Financial incentives for low-carbon transition: from citizens to professional investors

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Curtin, Joseph
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University College Cork
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Decarbonisation of the global economy requires an energy transition of exceptional scope, depth and speed, and a doubling of the current level of investment in low-carbon technologies. However, the risk perception of individual market participants—a key determinant of the pace at which these technologies will be deployed—is an under-addressed theme in the academic literature. In this thesis the risk-return preferences and investment attributes that are attractive to different types of investors are investigated, with a view to informing the design of financial incentives introduced by Governments. In Chapter 2 the literature assessing the impact of technology-specific financial incentives on the levels of investment in low carbon technologies from local citizen investors is evaluated. It is concluded that feed in tariffs, grants and tax incentives can be successful in mobilising greater levels of investment from non-traditional investors, but that soft loans are less effective as a stand-alone instrument. In the following chapter, a novel analytical approach is introduced to explore the use of financial incentives in key jurisdictions to overcome barriers to investment from local citizen actors. The importance of instrument design over instrument choice emerged from this analysis. The requirement for incentives at feasibility and development stages of renewable projects also emerged as a distinguishing feature of projects with citizen involvement, reflecting the high risk-aversion of these actors, as well as their inability to manage risk across a portfolio of projects. At later project stages, market-independent supports (feed in tariffs, grants and tax incentives) were found to have been effectively deployed, however, more market-based instruments (feed in premiums and quota schemes) were also found to be effective if tailored to the specific needs of citizen investors. In Chapter 4 the risk-return preferences of a representative sample of citizen investors in Ireland—a market with no citizen investment tradition—were explored using a choice experiment. A high level of interest in investing in wind, solar, biomass and waste-to-energy projects was uncovered, however, a majority of citizens were found to be highly risk-averse, and investment amounts were low compared to equity required for larger projects. These findings suggest that greater levels of investment capital could be mobilized from citizen investors using specifically tailored incentives. However, these actors can only make a limited overall contribution, and promoting greater levels of investment from professional investors is crucial if climate objectives are to be met. In Chapter 5, semi-structured interviews and an on-line survey were therefore used to compare attitudes to stranding risk for investors in power generation assets with investors in financial assets. Asset stranding risk was found to be a more prominent issue for the former cohort, suggesting that as you move along the investment chain—away from physical assets and towards financial assets—far less is known about climate risk, and it becomes increasingly challenging for investors to manage it. Managing the risks face by different investor cohorts emerges as an important means of mobilising greater levels of investment and reducing the cost of capital for low-carbon technologies, which in turn has the potential to increase the speed of energy transition. Understanding the risk-return preferences of different cohorts of investors, however, remains both understudied and underappreciated in the climate policy and climate finance literature. The findings from this study both address this literature gap and uncover several themes meriting further analysis and investigation.
Climate change , Renewable energy , Citizen investment , Financial incentives , Stranded assets , Risk perception
Curtin, J. 2019. Financial incentives for low-carbon transition: from citizens to professional investors. PhD Thesis, University College Cork.
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