Green state investment banks: Their role in mobilising finance to accelerate the energy transition and the politics behind their establishment and design

The adoption of the Paris Agreement in 2015 signified a shift away from the Kyoto Protocol’s international burden-sharing outlook towards nationally driven mitigation action, and therefore national level policy tools. Significantly this agreement recognizes the crucial role finance must play in addressing climate change, highlighting the importance of “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development” (Article 2.1c of the Paris Agreement). A major transition of our energy system will be required in order to reduce CO2 emissions, but the investment necessary for the rapid and large-scale deployment of low-carbon technology may not materialise. Developers continue to face difficulties in sourcing finance, and many investors still perceive low-carbon projects as high risk. Thus there is a demand for policies that can harness countries’ limited public finances to leverage in private sector finance. Subsequently, some governments have launched or appointed green state investment banks (GIBs), a relatively new policy tool, to support their country’s transition to a more sustainable economy. Thus this dissertation seeks to increase the understanding of this specific public finance policy tool, green state investment banks (GIBs), in order to derive practical insights for policymakers. It does so via three separate papers that each seeks to address a gap in the existing research. Collectively, the papers in this dissertation aim to explore the role of GIBs in mobilising finance to accelerate the energy transition, and to study the politics behind their establishment and design. The first paper investigates the role of GIBs in addressing barriers to finance for developers of low-carbon projects. Then, building on insights from Paper 1 that GIBs may be a suitable policy tool for supporting energy transition, Paper 2 aims to better conceptualise and integrate finance into the Multi-Level Perspective (MLP) on transitions using the empirical GIB case. Finally paper 3 draws on insights from Papers 1 and 2 that how well a GIB can mobilise finance for transition is subject to its establishment, mandate and design, which in turn may be conditional on the national political and policymaking environment. Paper 3 therefore explores the political discourse and decisions behind the establishment and design of GIBs. This dissertation makes three main contributions to the literature. First, it provides the first empirical analysis of the detailed roles and activities of GIBs that successfully address barriers and mobilise finance for the low-carbon energy sector. Previous GIB literature has been limited to focusing on their role in the overall economy, describing the various existing models and considering GIBs’ potential to expand climate finance in emerging economies. Second, this dissertation makes a theoretical contribution to the literature on the Multi-Level Perspective (MLP) on transitions. It takes a step towards better incorporating finance into the MLP, where finance has remained under-conceptualised despite the recognition of its importance by transitions studies. Third, it performs the first empirical exploration of the political decisions and discourse behind the establishment and design of GIBs by analysing parliamentary debates. To date there has been no analysis in the literature on how GIBs are established or why they exist in their present form. Collectively the findings from the three papers are used to derive implications for policymakers. First this work demonstrates that GIBs are an important and effective policy tool for both mobilising finance for the diffusion of innovative low-carbon technology, thereby enabling technological change and helping to accelerate the energy transition. Second, policymakers should use both neoclassical and evolutionary perspectives when establishing, designing and assessing GIBs and other similar public finance policy tools. Policy that is established, designed and assessed exclusively under the neoclassical viewpoint may not be the most effective, and may also be underestimated in terms of its performance and capacity to accelerate transition. Finally, policymakers should keep in mind that politics matters when it comes to establishing and designing GIBs and that they are not ‘immune’ to a country’s existing political controversy. Therefore a political consensus or government majority may be necessary in order for a country to establish a GIB. However if consensus exists, policymakers may then have greater opportunity to contribute to a GIB’s design aspects, and potentially apply this dissertation’s recommendations regarding neoclassical and evolutionary perspectives. This dissertation then concludes with a discussion on its limitations and avenues for further research.