Gireesh Shrimali, Head of Transition Finance Research and Christian Wilson Research Assistant at Oxford Sustainable Finance Group were recently published in the World Economic Forum talking about the critical role of cost-of-capital and climate policies in net-zero transitions.
Meeting the goals of the Paris Agreement requires a rapid scaling up of investment in low-carbon energy. The IEA estimates that limiting global temperature rise to 1.5C requires $4 trillion of investment in low-carbon energy annually by 2030, requiring investment to more than triple from current levels.
Yet, while this significant investment gap in low-carbon energy exists, investment in fossil fuel power continues, despite the need for sharp curtailments in development. Mobilizing private sector capital towards low-carbon energy and away from high-carbon energy is critical for closing the investment gap in low-carbon energy.
The theory of change: How the cost of capital impacts investments
The cost of capital is a key lever in accelerating this transition. First, the cost of capital affects the ability of firms and countries to finance the upfront investments required to decarbonize the energy system. Second, capital-intensive renewables are more sensitive to changes in the cost of capital than fossil fuel power.
In this context, using a global asset-level database of power assets to track the development of new assets by publicly listed electric utilities firms between 2012-2021, we examine the relationship between the firm-level cost of debt and debt capital raising with firm-level energy investment and the effect of environmental policy on these relationships.
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