## _wp11296 - introduction of carbon pricing schemes, or “feed-in-tariffs,” which require use of “green”

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### Key findings on policy impacts and green investment
- Introduction of carbon pricing schemes, or “feed-in-tariffs,” which require use of “green” energy, have a positive and significant impact on green investment.
- Feed-in-tariffs (FITs) and carbon pricing mechanisms are associated with higher GI:
  - FIT dummy ~ 1 point (log GI), implying GI should be two to three times larger in countries adopting FITs, other factors being equal.
  - Carbon pricing schemes: GI higher by about 0.5 point in countries with either a carbon tax or cap-and-trade; GI higher by about 1 point in countries with both schemes. Interpretation: GI about 60 percent larger in the first case, and two to three times larger in the second case.
- Renewable Portfolio Standards (RPS) and biofuel mandates do not significantly affect GI in the sample; biofuel support does not appear associated with higher overall GI investment rates.

### Definition and measurement of Green Investment (GI)
- GI concept:
  - GI refers to the investment necessary to reduce greenhouse gas and air pollutant emissions, without significantly reducing production and consumption of non-energy goods.
  - Covers both public and private investment.
  - Distinct from incremental mitigation investment relative to business-as-usual scenarios.
- Three main components of GI:
  - Low-emission energy supply:
    - Low-emission electricity supply: Nuclear; Renewable sources of electricity: Hydropower; Wind; Solar; Biomass.
    - Other low-emission/renewable energy supply: Biofuels; Biomass; Solar and geothermal for heating.
    - R&D in clean energy.
  - Energy efficiency (demand-side and electricity-sector): Households, Services, Industry, Agriculture, Transport; generation, transmission, and distribution improvements (e.g., smart grid).
  - Carbon sequestration: Agriculture, Deforestation, Carbon capture and storage (investment largely excluded from GI series due to measurement difficulties).
- Measurement choices and data sources:
  - GI series constructed from:
    - (i) financial investment in renewable technologies (including large hydroelectric projects excluded from BNEF financial series),
    - (ii) capacity investment in the nuclear sector (proxied by change in capacity × $4,000/kW; 40-year service life; 2.1 percent geometrical depreciation),
    - (iii) selected energy-efficient technologies (BNEF “Energy Smart Technologies”),
    - (iv) R&D in green technologies (BNEF data from 2004).
  - BNEF provides primary financial investment data (primarily private investment); public green fiscal stimulus and public R&D reported separately.
  - Hydroelectricity investment flows not estimated due to heterogeneity of capital costs; only capacity changes reported.

### Recent trends and regional patterns (2000–2010, and 2004–2010 regional detail)
- Global and sectoral scale:
  - Renewable GI increased from $7 billion in 2000 to $154 billion in 2010 (more than twentyfold).
  - Renewable energies and nuclear power represent one-third of electricity generation worldwide, and almost one-fourth of total energy consumption (IEA WEO 2010).
  - Excluding hydroelectric power, renewable technologies account for a small share of the electricity mix but contributed substantially to new capacity.
- Regional renewable GI developments (2004–2010):
  - Europe and North America quadrupled their renewable GIs.
  - Asia and Oceania increased renewable GIs tenfold.
  - 2010 regional investment levels (renewable GI):
    - North America: $35 billion
    - Europe: $36 billion
    - Asia: $64 billion
  - National 2010 figures:
    - Italy: $8 billion
    - Germany: $7 billion
    - Spain: $5 billion
    - China: $54 billion
    - United States: $30 billion
  - Changes in regional shares, 2004 to 2010:
    - Europe and North America share fell to 46 percent in 2010, from 68 percent in 2004.
    - Asia and Oceania share increased from 28 percent to 42 percent.
- 2009–2010 dynamics:
  - United States: GI declined in 2009 by $14 billion then picked up in 2010.
  - Europe: 2009 decline less marked due to stronger FIT-driven support; continued decline in 2010 influenced by lingering credit crunch.
  - Asia: GI increased by about $30 billion in 2009 and 2010, with China accounting for most growth.
  - China milestones:
    - In 2009, China became the country with the highest financial investment in renewables; added 37GW of renewable electricity capacity in 2009.
    - In 2010, China invested more GI than the entire European region.
    - China became world leader in photovoltaic module and wind equipment production and led in clean technology patents and IPOs.
- Technology-specific trends (2004–2010):
  - Wind:
    - Represented on average about half of total renewable GI over 2004–2010.
    - Growth rates of 22 percent and 14 percent in 2008 and 2009, respectively.
    - China became the largest investor in wind in 2009.
  - Solar:
    - Investment increased elevenfold between 2005 and 2008; fell by 24 percent in 2009 and stagnated in 2010.
  - Biomass and biofuels:
    - Biomass lost relative prominence due to feedstock bottlenecks and policy changes.
    - Biofuel investment boomed in 2005–2006 but stalled thereafter; severely affected in 2009 by lower oil prices and reduced blending demand.
  - R&D:
    - R&D in renewables steadily increased since 2004 and remained broadly constant in nominal terms in 2009.
    - BNEF estimates: on average, 14 percent of green stimulus was allocated to R&D.
    - 2009 R&D by region: Europe $12 billion (private R&D $8 billion), United States $7 billion ($4 billion public R&D).

