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Which policy instruments attract foreign direct investments in renewable energy?

Ronald Wall, Stelios Grafakos, Alberto Gianoli and Spyridon Stavropoulos

Climate Policy, 2019, vol. 19, issue 1, 59-72

Abstract: Reducing GHG emissions and mitigating climate change would require significant investments in renewable energy technologies. Foreign direct investments (FDI) in renewable energy (RE) have increased over the last years, contributing to the diffusion of RE globally. In the field of climate policy, there are multiple policy instruments aimed at attracting investments in renewable energy. This article aims to map the FDI flows globally including source and destination countries. Furthermore, the article investigates which policy instruments attract more FDI in RE sectors such as solar, wind and biomass, based on an econometric analysis of 137 Organisation for Economic Co-operation and Development (OECD) and non-OECD countries. The results show that Feed in Tariffs (FIT) followed by Fiscal Measures (FM), such as tax incentives and Renewable Portfolio Standards (RPS), are the most significant policy instrument that attract FDI in the RE sector globally. Regarding carbon pricing instruments, based on our analysis, carbon tax proved to be correlated with high attraction of FDI in OECD countries, whereas Emissions Trading Schemes (ETS) proved to be correlated with high attraction of FDI mainly in non-OECD countries.Key policy insights Feed in Tariffs is the most significant policy instrument that attracts FDI in the Renewable Energy sector globally.Fiscal Measures (FM), such as tax incentives, show a significant and positive impact on renewable energy projects by foreign investors, and particularly on solar energy.Carbon pricing instruments, such as carbon taxation and emissions trading, proved to attract FDI in OECD and non-OECD countries respectively.Public investments, such as government funds for renewable energy projects, proved not as attractive to foreign private investors, perhaps because public funds are not perceived as stable in the long run.

Date: 2019
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