Study: Energy should act as a policy model for decarbonising other sectors

The 'greening' of the energy sector should act as a policy template for other sectors, according to a new paper from LSE's Grantham Research Institute on Climate Change and the Environment that argues that clear and stable climate policy signals should be expanded to more sectors in order to drive investment in green goods and services into new markets.

The research, published today by the research group, has revealed that in the energy sector, firms with higher revenues derived from green goods and services are associated with better economic performance and higher market valuations.

This phenomenon sets the energy sector apart from other areas of the economy, according to the findings, and makes the case for introducing comprehensive policy frameworks that can drive decarbonisation in other emissions-intensive sectors.

Climate-focused policy over the past few decades in the energy sector have not only suceceded in accelerating decarbonisation, but has triggered shifts in technology and investment that have put the sector on a trajectory towards carbon neutrality, the researchers posit. As such, they argue that "greater policy intervention" across a broader spectrum of the global economy would incentivise the development of cleaner products and services that could improve firms' environmental performance as well as their economic and financial market performance.

Co-author Josh Burke, Policy Fellow at the Grantham Research Institute, explained: "To mobilise the large-scale investments in green products, production technologies and services necessary to meet mid-century net-zero carbon goals, policies that help create clearly distinguished markets for green goods and government support for financing the costs for green investments are required."

The policy report, entitled Does it pay for firms to go green?, reveals that financial markets responded positively to the landmark Paris Agreement, given that it reduced the uncertainty surrounding climate change regulations.

In the week that followed the climate accord, US green goods and services companies experienced a stock price increase of 10 per cent - a boost equivalent in market capitalisation of roughly $200m per firm.

The research argues that policy support can correct market failures and harness the ability of markets to allow the private sector to pursue a cost effective low-carbon transition while delivering public goods.

"The potential trade-off between the environmental performance and the economic performance of firms has been used to oppose stringent environmental policies," said report co-author Myra Mohnen, assistant professor in the economics department of the University of Essex. "Our findings support the growing evidence that no such trade-off needs to exist with the right policy framework in place."

However, the report warned that outside the energy sector, firms producing green goods and services typically have lower asset turnover (higher assets to sales) than other firms - a phenomenon the researchers said could reflect more recent and more costly capital investments.

"The lower operating efficiency of assets explains why higher profit margins do not translate into higher profitability," explained co-author Misato Sato, an assistant professorial research fellow at the Grantham Research Institute and deputy director of the Centre for Climate Change Economics and Policy.

The energy sector, where firms with higher green revenues on average have higher profitability and better stock market performance, is a "notable exception", she said.

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• Grantham Research Institute on Climate Change and the Environment