Climate Policies as a Catalyst for Green FDI

Samuel Pienknagura

No 2024/046, IMF Working Papers from International Monetary Fund

Abstract: This paper assesses the role of climate policies as a catalyst of low carbon technologies deployment through foreign direct investment (FDI). Leveraging detailed cross-border project-level information, it identifies “green” FDI and finds that a higher number of active climate policies is associated with higher levels of green FDI inflows. Importantly, climate policies do not appear to be linked to lower levels of non-green projects, suggesting relatively small overall costs from the green transition. The paper also finds heterogeneity across sectors and policy instruments. The association between climate policies and green projects is particularly strong in energy and manufacturing, and when the composition of the recipient's climate portfolio is tilted towards binding policies (e.g., taxes and regulation) and expenditure measures. Finally, results point to policy spillovers, whereby larger climate policy portfolios in the source country are linked to higher green FDI outflows, but green subsidies can discourage them. This, in turn, implies that subsidies could hamper efforts to deploy low-carbon technologies across countries.

Keywords: Climate policies; FDI; low carbon technologies; renewable energy; policy instrument; FDI inflow; policy spillover; FDI outflow; green FDI; Climate policy; Foreign direct investment; Tariffs; Climate change; Greenhouse gas emissions; Global (search for similar items in EconPapers)
Pages: 44
Date: 2024-03-01
New Economics Papers: this item is included in nep-ene, nep-env, nep-int and nep-ppm
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