### Hydro and nuclear capacity, investment, and regional patterns
- Nuclear:
  - Global installed nuclear capacity: 130GW (1980) → 325GW (1990) → about 370GW (as reported).
  - Share of total electrical capacity: about 12 percent in 1990 → 8 percent in 2008.
  - Reactors under construction: 159 in 1980; 20 in 2010; 42 currently under construction in Asia (as of text).
  - Asian markets accounted for about 90 percent of capacity increase since 1990.
  - Investment estimates: Asia averaged $7 billion per year during the last decade (excluding replacement); replacement needs make investment higher in Europe and North America when accounted for.
  - Public support/subsidies to nuclear: $45 billion in 2007 (Global Subsidies Initiative 2010a), with caveat on comparability.
- Hydropower:
  - Global hydro capacity grew from 480GW in the 1980s to 920GW in 2007.
  - Share of total electrical capacity: 23 percent in early 1980s → 19 percent in 2008.
  - Regional shares of hydropower capacity: Asia 32 percent; Europe 30 percent; North America 20 percent.
  - Over the last decade, average annual capacity growth: Asia 12 percent; Europe/North America about 1.5 percent.
  - China nearly doubled hydropower capacity over 2004–09.

### Econometric analysis: data, model, and key determinants
- Panel and variables:
  - Panel: 35 countries over 2000–2010.
  - Dependent variable: GI measured as financial investment in renewables (BNEF), expressed in real terms and in logarithms (except dummies and real interest rate).
  - Policy dummies/categorical variables: FIT (dummy); RPS (dummy); biofuel mandates (dummy); carbon pricing schemes (categorical: 0 / 1 / 2).
- Preferred fixed-effects specification includes five statistically significant covariates:
  - (i) GDP in constant dollars (log),
  - (ii) the long-term real interest rate,
  - (iii) the relative price of international crude oil (log),
  - (iv) the FIT dummy,
  - (v) the carbon pricing mechanism variable (categorical: 0 / 1 / 2).
- Elasticities and effects:
  - Income: an additional 1 percentage point of real GDP growth should raise real GI growth by about 4 percentage points in the long-run, other factors being equal (estimated elasticity).
  - Cost of capital: long-term real interest rate negative impact; estimated elasticity: GI declines by about 10 percent when the real interest rate increases by 1 percentage point.
  - Relative crude oil price: positive and large impact with a lag; a 10 percent increase in fuel prices—assuming other prices remain constant—could lead to a 10 percent increase in GI.
  - FIT and carbon pricing: see policy impacts subsection above.
  - Other variables: GDP per capita, GDP growth, R&D, tertiary education, and population are not statistically significant in the preferred specification; bank capital-to-asset ratio positive in some specifications; profit positive in some specifications.
- Robustness:
  - Results robust to inclusion of additional variables, sample date changes, exclusion of emerging countries, nominal estimations, GI-to-GDP ratio specification, and de-trended variables.
  - The 2009 time dummy (financial crisis) is not significant; the fall in GI during the crisis consistent with fundamentals.
  - Hausman test favors fixed effects. No correction for endogeneity of GDP was implemented.

### Policy implications and recommendations
- Macroeconomic policy levers:
  - Policies that enhance GDP growth and lower the cost of capital are effective at increasing GI (consistent with policies that increase private investment broadly).
- Energy price and fiscal measures:
  - Raising relative fossil-fuel prices (via higher taxation or reduction in subsidies) would help foster GI.
  - Quantification: a 10 percent increase in fuel prices could lead to a 10 percent increase in GI, other things equal.
- Targeted public interventions:
  - Feed-in-tariffs (FITs) and carbon pricing mechanisms are highlighted as effective instruments to support GI; FITs associated with two- to three-fold higher GI.
  - Many policies, including biofuel support, do not seem effective in increasing overall GI and may have adverse side effects (e.g., on food supply).
- Measurement and data priorities:
  - Improve measurement of carbon sequestration investment and hydro capital costs to better capture full GI.
  - Continue development of multi-country, harmonized datasets (e.g., BNEF, capacity proxies, public R&D series) to refine empirical analysis.

*Source: IMF Working Paper _wp11296 (content unit provided).*

### introduction of carbon pricing schemes, or “feed-in-tariffs,” which require use of “green”

### _wp11296 - introduction of carbon pricing schemes, or “feed-in-tariffs,” which require use of “green”

### Key findings on policy impacts and green investment
- Introduction of carbon pricing schemes, or “feed-in-tariffs,” which require use of “green” energy, have a positive and significant impact on green investment.
- Other interventions, such as biofuel support, do not appear to be associated with higher green investment.

