Investment Policies for the Energy Transition: Incentives and Disincentives

21 Nov 2023

UNCTAD has just released a new edition of its Investment Policy Monitor on investment policies for the energy transition. This Monitor reviews and analyses policies related to some of the main incentives and disincentives to clean energy investment, expanding on the findings and analysis presented in the World Investment Report 2023: Investing in sustainable energy for all (WIR23) and further drawing from the insights and the discussion at UNCTAD's 8th World Investment Forum, which took place in Abu Dhabi from 16 to 20 October 2023.

UNCTAD's World Investment Report 2023 highlights a worrisome increase in the SDG investment gap, surpassing $4 trillion annually in developing countries alone, with energy investment needs estimated at $2.2 trillion per year. Successful energy transition necessitates significant investment in renewable energy projects, the phased decommissioning of fossil fuel assets and the promotion of cleaner power generation solutions.

However, investing in renewables and clean energy is hindered by a range of specific risks and challenges, leading to higher costs of capital, especially in emerging and developing countries. Factors such as the natural resources endowment, the quality of the regulatory environment, market size and maturity, and economic and political uncertainty determine the unique potential and risk profile of each country.

Policies and regulations play a pivotal role in both de-risking and incentivizing investment in the clean energy sector. The Monitor thus reviews and analyses 800 renewable energy policies around the world, identifying the key policy tools employed by countries in different regions and at varying levels of development to promote renewable investments.

The Monitor’s findings reveal that existing policy frameworks aimed at promoting investment in the energy transition are notably inadequate, especially in poorer nations. Around the world, two-thirds of countries have adopted renewable energy policies. However, only half of the Least Developed Countries (LDCs) and one-third of Small Island Developing States (SIDS) have done so. While developed and emerging economies have integrated private investment promotion mechanisms into over 70 per cent of their renewable energy policies, the same holds true for only 24 per cent of policies in LDCs and 17 percent of those in SIDS.

While most developed economies use targeted investment promotion policies, many developing countries use generic tax incentives – applicable to investment in any industry – that do not address the specificities of energy investment projects. In recent times, auctions and tenders for renewable energy projects have gained traction across all country groups.

The monitor also provides an overview of existing clean energy transition policies in technologies and fuels that would allow the decarbonization of the traditional power sector. While ultimately the policy objective is to phase out fossil fuels, thermal power plants will continue to play a role in ensuring energy security for many countries in the years to come. To curb their environmental impact, broader adoption of technologies such as carbon capture, utilization and storage, cofiring, and low-carbon fuels is key. At present, policies and initiatives to promote investment in such technologies are predominantly confined to developed countries and large emerging economies.

Finally, this edition of the Investment Policy Monitor also highlights trends in the evolution of fossil fuel subsidies around the world, which represent a disincentive to the promotion of investment in clean energy. The value of fossil fuel subsidies has reached a staggering $1 trillion, far surpassing support for renewable energy. Gradually phasing out these subsidies, although complex for many countries, would incentivize investments in renewables.

Download it here