Government incentives accelerating the shift to green energy
Chapter preview
Many government policies—both carrots and sticks—are driving the global transition to greener energy systems. In this chapter, we compare regulatory sticks, like carbon pricing, with carrots like feed-in tariffs that subsidized solar renewables in countries like Germany.1
First, we review carbon pricing across the globe. Higher prices remain challenging to implement politically. We explain why some economists fixate on the efficiencies of carbon taxes and dismiss government subsidies as wasteful. We explore China’s new carbon market, which aims to lower emissions from China’s coal-fired power plants.
Second, we explain how governments like Germany helped kick-start a boom in solar-power innovations by deploying subsidized carrots. One of the biggest catalysts driving down today’s solar prices comes from economies of scale in Chinese manufacturing. We review an emerging consensus among economists that subsidies are accelerating a “green vortex” in places like Texas in the United States.
We conclude with an optimistic outlook of the US government’s new industrial policy and note a new record in global investments in low-carbon technologies. That said, governments in China, the European Union and the US are deploying carrots and sticks at markedly different speeds and intensity. Looking ahead, global security analysts seeking to generate alpha will need to integrate top-down subsidies into bottom-up security analysis to uncover risks and opportunities.
This is a chapter from the Franklin Templeton Institute publication, Energy transition: Accelerating investment opportunities. Arguably, humanity’s greatest current challenge is the need to shift to low and net-zero carbon in a little less than 30 years. New technologies are accelerating the renewable energy transition while reducing environmental impacts. The renewable energy sources of today and the future require new and smarter technologies as well as the rapid creation of new infrastructure. These challenges create investment opportunities as investors have a critical role given the capital required to fund this transition. To read the full paper and explore views from across our specialist investment managers, download the complete PDF or click here.
Endnotes
1. Sources: Inspiration for this economic research draws from The Financial Ecosystem, co-written by Anne Simpson, Franklin Templeton’s Global Head of Sustainability. See: Bose, S., Dong, G., and Simpson, A. The Financial Ecosystem. Palgrave Macmillan. 2019. Additionally, this paper builds on the framework we first explored in: Meng, B., and Simpson, A. “Beyond ESG: Government incentives delivering green transition.” Carbonomics: the path to net zero. OMFIF Sustainable Policy Institute Journal. Winter 2023.
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