As nations and international organizations ramp up rhetoric pledging to reduce carbon emissions, evidence suggests that actual investments in clean energy projects have lagged far behind the trillions of dollars needed to execute the energy transition, said Chris Greig and Scott Hobart, co-authors of a recent commentary published in Joule.
"Groups like the International Energy Agency (IEA) and the Climate Policy Initiative indicate that the current allocation of clean capital is only around 20% of the amount needed to meet ambitious climate goals like those set out under the Paris Agreement," said Greig, the Theodora D. ’78 and William H. Walton III ’74 Senior Research Scientist at the Andlinger Center for Energy and the Environment.
The reason the world is falling behind in its commitments stems from how project developers and investors manage capital-at-risk, according to Greig. They can’t predict future costs and performance of alternative technologies, when supply chain bottlenecks might arise, whether local communities will support certain projects and infrastructure, or how fast the market will shift to advancements like electric vehicles and low-carbon materials. All these uncertainties, which are especially high during initial project development stages, are sources of risk to the investor. As a defense against uncertainty, investors often take a cautious, risk-mitigating approach to allocating capital. While helpful for resolving investment uncertainty, this capital discipline often acts as a brake on the energy transition and encourages financiers to stick by well-established and well-defined projects and technologies.
When asked whether there is still time to change our current practices and meet emissions targets, Hobart, chief investment officer at investment firm Mercator Partners, "I am optimistic but cognizant of the fact that the window of opportunity is quickly closing. Unless we see a material shift in perspective and the parameters under which the private sector approaches clean energy capital deployment in the next few years, I think there will be cause for a far more dire outlook as we approach the end of the decade."