OECD Observer
Investing in green energy
climate change

A warming planet and a flat world economy have propelled the issue of investment in clean energy to the top of the policy agenda. The question has become all the more crucial in view of the landmark global summit on climate change to be held in Paris in December 2015. 

Investing in solar, wind, hydroelectric, geothermal and biomass carbon sectors seems indispensable in order to meet the goal of limiting temperature increases to 2°C set by the international community. Governments have already initiated the energy shift: Overcoming Barriers to International Investment in Clean Energy notes a sixfold increase in clean-energy investment between 2004 and 2011, reaching US$279 billion that year. The 2008 crisis has also contributed to this trend, since “the perceived potential of clean energy to act as a lever for growth and employment has led several OECD and emerging economies to design green industrial policies aimed at encouraging domestic solar panel and wind-turbine manufacturers”.

But what if government incentives backfired and did not support the clean energy sector? This report particularly highlights the negative effects of the local-content requirements (LCR) in the solar-photovoltaic and wind-power industries, implemented in 21 countries, including 16 OECD countries since 2009. These, defined as requirements for “investors to source a specific share of manufactured components, equipment locally”, may actually impede international investments in these sectors.

Focusing on midstream manufacturers through local-content requirements may result in a misallocation of resources by encouraging the substitution of potentially better imports by domestic goods, without regard to their quality or price. By stifling competition, such localcontent requirements may also increase overall costs for power producers, installation service providers and other downstream operations by forcing firms to purchase more expensive (and even less efficient) equipment. A better designed approach would allow for imports, as this would also bolster value-added and job-creation potential in downstream activities. Local initiatives would be better off addressing local impediments that hinder competitiveness and consider well-targeted support to research and development.

OECD (2015), Overcoming Barriers to International Investment in Clean Energy, Green Finance and Investment, OECD Publishing, http://dx.doi.org/10.1787/9789264227064-en.

See article by Geraldine Ang at http://oe.cd/10u