The critical role of cost-of-capital and climate policies in net-zero transitions

The research analyzes the relationship between firm-level cost of debt, debt capital raising, and energy investment from 2012-2021. It finds that while lower costs of capital generally increase both low-carbon and high-carbon energy investments, the effect is stronger for low-carbon energy globally. However, this positive climate outcome is observed only in OECD regions, whereas in non-OECD regions, lower costs of capital primarily drive high-carbon energy investment. The study argues that market-based policies, such as carbon pricing, are essential to channel capital toward low-carbon energy and prevent carbon lock-in, particularly in a rising interest rate environment.

• Reducing the cost of debt and increasing debt capital raised generally increases both low-carbon energy investment (LCI) and high-carbon energy investment (HCI) on a global scale, though the relationship is stronger for LCI.
• The impact of reduced cost of debt varies by region: in OECD regions, it only increases low-carbon energy investment, while in non-OECD regions, it only increases high-carbon energy investment.
• Market-based policies, including carbon prices, taxes, and portfolio standards, increase firm-level low-carbon energy investment and help direct debt capital away from high-carbon energy assets.
• A rising interest rate environment may negatively impact low-carbon energy investment, necessitating further policy interventions to maintain its cost competitiveness.
• The IEA estimates that achieving a 1.5C global temperature limit requires annual low-carbon energy investment of $4 trillion by 2030, which is more than triple current levels.

APA

Shrimali, G. (2024). The critical role of cost-of-capital and climate policies in net-zero transitions. World Economic Forum. https://www.weforum.org/stories/nature-and-biodiversity/cost-of-capital-climate-net-zero-transition/

Chicago

Shrimali, Gireesh. The critical role of cost-of-capital and climate policies in net-zero transitions. World Economic Forum, 2024. https://www.weforum.org/stories/nature-and-biodiversity/cost-of-capital-climate-net-zero-transition/.

Wikipedia

{{cite report |last1=Shrimali |first1=Gireesh |title=The critical role of cost-of-capital and climate policies in net-zero transitions |publisher=World Economic Forum |date=29 January 2024 |url=https://www.weforum.org/stories/nature-and-biodiversity/cost-of-capital-climate-net-zero-transition/ |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{shrimali2024critical, author = {Shrimali, Gireesh}, title = {{The critical role of cost-of-capital and climate policies in net-zero transitions}}, institution = {World Economic Forum}, year = {2024}, month = jan, url = {https://www.weforum.org/stories/nature-and-biodiversity/cost-of-capital-climate-net-zero-transition/}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }