allocation methods directly affect the pathways enterprises take to control emissions.Key policy insightsIn the national ETS, the compulsory force of ETS provisions should be strengthened.A reasonable level of free allowance shortage should be ensured to promote emission reduction by enterprises.Sufficient information should be provided to guide enterprises in their allowance management to activate the market.To promote the implementation of mitigation technologies by enterprises, actual output-based allocation methods should be used.The government should use market adjustment mechanisms, such as a price floor and ceiling, to ensure that carbon prices are reasonable and stable, so as to guide long-term low carbon investment.

The multiple roles of state investment banks in low-carbon energy finance: An analysis of Australia, the UK and Germany

Low-carbon energy technologies (renewable energy and energy efficiency) are considered essential to achieve climate change mitigation goals, so a rapid deployment is needed. However there is a significant financing gap and many policymakers are concerned that investment for the large-scale deployment of low-carbon technologies will not materialise quickly enough. State investment banks (SIBs) can play a key role in closing this finance gap and leverage additional private finance. Based on 52 interviews, this paper presents empirical evidence on the role of three SIBs in addressing the barriers to financing low-carbon energy projects; the Clean Energy Finance Corporation (CEFC) in Australia, the Kreditanstalt fuer Wiederaufbau (KfW) in Germany and the Green Investment Bank (GIB) in the UK. We investigate the activities and financial instruments offered by SIBs and compare these to the need for such from low-carbon developers when sourcing finance. Findings show that aside from capital provision and de-risking, SIBs take a much broader role in catalysing private investments into low-carbon investments, including enabling financial sector learning, creating trust for projects and taking a first or early mover role to help projects gain a track record.