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Study on the macroeconomics of energy and climate policies

By Climatekos

Climatekos, with its strategic partner Trinomics, is currently joining efforts with Cambridge Economics and E3 Modelling. Together, they will publish a “Study on the Macroeconomics of Energy and Climate Policies“, on behalf of the European Commission, Directorate-General for Energy.

The purpose of the assignment is, firstly, to use descriptive and econometric analysis to summarise and learn from the historical evidence on EU energy-related trends in the context of global trends. Secondly, they will explore the role of policy-induced technological innovation and investment-driven low-carbon developments. This will look at the relationships between the economy and innovation, with a particular focus on the supply and use of energy, and the possible impacts of public policy. Thirdly, the aim is to understand and assess the contribution of public and private finance in mobilising investments to decarbonise the EU's energy sector. This is so that these financial contributions can be included in relevant models. Finally, the study will use existing models (particularly E3ME and GEM-E3-FIT) to assess the potential impacts of change in energy systems. This is in particular reference to revised or new EU and non-EU energy-related policies that affect the EU macro-economy, and that incorporate innovation and finance.

Climatekos’ role is to assist in drawing and assessing the financial components of the “decarbonisation” scene today. The focus is mostly within the energy, industry, and transportation sectors. Many factors and players are involved in the financing of such broad areas of decarbonisation, e.g. public sources, large financial institutions, fixed income markets (public and corporate), equity markets (primary and lower markets), PE/VC, or even crowdfunding. All these players may finance the various sectors of decarbonisation (e.g. solar, wind, energy efficiency), indifferently or specifically. The factors that impact sources of finance and means of “decarbonisation” include:

  • Policy design, regulatory risk, uncertainties in public incentives and business components (e.g. return on investment, cost overrun)

  • Technology specific components (e.g. solar PV, on shore and off shore wind)

  • Elements linked to the nature of renewable energy (e.g. timing of energy production, timing of investments due to the CAPEX/OPEX issue)

  • Shortage of investable projects and opportunities

  • Country efficiency to support “decarbonisation” projects

  • Governance and accountability factors

  • Macro-economic factors (e.g. current low price of fossil fuel commodities) or even the influence of public opinion

Factors and players may either be a help or a hinderance, by "crowding out" each other. For instance, public interventions (such as financial subsidies, taxes or regulations) may crowd out private sector interventions. The bulk of the work comes from mapping all factors and players to assess how they may be better orchestrated or how they impede each other. In the process, we draw parallels between financing high-carbon power generation with that of low-carbon power generation. We also crudely analyse what factors are “well-orchestrated” and what factors simply “crowd out” others in the field of financing high-carbon power generation.

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