The aim of the Paris agreement to mobilize private investors for climate finance will trigger large investment needs in low-carbon infrastructure, exacerbating the general infrastructure financing gap arising from the specific challenges of infrastructure being illiquid, long-term assets and related regulatory uncertainty and unequal risk allocation. This project investigates financing instruments for low-emission infrastructures and evaluates their attractiveness and fit for different investor groups and aims to identify opportunities that make low-emission infrastructures attractive specifically for households and institutional investors. For both investor types, investment barriers as well as investor preferences will be examined in their potential for emission avoidance.
Update on the project´s process
Data collection is complete for the market analysis of financing products for low-carbon infrastructure and the financial performance of firms with different emission intensities, and the large survey on household preferences regarding infrastructure investment – after pandemic related delays – will be completed soon. Investor behavior is furthermore captured in an extended portfolio model, which is currently being integrated into a macro-economic context.
As first results, we find that firms with low-emission portfolios seem to outperform their peers, and even more so after the ratification of the Paris Agreement. Concerning households, we find that a perceived deterioration of the general economic situation due to the COVID-19 crisis has a significantly negative effect on the acceptance of climate-oriented economic stimulus programs. As a fundamental reason for low investment in infrastructure the low liquidity and long maturity of such investments was identified using portfolio modeling, which is currently being integrated into macro-model context. Finally, we produced a proposal of an innovative financing mechanism via state funds, namely to support long-term investments via interest rate discounts.
Preliminary results of the project
Infrastructure such as storage or grid infrastructure greatly facilitates the substitution of CO2 intensive activities with their clean counterparts and is thus indispensable for a successful transition. The figure shows model calculations demonstrating infrastructure’s potentially game-changing quality in a theoretical model with endogenous elasticity of substitution for energy sources.
As we increase the relative price of dirty energy, the benefits of substitutability enhancing infrastructure increase (bottom figure). The cost of such infrastructure is depicted by the dashed horizontal line. When these benefits exceed the cost, it becomes profitable to deploy such infrastructure. The usage of dirty energy can decrease dramatically once this technological tipping point is reached (top figure). If substitutability enhancing infrastructure is not available or is prohibitively expensive for the private sector, an increase of the relative price of dirty energy would only be able to decrease dirty energy usage as depicted by the blue dashed line.
Yanovski, Boyan and Lessmann, Kai and Tahri, Ibrahim (submitted). The Link between Short-Termism and Risk: Barriers to Investment in Long-Term Projects. In: Annals of Finance.
Edenhofer, O. and Klein, C. and Lessmann, K- and Wilkens, M. (2020). Wie Der ‘Green Deal’ Die Richtigen Anreize Setzen Kann: Ein Vorschlag Zur Ausgestaltung Eines Fonds Zur Staatlichen Finanzierung Nachhaltiger Unternehmen Und Realinvestitionen. Available at SSRN: http://dx.doi.org/10.2139/ssrn.3673811
Engler, Daniel, Elke D. Groh, Gunnar Gutsche und Andreas Ziegler (forthcoming). Acceptance of climate-oriented policy measures under the COVID-19 crisis: An empirical analysis for Germany. In: Climate Policy.
Engler, Daniel, Gunnar Gutsche und Paul Smeets (2021), Individual preferences for sustainable investments across Europe – A framed field experiment in five countries. Available at OSF: https://osf.io/6kyja