Given the increasing realization of the impact of climate change on productivity and output, which would disrupt fiscal positions (lower revenue and higher spending), discussion is now focusing on “green investment, which is the “investment necessary to reduce greenhouse gas and air pollutant emissions significantly”. Eyraud and Clements have a simple yet resourceful piece about green investment in this issue of F&D magazine.
They argue that green investment could take the following forms:
- Less polluting investment in energy generation (wind, solar, nuclear, hydropower or biofuel such as ethanol made from corn or sugarcane)
- Investments that reduce energy consumption (supercritical coal-fired plants, which are highly efficient electricity plants that burn less coal; efficient grids; efficiency gains in transportation—by using more fuel-efficient and hybrid cars and by increasing use of mass transit; energy-saving appliances and improved waste management; improved insulation and cooling systems)
Government support green investment primarily to
- Reduce carbon emissions and prevent climate change
- Improve energy security by diversifying the energy mix
- Foster growth by promoting competitiveness, job creation, and innovation in new industries.
Common forms of support policies for renewable electricity generation are
- Feed-in tariffs, which mandate that utility companies pay prices to green electricity producers that reflect the cost of the technology, which can be above the cost of conventional electricity generation
- Renewable portfolio standards, which require electricity companies to rely on renewables for some fraction of their energy sources
Eyraud and Clements argue that five factors determine the level of green investment:
- Real gross domestic product (GDP)—higher level of GDP tend to boost investment in green technologies; an additional 1 percentage point of GDP growth should raise green investment growth by about 4 percentage points in the long run, other factors being equal
- Long-term real interest rate—high cost of capital has a negative impact on green investment; green investment declines by about 10 percent when the real interest rate increases by 1 percentage point
- Relative price of international crude oil—higher fuel prices increases return on green investment by lowering cost of capital produced from renewables; green investment grows by an additional percentage point when there is a 1 percentage point difference between increases in crude oil prices and economy-wide inflation
- A variable representing the adoption of feed-in tariffs—high feedstock prices and overcapacity lower investment in biofuel; green investment should be two to three times larger in countries adopting feed-in tariffs, other factors being equal.
- A variable measuring whether a country has a carbon pricing mechanism (carbon tax or cap-and-trade)—environmental tax levied on the carbon content of fuels