This research is motivated by the need to transform the basis of energy systems from fossil fuels to renewable sources. As well as the imperative of climate change, this transformation is needed to create development trajectories for economies that are genuinely sustainable over the long term. Our objectives are therefore both environmental and developmental.
Understanding what drove low-carbon investments in the past is the key to identifying the drivers of investment in the future. In this regard, low-carbon investment decisions are not technical questions of optimal asset allocation. Rather, understanding these decisions requires an approach rooted in political economy, which assesses the motivations and incentives of the different actors involved, and how these interact. Understanding the dynamics of this process is the first step in shaping it.
This research concentrates on private investment. Of the US$45 trillion of investments that the International Energy Agency (IEA) estimates are required by 2050 to reduce global carbon emissions by half, it is assumed that 85 per cent will need to come from the private sector. Annually, this averages at a little over US$1 trillion, half of which will fund the replacement of existing technologies, largely in developed countries. The remaining US$530bn is investment in new capacity, the bulk of which (US$400bn pa) will be in developing countries (IEA 2008).
Our focus is on the determinants of low-carbon investment in the world’s two largest emerging economies: China and India. While these countries are responsible for the biggest growth in carbon emissions, China is now the largest global investor in renewable energy and India saw the highest growth rate in recent times between 2010 and 2011 (BNEF 2012).