PNNL

Abstract

Assessments of emissions mitigation patterns have largely ignored the huge variation in real-world factors—in particular, institutions—that affect where, how and at what costs firms deploy capital. We investigate one such factor—how national institutions affect investment risks and thus the cost of financing. We use an integrated assessment model (IAM) 9 to represent the variation in investment risks across technologies and regions in the electricity generation sector - a pivotally important sector in most assessments of climate change mitigation- and compute the impact on the magnitude and distribution of mitigation costs. This representation of investment risks has two major effects. First, achieving an emissions mitigation goal is more expensive than it would be in a world with uniform investment risks. Second, industrialized countries mitigate more, and developing countries mitigate less. This paper introduces a new front in the research on how real-world factors influence climate mitigation. It also suggests that institutional reforms aimed at lowering investment risks could be an important element of cost-effective climate mitigation strategies.