A “Cap and Invest” Strategy for Managing the Intergenerational Burden of Financing Energy Transitions

The investment in sustainable energy required to meet climate change commitments made by 190 countries that signed the 2015 Paris Accord is in the order of $100 trillion over the next 2 decades. Reducing carbon emissions requires a financing strategy for managing risk that is an intergenerational burden. We propose a “cap and invest” strategy for building up the necessary infrastructure to reduce greenhouse gas emissions consistent with national commitments. “Cap and invest” is in sharp contrast to “cap and trade.” An economy-wide general environmental tax (GET) on consumption is the basis for financing the energy transition. The GET creates a large “pool of capital” to de-risk investment in emerging low-carbon solutions in support of an energy infrastructure resilient to the threat of climate change. Innovation in governance is an integral part of the policy to leverage the capital markets through public–private partnerships in green financing.

WORKING PAPER NO: 869