Role of climate policies in propelling green foreign direct investment

What is it about?

Climate policies can help countries deploy low carbon technologies (LCTs) and reduce greenhouse gas emissions. LCTs are mainly important for emerging markets and developing economies (EMDEs). These regions typically have higher emissions than developed countries. Foreign direct investment (FDI) and multinational companies play a crucial role in bringing LCTs to EMDEs. Therefore, the focus is on attracting FDI to low carbon activities. These investments are also known as green FDI. This study examines how climate policies drive the use of LCTs through green FDI. It involves examining data from investment projects across countries.

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Photo by Markus Winkler on Unsplash

Photo by Markus Winkler on Unsplash

Why is it important?

The study finds that an increased number of climate policies is linked to higher inflows of green FDI. This shows that countries with more climate policies tend to attract more foreign investments in LCTs. Climate policies are most effective in attracting green FDI when countries receiving FDI use binding policies and expenditure measures. Such strong policies and measures create a stable environment for green FDI. Climate policies positively impact green and nongreen FDI in sectors like industry and services. However, they pose challenges for nongreen projects in energy and agriculture. Policymakers should create strategies that address the unique needs of each sector. Countries that initiate FDI and have a wide range of climate policies tend to have higher outflows of green FDI. But some policies, like subsidies, can discourage them and slow the spread of LCTs to other countries. Therefore, countries must work together to design climate policies that balance domestic and global climate goals. KEY TAKEAWAY: Climate policies increase the flow of FDI to green projects. But these policies should be carefully designed and strictly enforced. They must also align with local and global climate goals. Hence, these findings could help policymakers, green investors, and other stakeholders to promote economic growth and sustainable development more effectively. This research relates to the following Sustainable Development Goals: •SDG 13: Climate Action •SDG 7: Affordable and Clean Energy •SDG 9: Industry, Innovation, and Infrastructure •SDG 17: Partnerships for the Goals •SDG 8: Decent Work and Economic Growth