Private Financing in Low-Carbon Energy Transition: Imbalances and Determinants

Abstract

Transition centred on innovation and application of low-carbon products to establish a sustainable environment requires financial support. However, as the core component of low-carbon energy system (LCES), renewable energy (RE) has been experiencing imbalanced in the overall transition process across countries and categories in private investment. Evidences in research provide rationality to assume balanced private investment on RE will apply a positive influence on environmental sustainability and global economy. Thus, in order to throw a light on policy perspective, this paper establish a stochastic frontier model to identify the determinants of private investment on RE based on profit theory of investment. By empirically estimating data of 18 developing countries, the estimation results show positive statistically significance on risk premium of country-specific low-carbon risks and the macroeconomic risk, political risk, trade openness, and business environment. The implication suggest feasible approaches to eliminate perceived risks associated with RE sector are essential. Government can play a role in adopting a more open trade policy, providing a more friendly business environment for investors, encouraging innovation by establishing green investment bank, reducing tax on low-carbon energy investment, and stimulating green investment in financial markets. In addition, regional and international cooperation is another solution to the transition to LCES by attracting financial and technology support.