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Bridging the clean energy investment gap: Cost of capital in the transition to net-zero emissions

Author

Listed:
  • Cian Montague
  • Kilian Raiser
  • Moongyung Lee

Abstract

The rapid and deep emissions reductions needed to keep global warming to 1.5°C rely critically on an immense scaling-up of investment in clean energy technologies. The cost of capital plays a key role in determining investment decisions and, when elevated, can pose a significant barrier to accelerated climate action. The high capital expenditure needs of clean energy technologies make them more vulnerable to changes in the cost of capital than fossil fuel alternatives. This paper provides an overview of the cost of capital as a barrier to clean energy investment and depicts the key risk factors that determine the cost of capital for specific investments. It shows how, particularly in developing countries and for new and emerging technologies, a high cost of capital can significantly stifle investment, and calls on governments to implement better risk sharing mechanisms to overcome this barrier.

Suggested Citation

  • Cian Montague & Kilian Raiser & Moongyung Lee, 2024. "Bridging the clean energy investment gap: Cost of capital in the transition to net-zero emissions," OECD Environment Working Papers 245, OECD Publishing.
    • Handle: RePEc:oec:envaaa:245-en
    DOI: 10.1787/1ae47659-en
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    More about this item

    Keywords

    clean energy investment; clean energy technologies; climate policy; developing countries; finance;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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