The financial sector is increasingly cited as a core pillar of the energy transition and greater focus is placed on mobilizing private capital flows to meet key climate and energy targets set at EU and international levels. From a modeling perspective, it is critical to improve the tools in place so as to better capture how different financing schemes affect the pace and direction of the energy transition.

Key insights of our analysis:

📌 Have clear financing conditions in place when the investment decision is made: if it is about project financing, the financial sector (primarily banks and private equity) is directly involved. If it is about corporate financing, the financial sector is less directly involved (influences the cost of capital for the corporate investor – could be a utility).
📌 Public policy can improve the financing conditions for energy transition projects by using levers that directly target risks, returns and cost of capital (thereby lowering the minimum required return on an investment).
📌 The financial sector attaches more weight to policies related with risks and returns of investment (e.g., feed-in-tariffs) and the relative competitiveness of technologies (e.g., carbon tax / trading systems) rather than policies that target the availability of finance and financing conditions.
📌 While there is no doubt that the energy transition requires large investments (in the order of 2-3% of GDP annually), not seeing such investments happening is because of lack of investment opportunities with a sufficiently attractive risk/return ratio, rather than a lack of capital in the market.
📌 Increasingly mature RES technologies and stringent climate policy allows renewable energy investments to have access to much cheaper capital than fossil investments.
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On top, using the GEM-E3 and E3ME models we run scenarios to assess different financing, trade and climate-related fiscal revenue recycling conditions and their macroeconomic implications.
✅ First, we explored the effects of a co-financing of planned climate investments in the EU in the 2021-2027 period;
✅ Then we expanded the analysis to include additional investments in digitalisation, healthcare and education in the 2021-2027 period.
In both cases, investments were financed through government borrowing and repaid from the EU ETS and CBAM revenues.
✅ Third, we performed a sensitivity analysis of alternative financing, trade and revenue recycling options to explore their marginal impact.
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