Climate Policy with the Chequebook – An Economic Analysis of Climate Investment Support

Frankfurt Working Paper Series No. 219

31 Pages Posted: 7 Jun 2016

See all articles by Karol Kempa

Karol Kempa

Frankfurt School of Finance & Management; Justus-Liebig University Giessen - Department of Economics

Ulf Moslener

Frankfurt School of Finance & Management gemeinnützige GmbH

Date Written: March 23, 2016

Abstract

Across the globe, climate policy is increasingly using investment support instruments, such as grants, concessional loans, and guarantees – whereas carbon prices are losing importance. This development substantially increases the risk of inefficient public spending. In this paper, we examine the ability of finance instruments to effectively and efficiently address market failures related to clean energy investments. We characterise these market imperfections – emission externalities, knowledge spillovers and capital market imperfections – and identify their negative impacts on the investor-relevant risk-return characteristics. We argue that finance instruments are able to address the effects of these market failures. However, a carbon price is superior in internalising the emission externalities. With respect to the latter two inefficiencies, investment support instruments can effectively compensate for the market failures if designed appropriately. We further provide policy recommendations on the choice of finance instruments to address the various market failures and guidance on how to use these instruments avoiding inefficient government spending.

Keywords: climate finance, investment support, market failures, policy instruments

JEL Classification: G14, Q54, Q55, Q58

Suggested Citation

Kempa, Karol and Moslener, Ulf, Climate Policy with the Chequebook – An Economic Analysis of Climate Investment Support (March 23, 2016). Frankfurt Working Paper Series No. 219. Available at SSRN: https://ssrn.com/abstract=2788077 or http://dx.doi.org/10.2139/ssrn.2788077

Karol Kempa (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Justus-Liebig University Giessen - Department of Economics ( email )

Licher Str. 66
Giessen, 35394
Germany

Ulf Moslener

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

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