CONTRIBUTORS
Ben Meng, Ph.D.
Chairman of Asia Pacific,
Franklin Templeton
Anne Simpson
Global Head of Sustainability, Franklin Templeton
Frank Stanton
Senior Editor,
Thought Leadership,
Franklin Templeton
Seth Cothrun
Director, Thought Leadership
Franklin Templeton
This is a chapter from the Franklin Templeton Institute paper, Energy transition: Accelerating investment opportunities. To read all chapters in this paper, download the complete PDF or click here.
Chapter preview
Many government policies—both carrots and sticks—are driving the global transition to greener energy systems. In this chapter, we compare regulatory sticks, like carbon pricing, with carrots like feed-in tariffs that subsidized solar renewables in countries like Germany.1
First, we review carbon pricing across the globe. Higher prices remain challenging to implement politically. We explain why some economists fixate on the efficiencies of carbon taxes and dismiss government subsidies as wasteful. We explore China’s new carbon market, which aims to lower emissions from China’s coal-fired power plants.
Second, we explain how governments like Germany helped kick-start a boom in solar-power innovations by deploying subsidized carrots. One of the biggest catalysts driving down today’s solar prices comes from economies of scale in Chinese manufacturing. We review an emerging consensus among economists that subsidies are accelerating a “green vortex” in places like Texas in the United States.
We conclude with an optimistic outlook of the US government’s new industrial policy and note a new record in global investments in low-carbon technologies. That said, governments in China, the European Union and the US are deploying carrots and sticks at markedly different speeds and intensity. Looking ahead, global security analysts seeking to generate alpha will need to integrate top-down subsidies into bottom-up security analysis to uncover risks and opportunities.
This is a chapter from the Franklin Templeton Institute publication, Energy transition: Accelerating investment opportunities. Arguably, humanity’s greatest current challenge is the need to shift to low and net-zero carbon in a little less than 30 years. New technologies are accelerating the renewable energy transition while reducing environmental impacts. The renewable energy sources of today and the future require new and smarter technologies as well as the rapid creation of new infrastructure. These challenges create investment opportunities as investors have a critical role given the capital required to fund this transition. To read the full paper and explore views from across our specialist investment managers, download the complete PDF or click here.
Endnotes
- Sources: Inspiration for this economic research draws from The Financial Ecosystem, co-written by Anne Simpson, Franklin Templeton’s Global Head of Sustainability. See: Bose, S., Dong, G., and Simpson, A. The Financial Ecosystem. Palgrave Macmillan. 2019. Additionally, this paper builds on the framework we first explored in: Meng, B., and Simpson, A. “Beyond ESG: Government incentives delivering green transition.” Carbonomics: the path to net zero. OMFIF Sustainable Policy Institute Journal. Winter 2023.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
Equity securities are subject to price fluctuation and possible loss of principal.
Investing in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector—prices of such securities can be volatile, particularly over the short term.
Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign securities generally, including, but not limited to, the risk that a governmental entity may be unwilling or unable to pay interest and repay principal on its sovereign debt.
Investments in fast-growing industries like the technology and health care sectors (which have historically been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement.
Real estate securities involve special risks, such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments affecting the sector.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.
Franklin Templeton and our Specialist Investment Managers have certain environmental, sustainability and governance (ESG) goals or capabilities; however, not all strategies are managed to “ESG” oriented objectives.