Editing IPCC:AR6/WGIII/Chapter-17 (section)

=== 17.4.3 Financial Systems and Economic Instruments ===

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Market-oriented policies, such as carbon taxes and green finance, can promote low-carbon technology and encourage both private and public investment in enabling transitions. Policies that are currently being tested include loan guarantees for renewable-energy investments in Mali, policy insurance to reduce credit defaults within the feed-in tariff regime in Germany, or pledged funding to fully finance or partner private firms in order to advance renewable-energy projects ( [[#Roy--2018|Roy et al. 2018]] a). However, there may be some limitations in using carbon pricing alone (rather than in combination with flexible regulations and incentives) where market failures hinder low-carbon investments ( [[#Campiglio--2016|Campiglio 2016]] ; [[#World%20Bank--2019|World Bank 2019]] ) and high political costs are incurred (Van Der Ploeg 2011).

Many forms of transformational change to energy systems are not possible when financial systems still privilege investing in unsustainable, carbon-intensive sectors. One of the root causes of the failure of traditional financial systems is the undervaluation of natural capital and unsettled property-right issues that are associated with it. The exclusion of proper rents for scarcities or for global and local externalities, including climate change, can undermine larger-scale changes to energy systems ( [[#Clark--2018|Clark et al. 2018]] ). But even smaller-scale low-carbon energy and infrastructure projects can fail to get off the ground if uncertainty and investment risk discourage project planning and bank-lending programmes ( [[#Bolton--2016|Bolton et al. 2016]] ). The EU’s previous actions regarding the ‘shareholder maximisation norm’ and non-binding measures have created path dependencies, limiting its flexibility in creating sustainable financial legislation. However, the Sustainable Finance Initiative and the Single Market may prove to be ‘policy hotspots’ in encouraging sustainable finance ( [[#Ahlström--2019|Ahlström 2019]] ). Taking advantage of these hotspots may be crucial in overcoming path dependencies and setting new ones in motion.

One possible positive turn in this regard is the acceleration in investing in the environment (impact and ESG) globally: for instance, there is evidence that some institutional investors are divesting from coal, potentially auguring well for the future ( [[#Richardson--2017|Richardson 2017]] ). The encouragement of governance and policy reforms that could facilitate similar expansions of investment in sustainable firms and sectors ( [[#Clark--2018|Clark et al. 2018]] ; [[#Owen--2018|Owen et al. 2018]] ) could contribute to the dynamic feedback that gives a transition lift and injects momentum into it. Also, the degrowth movement, with its focus on sustainability over profitability, has the potential to speed up transformations using alternative practices such as fostering the exchange of non-monetary goods and services if large numbers of stakeholders want to invest in these areas ( [[#Chiengkul--2017|Chiengkul 2017]] ).

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