### Scope, classification, and authorship
- JEL Classification Numbers: Q27, Q40, Q50
- Keywords: Renewable resources and conservation, energy, environmental economics
- Authors’ E-Mail Addresses: LEyraud@imf.org, AWane@imf.org, BClements@imf.org

### Structural outline of the working paper (major themes and empirical focus)
- I. Introduction
- II. What Is Green Investment and How Can It Be Measured?
  - A. Definition and Components of Green Investment
  - B. Measuring Green Investment
- III. The Growing Importance of Green Energy Sources
  - A. Green and Brown Energies
  - B. Government Support for Renewables
- IV. What Are the Recent Trends in Green Investment?
  - A. Renewable Energy
  - B. Hydro and Nuclear Power
- V. What Drives Green Investment?
  - A. Theoretical Determinants of Green Investment
  - B. Empirical Model and Econometric Results
- VI. Conclusion and Policy Implications

### Empirical materials and data components referenced
- Tables included: Structure of Green Investment by Category; Main Policy Instruments; Estimates of Public Support for Renewables; Green Investment Determinants.
- Figures included: World Electricity Generation; New Electricity Capacity (World); World Primary Energy Consumption, 2007; Green Component of Economic Stimuli as of February 2011; Renewable Green Investment, 2000–2010; Renewable Green Investment by Region, 2004–2010; Nuclear Installed Capacity, 1980–2008; Nuclear Investment by Region, 1980–2009; Installed Hydroelectric Capacity, 1980–2008.
- Box and appendices: Selected Renewable Technologies; Green Investment in Economic and Business Publications; The New Energy and Finance Database; Energy, Electricity, Power, and Capacity; Key Renewable Technologies: Definition and Trends; Research and Development in Green Technologies; Country List and Data Sources.
- Appendix Table and Figures: List of Variables, Definitions, and Sources; Renewable Green Investment by Technology, 2004–2010; Public and Private R&D in the World.

### Acknowledgements and disclaimers
- Acknowledged contributions from Ben Jones, Alex Bowen, Benjamin Carton, Derek Eaton, Thomas Helbling, Lusine Lusinyan, Ian Parry, Fulai Sheng; editorial support by Jeffrey Pichocki and Alica Dzelilovic; data management support by Matias Antonio, Lilla Nemeth, and the team of Bloomberg New Energy and Finance.
- The Working Paper should not be reported as representing the views of the IMF. The views expressed are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress and are published to elicit comments and to further debate.

*Source: IMF Working Paper _wp11296 (content unit provided).*

### References .............................................................................................................

### _wp11296 - References .............................................................................................................

### I. INTRODUCTION
- Consensus: climate change is occurring and is caused by human-induced greenhouse gas emissions, mainly from fossil fuel combustion and changes in land use.
- Macroeconomic consequences highlighted:
  - Higher temperatures, rising sea levels, and extreme weather may severely impair output and productivity (IMF 2008a).
  - Fiscal positions affected via direct impact on tax bases and spending programs, and via mitigation/adaptation policies (IMF 2008b, Jones and Keen 2009, Parry 2011).
- Transition to low-carbon model requires large investments in alternative energy sources; green technologies are capital-intensive, especially early on (Johnson and Lybecker 2009).
- Non-climate motivations for GI: energy security, reduced air-pollution health effects, and new growth sources (PriceWaterhouseCoopers 2008, McKinsey 2009, Accenture 2011, OECD 2011).
- Current scale of green energy:
  - Renewable energies and nuclear power represent one-third of electricity generation worldwide, and almost one-fourth of total energy consumption (IEA WEO 2010).
- Paper purpose:
  - Analyze and explain recent trends in green investment (GI) using a new multi-country dataset.
  - Define GI in a macroeconomic sense and relate it to macro determinants from a cross-country perspective.
- Key empirical implications:
  - Macroeconomic policies that boost private investment broadly (enhancing GDP growth and lowering cost of capital) are useful for GI.
  - Feed-in tariffs and carbon pricing mechanisms foster GI; biofuel support does not appear associated with higher investment rates.
- Paper organization overview: Sections II–VI cover definition/measurement, relative importance of green vs. conventional energy, recent GI trends, determinants (theory and empirics), and conclusions.

### II. WHAT IS GREEN INVESTMENT AND HOW CAN IT BE MEASURED?
- Definition and scope:
  - GI refers to the investment necessary to reduce greenhouse gas and air pollutant emissions, without significantly reducing production and consumption of non-energy goods.
  - GI covers both public and private investment.
  - Distinct from forward-looking mitigation literature that measures incremental investment relative to business-as-usual scenarios.
- Three main components of GI (Table 1 structure preserved):
  - Low-emission energy supply
    - Low-emission electricity supply: Nuclear; Renewable sources of electricity: Hydropower; Wind; Solar; Biomass.
    - Other low-emission/renewable energy supply: Biofuels; Biomass; Solar and geothermal for heating.
    - R&D in clean energy.
  - Energy efficiency (demand-side and electricity-sector)
    - Energy efficiency across Households, Services, Industry, Agriculture, Transport.
    - Electricity-sector efficiency: generation (e.g., moving from sub- to super-critical coal), transmission, and distribution (efficient grids, smart grid technologies).
  - Carbon sequestration
    - Agriculture, Deforestation, Carbon capture and storage technologies.
    - Note: Deforestation accounts for 20 percent of total emissions (Report of the Intergovernmental Panel on Climate Change 2007).
    - Main mitigation strategies in agriculture/forestry rely more on labor than physical capital; available data on GI in this area is limited.
- Inclusion decisions:
  - Nuclear included in GI definition because definition is based on impact on gas emissions, despite contested status due to radioactive waste.
  - Biofuels included, despite debated impact on carbon emissions (IMF 2008d).
  - Fossil-fuel switching (e.g., coal to natural gas) excluded from GI measure for simplicity.

