Feedbacks between public and private finance 

Public finance plays a pivotal role in stimulating new investment by encouraging private investors to follow suit (Mazzucato, 2013). This is not only due to the substantial amount of funding provided by public actors, such as public investment banks and governmental agencies, but also to the quality of financing schemes they offer. Public financing, with its long-term time horizons, favourable repayment conditions, and support services, resembles the role of financial entrepreneurs (Perez, 2003). By minimising risks associated with investments and supporting specific technological trajectories, public finance can mitigate market uncertainty, potentially enabling tipping points in the financing of low-carbon projects and assets (Campiglio and Lamperti, 2021; Mazzucato and Semieniuk, 2018). However, adequate policy support, such as mission-oriented industrial policies, is essential to facilitate these tipping dynamics.

Figure: 4.4.5
Figure 4.4.5: The figure shows the set of self-reinforcing mechanisms and feedback loops occurring in the process between climate policy certainty and deployment of green physical capital. Expectation alignment creates a positive feedback which can be triggered and sustained by certainty in climate policy. The + symbol indicates a positive effect. 

Expectation alignment on the timing and speed of the transition is an additional tipping element that can scale up sustainable investment (Campiglio and Lamperti, 2021; Campiglio et al., 2023; see Figure 4.4.6). Uncertainty about the future prospects of low-carbon assets and unclear information about the strength of climate policy can lead to conservative wait-and-see approaches among investors, especially private ones. However, certainty regarding future climate policy schedules can signal the long-term trajectory of the economy, establishing a positive correlation between macroeconomic performance and the returns of low-carbon assets. For example, the public Contracts for Difference scheme in the UK) provided policy certainty on low-carbon electricity generation and triggered large private investments, expanding the stock of offshore wind capacity and lowering power generation costs well below conventional sources. Further, the alignment of beliefs can coordinate and shift the strategies of long-term institutional investors, transforming low-carbon investment from diversification assets to strategic ones and increasing the risk of carbon-intensive assets. Clear and trustworthy climate policy is key for such an alignment to occur. This shift would reduce the cost of capital for low-carbon firms, facilitate their growth, and create a virtuous feedback loop of low-carbon investment.

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