Policies to enhance economic feasibility of a sustainable energy transition

A commentary reported in this month’s Journal of the Proceedings of the National Academy of Sciences states a unique concept to provide an incentive for shareholders of energy generation industry stocks. Thought is was worth mentioning in our blog because of the what strikes at the hearts of investors: profit and accountability. S. Levy

An important task of contemporary academic research is the design of policy that promotes a sustainable energy transition. Dangerman and Schnellnhuber (1) (D&S hereafter) explain theoretically, and show empirically, that it is very difficult to move away from unsustainable technologies. The role of investment funds that go disproportionally to dominant, pollutive technologies is emphasized. The policy suggestion of D&S is modifying corporate law to make shareholders legally liable for environmental impacts of firms in which they invest. The resulting “legal negative feedback loop” to shareholders’ decisions will alter the allocation of capital investment in favor of cleaner “niche” technologies. According to D&S, this would “balance the shareholders’ zest for unrestricted expansion.” They add that it can have a precautionary effect by discouraging investment away from pollutive industries in an early development phase.

Studies on environmental policy tend to focus on changing the behavior of consumers and producers and give considerably less attention to investors. The D&S proposal is therefore a welcome addition to the literature. Investors receive more notice in research on “environmental innovation” and “sustainability transitions”. A central policy finding here is that a combination of environmental regulation and innovation support is needed to foster a sustainable energy transition . The first will change the costs and benefits of production and thus the profits in the positive feedback cycle of both the dominant and alternative technologies.