- Measuring GI:
  - GI measure covers:
    - (i) financial investment in renewable technologies (including large hydroelectric projects),
    - (ii) capacity investment in the nuclear sector,
    - (iii) selected energy-efficient technologies,
    - (iv) R&D in green technologies.
  - Investment in carbon sequestration excluded due to measurement difficulties.
  - Data sources and methods:
    - Bloomberg New Energy Finance (BNEF) provides renewable GI financial data (excluding large hydro). BNEF records financial investment (acquisition of financial assets); database primarily private investment, with separate reporting of green fiscal stimulus and public R&D spending.
    - Where financial data unavailable, investment approximated from capacity data (applied to nuclear).
      - Nuclear investment proxied by change in capacity times an average fixed capital cost of $4,000/kW (Schlissel and Biewald 2008).
      - Nuclear service life assumption: 40 years.
      - Geometrical depreciation rate: 2.1 percent (based on estimates from the U.S. Bureau of Economic Analysis).
    - Hydroelectricity: investment flows not estimated due to high heterogeneity of capital costs; only changes in capacity reported in Section IV.B.
  - BNEF “Energy Smart Technologies” category covers selected energy-efficient technologies (e.g., smart grids, power storage).

### III. THE GROWING IMPORTANCE OF GREEN ENERGY SOURCES
- Green vs. Brown energies (aggregate generation and consumption):
  - Electricity generation:
    - In 2008, about one-third of global electricity was generated from green sources (nuclear and renewables), and two-thirds from conventional sources.
    - Since the second half of the 1990s, composition of green generation shifted from hydro and nuclear toward other renewables.
    - Excluding hydroelectric power, renewable technologies account for a small share of the electricity mix relative to fossil fuels, nuclear, or hydropower; however, their contribution to new electricity capacity has been substantial in recent years.
  - New electricity capacity (2008–2009 context from BNEF):
    - 2008 world new capacity components shown: Fossil Fuel 90 GW; Renewables* 40 GW; Large Hydro 25 GW (chart annotation).
    - 2009 world new capacity components shown: Fossil Fuel 83 GW; Renewables* 50 GW; Large Hydro 28 GW (chart annotation).
    - Note: New Nuclear capacity is not reported, as nuclear capacity remained stable in 2008 and 2009.
  - Energy consumption:
    - Depending on measurement method, green energy sources (renewables and nuclear) supply about 20 to 25 percent of global energy consumption, owing to biomass use for cooking and heating.
    - Excluding non-traded fuels, the share of renewables and nuclear falls to about 15 percent.
- Government support for renewables:
  - Policy proliferation:
    - Number of countries with policy target/support almost doubled from 55 in early 2005 to more than 100 by early 2010 (Renewable Energy Policy Network 2010).
  - Support scheme objectives:
    - (i) reduce carbon emissions and avoid climate change;
    - (ii) improve energy security by diversifying energy mix;
    - (iii) foster growth via competitiveness, job creation, and innovation in new industries.
  - Most common policy instruments (Table 2):
    - Feed-in-tariffs (FITs): adopted by 50 countries and 25 states/provinces by early 2010.
    - Renewable portfolio standards (RPS): found in 10 countries and 46 states/provinces.
    - Biofuel blending mandates: 24 countries, 41 states/provinces.
  - Cost and scale of public programs:
    - Published estimates of public support for renewables provide a range of $40–$60 billion per year worldwide (Table 3).
    - Biofuel subsidies account for the lion’s share of public program costs.
    - Renewables receive about six times more subsidies than fossil fuels on an output basis ($0.05 per kWh vs. $0.008 per kWh) (Global Subsidies Initiative 2010a, cited).
    - Fiscal stimulus green components (pledged as part of 2008/09 responses) estimated at about $180–$195 billion; United States $65 billion; China $46 billion; South Korea $32 billion (Renewable Energy Policy Network 2010 and BNEF 2011a cited).
    - In the countries with the largest green packages, green measures represent no more than 15 percent of the total fiscal stimulus, except South Korea where 80 percent of the stimulus was earmarked for green investment.
    - Largest share of green stimulus financing (almost one-fourth) went to energy efficiency measures.
    - Only half of the total allocated green stimulus funds were disbursed in 2009 and 2010 ($20 and $74 billion, respectively).
    - Implementation delays and project scaling-down occurred in some countries (Brazil, China, Spain, United Kingdom).
  - Typical policy instruments summarized (Table 2):
    - Subsidies to producers and consumers: Direct payments, Tax breaks, Preferential financing.
    - Regulations: Blending mandates, Feed-in-tariffs, Cap and trade / RPS and green certificates.
    - Indirect support: Support for energy efficiency, Fossil fuel taxation and cap-and-trade systems, Upstream support.
    - R&D: Development and deployment of new technologies.
  - Published estimates of public support for renewables (excluding hydro and nuclear) (Table 3):
    - ELI (2009): United States, 2002-2008, $29 billion over the period.
    - GSI (2010a): World, 2007, $47 billion, of which $27 billion for renewable electricity sources; $20 billion for biofuels.
    - IEA WEO (2010): World, 2009, $57 billion, of which $37 billion for renewable electricity sources; $20 billion for biofuels.
    - BNEF (2010b): World, 2009, $43–$46 billion.
  - Green stimulus pledges (Figure 4 annotated values):
    - Pledged green stimulus amounts (not necessarily disbursed): 65; 46; 32; 15; 11; 10; 4; 3; 3; 2; 2; 1 (billion-dollar scale on figure).

