Download
  • WP0513 TS JS financial regulation
By downloading this publication, I accept the terms of use and reproduction of any document of Iddri.

EU Low-Carbon Investment and New Financial Sector Regulation: What Impacts and What Policy Response?

Working Papers N°05/2013. Iddri, 2013. 18 p.

Un article consacré au financement des investissements nécessaires à l'atteinte des objectifs climatiques et énergétiques de l'Union européenne. De nouvelles régulations financières (banques et assurances) sont en cours de mise en œuvre qui pourraient impacter ces investissements décarbonés. Comment dans ce contexte faire face au défi du financement de long terme ?

Points clés [en anglais] :

  • CHALLENGES TO THE MOBILISATION OF LOW-CARBON FINANCE

The EU’s climate and energy goals will require investments of around 1.5% of GDP per year. The banking sector and capital markets will be crucial to providing a large share of this capital. Three headwinds threaten the effective mobilisation of low-carbon financing. First, economic growth is low or negative in much of the EU. Second, the climate and energy policy framework, particularly after 2020, is too uncertain to send the necessary investment signals. Finally, new financial regulations are also being put in place for banks and insurers, which may impact the supply of capital for low-carbon investments.

  • FINANCIAL REGULATION EXACERBATES THE LONG-TERM FINANCING CHALLENGE

New financial regulation will induce structural changes in the financial sector, in particular a reduction in the capacity of banks to provide long-term credit. Without the mobilisation of new capital sources and financing models, there could be a shortage of long-term financing. However, the low-carbon securitisation market is largely non-existent and institutional investors face prohibitive transaction costs to scaling up direct equity investment in low-carbon projects. New financial sector regulations are also likely to slow the development of low-carbon bond products that could attract institutional investors.

  • BRIDGING THE LONG-TERM FINANCING GAP

There is a case for easing the regulation on infrastructure investment under the insurance sector regulation. Public banks will also need to play a stronger role. They could provide low-carbon refinancing guarantees, in order to bridge the long-term financing gap. A secondary bond market for low-carbon assets should be encouraged. This could involve the issuance of asset backed securities from the low-carbon portfolios of public banks, and the provision of public wrappers for low-carbon bonds. A framework for low-carbon covered bonds should be developed, given the favourable treatment of covered bonds under the banking regulation. Equity investments in low-carbon projects by institutional investors should be supported, for example through public-private or private-private matching agencies or equity funds.