Financing a Sustainable Energy Transiton

Abstract

We begin by identifying the four major obstacles for financing the transition to a sustainable energy world: the immense size of the required financing, the need to coordinate investments in dozens of interrelated projects required for an orderly transition, the need to get the investment incentive right and to avoid crony capitalism, and the need to manage the political economics of electricity regulation and pricing. We then show that these obstacles cannot be overcome by sole reliance on either public or private finance. What is need is a creative combination of the two. In this regard, we suggest several possible policies. These include an expanded role of government guarantees of the private financing of sustainable energy projects, a focus on the funding of basic research, and an entire rethinking of the role of electricity pricing and regulation.