Neither Crowding In nor Out: Public direct investment mobilising private investment into renewable electricity projects

>> Read article in Energy Policy
>> Read preprint here 


Rapid structural change towards a low-carbon energy supply requires significant additional investments into innovative but high-risk low-carbon tecUhnologies. Mobilising greater private investments requires applying the right policy instruments, but while fiscal measures and regulation have been well researched, systematic quantitative evidence about the effect of public direct investment is lacking. Absent empirical evidence, contradictory theoretical arguments claim that such public (co-)investments either ‘crowd out’ or ‘crowd in’ private investors. In this paper we show that the macroeconomic concept of crowding out/in is inapplicable to sectoral studies such as of renewable electricity. Instead, both neoclassical microeconomics and evolutionary economics suggest public direct investment to have a positive effect due to either externalities or market creation effects. We also provide the first quantitative estimate of the effect of public direct investment on private investment into renewable electricity technologies for 17 countries in the period 2004–2014. Using FGLS and static and dynamic GMM estimators, we find that public investments not only have a positive but also consistently the largest effect on private investment flows relative to feed-in tariffs, taxes and renewable portfolio standards in general, and for wind and solar technologies separately. Implications for policy aimed at accelerating the low-carbon transition are discussed.

This is an official web page
of the University of Massachusetts.

Political Economy Research Institute

Gordon Hall, 418 N. Pleasant St., Suite A

Amherst, MA 01002
Tel: 413-545-6355 Fax: 413-577-0261