### IV. WHAT ARE THE RECENT TRENDS IN GREEN INVESTMENT?
- Renewable energy investment (BNEF data, excluding large hydro):
  - Between 2000 and 2010, renewable GI increased more than twentyfold from $7 billion to $154 billion.
  - Main drivers: global economic growth, increasing fossil fuel prices, technology advances, policy support, and stronger consumer demand for cleaner environment.
  - Cost reductions achieved via economies of scale, technological progress, and lower interest rates; green energy can already compete unsubsidized in some markets (BNEF 2011b), though total renewables remain highly subsidized (see Section III.B).
  - 2009 downturn:
    - Renewable GI temporarily declined in 2009 during the global recession due to less favorable financial conditions, reduced liquidity, and uncertainty as fossil fuel prices receded.
    - Decline was partially countered by green components of fiscal stimulus (Section III.B).

### V. KEY FINDINGS AND POLICY IMPLICATIONS (Synthesis of paper’s empirical conclusions)
- GI has become a key driver of the energy sector and exists on a similar scale to investment in fossil-fuel capacity (paper’s comparative finding).
- GI is a global phenomenon with leadership shifting geographically:
  - Europe and the United States led in the 1990s; China has become the leader in more recent years.
- Macroeconomic policy implications:
  - Policies that enhance GDP growth and lower the cost of capital are effective at increasing GI (consistent with policies that increase private investment broadly).
- Public policy effectiveness:
  - Feed-in tariffs (price support) and carbon pricing mechanisms are associated with higher GI.
  - Biofuel support does not appear associated with higher overall GI investment rates.
- Measurement and data considerations:
  - Financial measures (BNEF) and capacity-based proxies (nuclear: $4,000/kW; 40-year life; 2.1 percent geometrical depreciation) used to construct GI series.
  - Carbon sequestration investments are excluded due to measurement limitations.

*Italic: Source PDF filename: _wp11296 - References .............................................................................................................*

### Section IV.B). Data is not corrected for inflation, owing to the difficulty in finding a relevant deflator for

### _wp11296 - Section IV.B). Data is not corrected for inflation, owing to the difficulty in finding a relevant deflator for

### Renewable Green Investment — regional trends and figures
- Renewable GI grew steadily in all major regions until the onset of the economic crisis.
- From 2004 to 2010:
  - Europe and North America quadrupled their renewable GIs.
  - Asia and Oceania increased renewable GIs tenfold.
- 2010 regional investment levels (renewable GI):
  - North America: $35 billion
  - Europe: $36 billion
  - Asia: $64 billion
- Within Europe, 2010 national investors:
  - Italy: $8 billion
  - Germany: $7 billion
  - Spain: $5 billion
- In Asia, 2010:
  - China: $54 billion
- In North America, 2010:
  - United States: $30 billion
- Changes in regional shares, 2004 to 2010:
  - Europe and North America share fell to 46 percent in 2010, from 68 percent in 2004.
  - Asia and Oceania share increased from 28 percent to 42 percent.
- 2009–2010 dynamics:
  - United States: GI experienced a severe decline in 2009 (by $14 billion) owing to less aggressive policy support and effects of the global financial crisis; investment picked up in 2010.
  - Europe: trend less marked in 2009 due to stronger government interventions (in particular through feed-in-tariffs (FIT)); European investment continued to decline in 2010 affected by the lingering credit crunch.
  - Asia: GI continued to soar during the financial crisis, increasing by about $30 billion in 2009 and 2010, with China accounting for the bulk of the growth.
- China-specific developments:
  - In 2009, China moved ahead of the United States as the country with the highest financial investment in renewables, and added 37GW of renewable electricity capacity in 2009.
  - In 2010, China was responsible for more GI than the entire European region alone.
  - China is now the world leader in the production of photovoltaic modules and wind power equipment, has stepped up research and development efforts, and has the lead in clean technology patents and Initial Public Offerings (IPOs) in the renewable sector.
- Data source cited: BNEF.

### Drivers of Renewable GI growth during the period
- Public-sector support factors identified:
  - Major development banks (EIB, KfW, EBRD, and WB) financed large projects in offshore wind and solar thermal.
  - Monetary policy eased globally and interest rates reached historic lows.
  - Many green projects were supported by public measures in the context of fiscal stimulus programs.
- Other supportive conditions in Asia/China:
  - Benign macroeconomic conditions, a resilient banking sector, and high saving rates.
  - Series of new laws and financial support measures (including loans from state-owned banks) encouraged large renewable energy projects to promote domestic manufacturing and improve energy security.

