Periodic Reporting for period 2 - GREENFIN (Effective green financial policies for the low-carbon transition)
Reporting period: 2022-07-01 to 2023-12-31
Mitigating dangerous climate change requires a fundamental transition of global economies. This transition calls for an annual investment of 2–4 trillion USD, which is a multiple of current climate investment. Accordingly, the EU and many countries are enacting green financial policies, intervening in the financial sector to improve financing conditions for low-carbon technologies. Examples include green state investment banks, green finance taxonomies, and instruments to lower the cost of capital for low-carbon technologies. However, the effect of these financial policies on investments in non-financial sectors such as energy or transport is largely unknown, and it remains unclear how to make best use of such policies to fill the climate finance gap.
Against this backdrop, the project GREENFIN combines theory from technology innovation studies and financial economics to derive how different low-carbon technologies require different types of finance, as a starting point for targeted policy interventions. Empirically, novel climate finance datasets are used, exploiting both structured financial data and unstructured information, drawing on recent advances in machine learning methods (e.g. natural language processing). The project aims at delivering specific recommendations for designing more effective green financial policies in the EU and beyond.
Against this backdrop, the project GREENFIN combines theory from technology innovation studies and financial economics to derive how different low-carbon technologies require different types of finance, as a starting point for targeted policy interventions. Empirically, novel climate finance datasets are used, exploiting both structured financial data and unstructured information, drawing on recent advances in machine learning methods (e.g. natural language processing). The project aims at delivering specific recommendations for designing more effective green financial policies in the EU and beyond.
Since the start of the project in 2021, GREENFIN has made progress in three main areas.
Technology Finance for the Low-Carbon Transition (WP1): This part of the project studies technology-specific financing needs for Europe and the related investment shifts required to move towards a net-zero pathway. We performed an extensive meta-analysis including both model-based information and industry studies. Results were published in the journal Nature Climate Change and received a lot of media attention. Ongoing work includes understanding how financing needs depend on technology-inherent characteristics, studying the cost of capital for new low-carbon technologies, and understanding how technological maturity affects financing patterns.
Green financial policy options and effectiveness (WP2): Concerning policies in general, we first developed a definition of “green financial policies” and analyzed the policy output in OECD countries, with the dataset and analysis published in the journal Environmental Research Letters. Further analyses concerned two specific policy instruments. First, we assess the role of Green State Investment Banks as a way to mobilize private finance and to absorb investment risks related to new technologies. We provide an empirical contribution by assessing the predictors of SIB involvement in renewable energy deals in OECD countries. A working paper resulting from the empirical research was published in the Massachusetts Institute of Technology’s MIT Center for Energy and Environmental Policy Research Working Paper Series, alongside a Policy Brief on the matter. Second, we are interested in climate-related disclosure requirements and used machine learning methods to automatically identify disclosures of five different types of climate risks.
Green Financial Policy Mix (WP3): This part of the project has just begun. We're working on improving energy system models to better represent financial aspects. Focussing on the cost of capital of different energy technologies, a perspective article in the journal Joule describes key challenges and provides practical suggestions how to overcome them.
Technology Finance for the Low-Carbon Transition (WP1): This part of the project studies technology-specific financing needs for Europe and the related investment shifts required to move towards a net-zero pathway. We performed an extensive meta-analysis including both model-based information and industry studies. Results were published in the journal Nature Climate Change and received a lot of media attention. Ongoing work includes understanding how financing needs depend on technology-inherent characteristics, studying the cost of capital for new low-carbon technologies, and understanding how technological maturity affects financing patterns.
Green financial policy options and effectiveness (WP2): Concerning policies in general, we first developed a definition of “green financial policies” and analyzed the policy output in OECD countries, with the dataset and analysis published in the journal Environmental Research Letters. Further analyses concerned two specific policy instruments. First, we assess the role of Green State Investment Banks as a way to mobilize private finance and to absorb investment risks related to new technologies. We provide an empirical contribution by assessing the predictors of SIB involvement in renewable energy deals in OECD countries. A working paper resulting from the empirical research was published in the Massachusetts Institute of Technology’s MIT Center for Energy and Environmental Policy Research Working Paper Series, alongside a Policy Brief on the matter. Second, we are interested in climate-related disclosure requirements and used machine learning methods to automatically identify disclosures of five different types of climate risks.
Green Financial Policy Mix (WP3): This part of the project has just begun. We're working on improving energy system models to better represent financial aspects. Focussing on the cost of capital of different energy technologies, a perspective article in the journal Joule describes key challenges and provides practical suggestions how to overcome them.
The project results so far highlight the need to consider climate finance in the context of the technologies that need to be financed. Thus, our insights on technology-specific investment shift requirements and the enhanced understanding of how technological-specific financing needs are reflected in models represents a significant advancement to the research field. The ongoing GREENFIN work will help to leverage the enhanced understanding of tech-specificities in climate finance for more effective policy design.