Climate Policies as a Catalyst for Green FDI

IMF Working Papers, March 1, 2024

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Assesses the role of climate policies as a catalyst of low carbon technologies deployment through foreign direct investment (FDI).
Leverages detailed cross-border project-level information to identify “green” FDI.
Core finding: a higher number of active climate policies is associated with higher levels of green FDI inflows.

A higher number of active climate policies in a recipient country is associated with higher levels of green FDI inflows.
Climate policies do not appear to be linked to lower levels of non-green projects, suggesting relatively small overall costs from the green transition.
Heterogeneity across sectors and instruments:
- The association between climate policies and green projects is particularly strong in energy and manufacturing.
- Stronger effects when the recipient's climate portfolio is tilted towards binding policies (e.g., taxes and regulation) and expenditure measures.
Policy spillovers:
- Larger climate policy portfolios in the source country are linked to higher green FDI outflows.
- Green subsidies in source countries can discourage green FDI outflows, implying subsidies could hamper efforts to deploy low-carbon technologies across countries.

Expanding the number of active climate policies can attract green FDI without reducing non-green projects, indicating limited short-term trade-offs.
Binding policies (taxes, regulation) and expenditure measures in recipient countries are particularly effective at catalyzing green FDI in energy and manufacturing.
Source-country policy design matters for international deployment of low-carbon technologies:
- Broad, binding climate policy portfolios in source countries can promote green FDI outflows.
- Green subsidies may have unintended cross-border effects by discouraging green FDI outflows and thus potentially limiting international diffusion of low-carbon technologies.

Balance of payments; Climate change; Climate policy; Environment; Foreign direct investment; Greenhouse gas emissions; Tariffs; Taxes.
Keywords: Climate change, Climate policies, Climate policy, FDI, FDI inflow, FDI outflow, Foreign direct investment, Global, green FDI, Greenhouse gas emissions, low carbon technologies, policy instrument, policy spillover, renewable energy, Tariffs.

Source: Climate Policies as a Catalyst for Green FDI — Samuel Pienknagura, March 1, 2024.