### Hydro and Nuclear Power — capacity, investment, and regional patterns

- Nuclear capacity and trends:
  - Global installed nuclear capacity grew from 130GW to 325GW between 1980 and 1990, and now stands at about 370GW.
  - As a share of total electrical capacity, nuclear capacity declined from about 12 percent in 1990 to 8 percent in 2008.
  - Installed capacity growth was driven by Asia; Europe and North America grew on average by 14 percent per year between 1980 and 1990 but stalled thereafter.
  - Number of nuclear reactors under construction:
    - 159 in 1980
    - 20 in 2010
    - 42 currently under construction in Asia (as of text)
  - Asian markets accounted for about 90 percent of the capacity increase since 1990.
  - China was the only country with ambitions for nuclear expansion even before the events in Japan (IEA 2010).
- Nuclear investment computations:
  - Based on capacity data and methodology in Section II.B, investment series were computed.
  - In Europe and North America, investment in new capacity (excluding replacement) shrunk in the 1990s and is now negligible.
  - Investment in Asia averaged $7 billion per year during the last decade (with growth shifting from Japan to China).
  - When replacement of obsolete capital is taken into account, investment appears higher in Europe and North America because of their larger existing capacity.
- Public support to nuclear industry:
  - Public support (subsidies and contingent guarantees to investment, operating, waste management, and decommissioning costs) amounted to $45 billion in 2007 according to Global Subsidies Initiative (2010a).
  - Note in text: the $45 billion figure may not be fully comparable to capacity-investment estimates; construction cost assumptions and operating costs differ.
- Hydropower capacity and trends:
  - Global hydro capacity grew from 480GW in the 1980s to 920 GW in 2007.
  - As a share of total electrical capacity, hydropower declined from 23 percent in the early 1980s to 19 percent in 2008.
  - Regional shares of hydropower capacity:
    - Asia: 32 percent
    - Europe: 30 percent
    - North America: 20 percent
  - Over the last decade, capacity growth strongest in Asia with an average annual growth of 12 percent; about 1.5 percent in Europe or North America.
  - China nearly doubled its hydropower capacity over 2004–09.
  - Compared to other renewables and nuclear, hydro projects do not benefit from significant public support owing to better cost competitiveness.

### What drives Green Investment? — theoretical determinants (variables used in econometric analysis)
- Two broad categories of drivers:
  - Traditional determinants of investment: interest rates, income level and growth, production costs.
  - Determinants specific to green capital accumulation.
- Specific determinants and expected relationships included in the analysis:
  - Economic growth and income level:
    - Economic activity expected to boost demand for energy and investment in the energy sector (“accelerator effect”).
    - Environmental Kuznets Curve (EKC) hypothesis: higher levels of development may eventually lead to lower pollution; GDP growth and level variables included in econometric analysis.
  - Population:
    - Rapidly increasing populations face important energy needs that may require investment in alternative energy sources.
    - Expectation: positive relationship between population and GI.
  - Technological progress and innovation:
    - Innovation (e.g., energy storage techniques) enables expansion of GI.
    - Expectation: positive relationship between GI and R&D spending and human capital variables.
  - Interest rates:
    - High interest rates reduce investment; renewables expected to be particularly sensitive due to high upfront costs and capital intensity.
    - Expectation: negative relationship between interest rates and GI.
  - Cost of fossil energy sources:
    - High fossil energy prices expected to foster GI; the GI indicator includes biofuel industry investment.
    - In econometric estimation: international prices of crude oil and coal, and domestic price of gasoline used to measure cost of brown capital.
    - Also tested: effect of energy dependence (share of imported energy) and of carbon emissions.
  - Production cost of green capital goods:
    - Demand for investment inversely related to its cost; cost variables included: unit labor costs, wages, cost of starting a business, and corporate income tax.
  - Profit (cash flow):
    - Current profit as predictor of future profits; financing constraints make cash flow a determinant of investment.
  - Public policies to support green investment:
    - Public interventions correct carbon externalities.
    - Four time-varying dummy variables constructed to measure whether country i in year t implements:
      - feed-in-tariffs
      - renewable portfolio standards
      - biofuel mandates
      - carbon pricing schemes

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp11296.pdf*

### Section III.B). As these policies are more likely to be conducted by governments

### _wp11296 - Section III.B). As these policies are more likely to be conducted by governments

### Empirical model and data
- Panel: 35 countries over 2000–2010.
- Dependent variable: GI measured as financial investment in renewables (BNEF database), expressed in real terms and in logarithms (except dummies and real interest rate).
- Estimation: fixed-effects methodology.
- Preferred specification includes five statistically significant covariates:
  - (i) GDP in constant dollars (log),
  - (ii) the long-term real interest rate,
  - (iii) the relative price of international crude oil (log),
  - (iv) the FIT dummy,
  - (v) the carbon pricing mechanism variable (categorical: 0 / 1 / 2).
- Some variables enter with one or two lags to allow time for GI responses.
- A large set of other covariates was tested (GDP growth; GDP per capita; population; fuel prices; wages, unit labor costs, profit tax; cost of starting a business; inflation; financing variables; energy dependency; carbon emissions per capita; R&D spending; FIT, RPS, biofuel mandates, carbon pricing; tertiary education spending/enrollment; importance of green parties).

### Key econometric findings (direction, magnitudes, and statistical notes)
- Income
  - Higher levels of income boost investment in green technologies.
  - Based on the estimated elasticity, an additional 1 percentage point of real GDP growth should raise real GI growth by about 4 percentage points in the long-run, other factors being equal.
  - Results remain valid when using GDP per capita or OECD constant PPP GDP per capita instead of GDP.
  - GDP growth, R&D, tertiary education, and population are not statistically significant in the preferred specification.

- Cost of capital and financing constraints
  - Long-term real interest rate has a significant and negative impact with a lag.
  - Estimated elasticity: GI declines by about 10 percent when the real interest rate increases by 1 percentage point.
  - Long-term nominal interest rate is also significant in alternative specifications; short-term real interest rates are not significant.
  - Bank capital-to-asset ratio (capital ratio) exerts a positive effect on GI (significant in some specifications).
  - Profit (log) positively impacts GI in some specifications, suggesting reinvestment of profits can substitute for borrowing when market access is constrained (this effect is less robust).

