The Effects of Climate Related Natural Disasters on Renewable Energy Finance

Many countries have policies in place to promote renewable energy in order to meet their commitments to the Paris Agreement. There is a consensus that in order to achieve a transition to renewable energy, in order to fight climate change, high volumes of finance are required, in which the private sector will play an important role. As the impacts of climate change start to become more evident (including increased impacts and occurrence of natural disasters linked to extreme weather events) this is very likely going to affect international trade and financial flows including finance directed to renewable energy. In other words, there is a danger that the presence of negative feedback effects will limit the ability to transition to renewable energy as this transition takes longer to implement. This study aims to identify and quantify such negative feedback effects. More specifically, this study looks at the effects of natural disasters on private renewable energy financial flows by using two datasets one that tracks in detail financial flows directed to renewable energy projects, globally over time, and another one that tracks natural disasters that occur globally over time. This is a quantitative study using a fixed effects panel estimator. A number of covariates are also included in the estimation to study the possible presence of heterogeneous effects. These include: the quality of institutions and level of financial sector development, policy risk and environmental policy measures in place. In addition, the possible heterogeneous effects on the structure of different financial products are also explored (e.g. project finance vs corporate finance). A number of studies have looked at the effects of natural disasters, on financial flows. The majority of these studies focus on developing countries and study the impact of important flows such as remittances and foreign aid inflows. Overall, they find that these tend to increase modestly after natural disasters occur. However, the evidence regarding foreign direct investment and other private capital flows is less studied and results are mixed. In addition, no study yet has tried to identify the impacts particularly on renewable energy finance. A better understanding of the impact of climate change on renewable energy finance is important to advance our knowledge regarding the costs of postponing the clean energy transition and how these costs could potentially be unevenly distributed between countries. In addition, studying the potential heterogenous impacts in terms of environmental policies in place and structures of financial deals can have important policy implications on how to mitigate such negative impacts.