Investing in low-carbon transitions: energy finance as an adaptive market

Abstract

The amount of capital required to transition energy systems to low-carbon futures is very large, yet analysis of energy systems change has been curiously quiet on the role of capital markets in financing energy transitions. This is surprising given the huge role finance and investment must play in facilitating transformative change. We argue this has been due to a lack of suitable theory to supplant neoclassical notions of capital markets and innovation finance. This research draws on the notion from Planetary economics: Energy, climate change and the three domains of sustainable development, by Grubb and colleagues, that planetary economics is defined by three 'domains', which describe behavioural, neoclassical, and evolutionary aspects of energy and climate policy analysis. We identify first-and second-domain theories of finance that are well established, but argue that third-domain approaches, relating to evolutionary systems change, have lacked a compatible theory of capital markets. Based on an analysis of electricity market reform and renewable energy finance in the UK, the 'adaptive market hypothesis' is presented as a suitable framework with which to analyse energy systems finance. Armed with an understanding of financial markets as adaptive, scholars and policy makers can ask new questions about the role of capital markets in energy systems transitions. Policy relevanceThis article explores the role of financial markets in capitalising low-carbon energy systems and long-term change. The authors demonstrate that much energy and climate policy assumes financial markets are efficient, meaning they will reliably capitalise low-carbon transitions if a rational return is created by subsidy regimes or other market mechanisms. The authors show that the market for renewable energy finance does not conform to the efficient markets hypothesis, and is more in line with an 'adaptive' markets understanding. Climate and energy policy makers that design policy, strategy, and regulation on the assumption of efficient financial markets will not pay attention to structural and behavioural constraints on investment; they risk falling short of the investment levels needed for long-term systems change. In short, by thinking of financial markets as adaptive, the range of policy responses to enable low-carbon investment can be much broader.

Financing green growth

“…Hence, the public utilities that the data show are some of the most risk-taking corporations are a minority. They are outflanked by private utilities that are creaking under the weight of low electricity prices in energy markets upended by fluctuating solar and wind electricity (Hall et al 2015). Ironically, while past energy infrastructure transformation could be bankrolled by strong public sector organisations, often propped up with funds from state banks, today in many countries private investors have to be enticed to partake in 'de-risked' projects and the state banks instead subsidize these private investors, an area that, incidentally, could benefit from further research.…”

Energy System Transitions in the Eastern Coastal Metropolitan Regions of China—The Role of Regional Policy Plans

“…There seems to be a consensus in the energy systems analysis community that a reliable, binding, and courageous energy-efficiency policy is the backbone of each decarbonization pathway. Rapid efficiency improvements in all sectors are essential, especially under the continued urbanization and industrialization process in China [36,37]. Changes in the regional economic structure may support the implementation of new and more efficient techniques and processes.…”

A quantitative study of financing efficiency of low‐carbon companies: A three‐stage data envelopment analysis

“…For example, a lack of appropriate financing mechanisms is a significant hurdle for low‐carbon industries and projects to overcome. Numerous studies have documented that financing constitutes one of the major challenges to the deployment of low‐carbon technologies (e.g., Hall, Foxon, & Bolton, ; Li & Colombier, ; Polzin, ), and evidence shows there is a significant “financing gap” for low‐carbon projects and industries (Bowen, Campiglio, & Tavoni, ; Campiglio, ; Geddes, Schmidt, & Steffen, ). Actually, large‐scale economic gain and environmental payback are possible only if sustainable financing mechanism that supports low‐carbon industries and projects are devised and other obstacles (e.g., lacking of awareness and access to technology) are successfully addressed (Böttcher & Müller, ; Pinkse & Kolk, ).…”