- Relative fuel prices
  - Log(relative crude oil price) has a positive and large impact on GI with a lag.
  - Coefficient interpretation: GI grows by an additional percentage point when there is a 1 percentage point differential between increases in crude oil prices and economy-wide inflation (GDP deflator).
  - In alternative specifications, relative coal price is significant but with a weaker and less robust impact.
  - Growth rate of crude oil prices (Dlog(relative crude oil price)) has a positive effect; interpretation: investors may anticipate higher future oil prices when growth rates are high.
  - Log(energy dependence) is negatively related to GI in one specification.
  - No direct impact of carbon emissions per capita was found, possibly because carbon pricing captures this effect.

- Policy support variables
  - Renewable Portfolio Standards (RPS) and biofuel mandates do not significantly affect GI in the sample.
  - FIT (feed-in tariff) dummy is statistically significant with a lag.
    - Estimate: FIT dummy ~ 1 point (log GI), implying GI should be two to three times larger in countries adopting FITs, other factors being equal.
  - Carbon pricing schemes significant in almost all specifications:
    - GI higher by about 0.5 point in countries with either a carbon tax or cap-and-trade.
    - GI higher by about 1 point in countries with both schemes.
    - Interpretation: GI about 60 percent larger in the first case, and two to three times larger in the second case.
  - Importance of green parties is insignificant in most specifications.

### Robustness and specification checks
- Results robust to:
  - Inclusion of additional variables.
  - Changing start and end dates of the sample.
  - Excluding emerging countries.
  - Estimating the model in nominal terms.
  - Using the explained variable as the GI-to-GDP ratio (column 10).
  - Re-estimating with de-trended variables (coefficients not fundamentally affected though R2 smaller).
- The 2009 time dummy (financial crisis) is not significant; the fall in GI during the crisis appears consistent with fundamentals.
- Hausman test favors fixed effects over random effects.
- No correction for possible endogeneity of GDP was implemented; reverse causality from GI to GDP expected to be weak given the relatively small size of the renewable sector.

### Policy implications (conclusions drawn from results)
- Macroeconomic factors (economic growth, interest rates, profit developments) and energy policies matter for GI.
- Higher relative fossil-fuel prices increase the return to GI; policy levers that raise fossil-fuel prices (higher taxation or reduction in subsidies) would help foster green investment.
  - Quantification: a 10 percent increase in fuel prices—assuming other prices remain constant—could lead to a 10 percent increase in GI.
- Specific public interventions:
  - Feed-in-tariffs (FITs) and carbon pricing mechanisms tend to support GI.
  - FIT is highlighted as one of the most important instruments, with GI two to three times larger when FITs are adopted (other things equal).
  - Many policies, including support for biofuels, do not seem effective in increasing GI; concerns about biofuel subsidies and adverse effects on food supply are noted.

*Source: IMF staff estimates (Section III.B of the provided document).*

### Box 1. Selected Renewable Technologies: Terminology and Key

### Box 1. Selected Renewable Technologies: Terminology and Key Features

### Terminology and technology descriptions
- Biofuels: A wide range of fuels derived from biomass (either from organic living organisms or from metabolic byproducts) and used for transport.
- Biomass: Energy produced from organic material grown, collected, or harvested for energy use. Feedstock absorbs carbon while growing, and returns it when burned or decaying, with zero net increase in carbon. Biomass is the only renewable energy that can be used for all three of the major categories of energy consumption, namely, electrical power generation, heat production, and transport fuels.
- Geothermal: Heat extracted from the earth, usually in the form of hot water or steam. It can be exploited for electricity generation or for direct use in district heating systems.
- Hydropower: Results from the conversion of the kinetic energy of water into electricity, produced either in run-of-river plants or reservoirs. It is the most mature renewable energy technology.
- Solar: Three types of technology are identified:
  - Solar photovoltaic (PV) converts direct and diffused solar radiation into electricity through solar panels.
  - Concentrated solar power (CSP) uses lenses or mirrors to concentrate sunlight to produce a high heat and then converts it into electricity. CSP can only exploit direct sunlight.
  - Solar Thermal (ST) produces heat derived from solar radiation by heating a fluid circulated through a collector. ST can exploit both direct and diffused sunlight.
- Wind: Exploits the kinetic energy of wind for electricity generation through the use of turbines.

### Investment trends and technology performance (2004–2010)
- Wind:
  - Wind power is described as the most commercially viable renewable technology.
  - It represented on average about half of total renewable GI over 2004–2010.
  - Wind investment experienced steadier growth compared to other renewable technologies due to technology maturity, lower risk, policy support (especially under the form of FITs), and cheaper capital costs.
  - Wind sustained growth rates of 22 percent and 14 percent in 2008 and 2009, respectively.
  - Most investment in renewable energy now goes into wind power.
  - Recent increases are almost exclusively due to a boom in wind projects in China, which became the largest investor in this technology in 2009 (although installed capacity is still larger in the U.S.).
- Solar:
  - Solar is the second-most invested technology after wind.
  - Investment in solar power increased elevenfold between 2005 and 2008.
  - Solar investment suffered a correction in 2009 (by 24 percent) and stagnated in 2010.
  - Causes of the 2009 decline included a shortage of financing (solar perceived as less mature and higher-risk), a sharp drop in solar equipment prices as the industry shifted from excess demand to excess supply, and less favorable public support in Spain.
- Biomass and biofuels:
  - Biomass was the second-largest technology in the early 2000s but lost its leading role owing to less supportive public policies and feedstock-related bottlenecks (long-term availability and price security cannot be guaranteed by suppliers, and prices lack transparency, as biomass is mostly bilaterally traded).
  - Biomass showed some resilience in 2009, possibly reflecting perception by investors that it is a more mature technology.
  - Investment in biofuels boomed in 2005 and 2006, supported by aggressive policies, but has since stalled due to high feedstock prices and over-capacity, particularly in the United States.
  - In 2009, the biofuel industry was severely affected by the fall in oil prices and lower overall demand for oil that limited the amount of biofuels that could be absorbed by gasoline and diesel blending pools.
  - Investment in biofuels was also deterred by higher crop and output prices, concerns about environmental sustainability, impacts on overall greenhouse gas emissions, and effects on food prices.

### R&D in green technologies
- Coverage and measurement:
  - R&D in green technologies is an important component of GI and can be measured using the BNEF database (which does not cover R&D in large hydro and nuclear powers).
  - BNEF provides data on R&D starting in 2004.
- Levels and trends:
  - R&D in renewable energies has steadily increased since 2004 and was broadly constant in nominal terms in 2009 despite the crisis.
  - BNEF (2010d) estimates that, on average, 14 percent of the green stimulus was allocated to R&D.
  - Europe and the United States are the largest investors in renewable R&D in 2009, with $12 billion and $7 billion, respectively.
  - Private sector R&D accounted for the majority of European spending ($8 billion out of $12 billion).
  - In the United States, R&D was more equally distributed with $4 billion for public R&D out of $7 billion.
- Focus and concerns:
  - In 2008, 70 percent of total R&D was allocated to energy-smart technologies (examples include efficient lighting and insulation, smart grids, new batteries, and hybrid or electric vehicles).
  - Amounts allocated to R&D on renewables remain small compared to nuclear power: in the sample of IEA countries, public R&D on renewable energy—although comparable in size with fossil fuel R&D—accounted for only one-third of the financing given to nuclear power in recent years.
  - The concentration of R&D spending on energy efficiency rather than on bringing new renewable technologies to market is identified as a potential source of concern for further deployment of new technologies.

### Data coverage and variables used in econometric analysis
- Countries covered (35): Australia, Austria, Belgium, Brazil, Canada, Chile, China, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, India, Ireland, Italy, Japan, Korea (Republic), Luxemburg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.
- Key variables, definitions, and sources (selected):
  - Renewable investment: Financial investment in renewables, excluding large hydro projects, in billions of dollars (BNEF).
  - GDP: Nominal and real GDP in dollars and domestic currency (in billions) (WEO).
  - GDP per capita PPP, constant (OECD).
  - Population: In millions (WEO).
  - Inflation: GDP deflator (WEO).
  - International gasoline price: In dollars per liter (Reuters).
  - Crude oil price: Simple average of three spot prices: Dated Brent, West Texas Intermediate, and the Dubai Fateh, US$ per barrel (WEO).
  - Domestic gasoline price: In dollars per liter (IMF FAD).
  - Wage: Compensation of employees, in billions of dollars (National Accounts) (OECD, Economic Outlook).
  - Unit labor cost: Total economy, 2005 base (OECD, Economic Outlook).
  - Profit: Gross operating surplus and mixed income, in millions of dollars (National accounts) (OECD, Economic Outlook).
  - Cost of starting a business: Percent of per capita income (Doing Business indicators, WDI).
  - Interest rates: Nominal and real, short-term and long-term (WEO).
  - Tax on business: Tax paid by businesses in percent of profit (Doing Business indicators, WDI).
  - Fossil fuel use: Fossil fuel energy use, percent total energy use (WDI).
  - Green parties: Share of votes and share of seats (Comparative political dataset).
  - Domestic credit: Domestic credit to the private sector (percent of GDP) (IMF IFS).
  - Bank capital: Bank capital-to-asset ratio (IMF GFS report).
  - Energy dependency: Net energy imports, percent of energy use (WDI).
  - Carbon emissions: Per capita metric tons (WDI).
  - R&D: Expenditure for R&D, percent of GDP (WDI).
  - FIT: Dummy (0=no FIT) (IMF Staff).
  - RPS: Dummy (0=no RPS) (IMF Staff).
  - Biofuel mandates: Dummy (0=no mandate) (IMF Staff).
  - Carbon pricing schemes: Categorical viable (0=neither carbon tax nor cap-and-trade; 1=either; 2=both) (IMF Staff).
  - Spending on tertiary education: Public expenditure per student, percent of GDP per capita (UNESCO, WDI).
  - Enrollment in tertiary education: Gross enrollment in percent of relevant age group (UNESCO, WDI).
  - Coal price: Australian coal; 2005-based index (US$ per Mt) (WEO).

*Source: _wp11296 - Box 1. Selected Renewable Technologies: Terminology and Key Features (IMF).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp11296.pdf_