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FINCLIM focuses on climate policy induced investment strategies: it assesses the financial flows needed to transform the energy sector and it evaluates the amount of increased spending in Research and Development to increase energy efficiency and to invent low or zero carbon technologies. A comprehensive analysis of revenues from carbon taxes or from permits auctioning, as well as an estimate of the volume and distribution of carbon markets are key parts of the project.

Strong climate policies will require radical technological transformation. In particular, the energy sector will evolve in a totally different way, with zero or low carbon technologies gradually replacing fossil fuel based systems. What are the financial implications of these deep changes? What is the amount of resources that has to be mobilized to finance Research and Development (R&D) in new technologies? What role can revenues from carbon taxes or from emissions permits auctioning play to support the transition to a low-carbon world? And how do international financial flows in carbon markets and fossil fuels markets change if a stringent climate policy is implemented?

This project goal is to answer these questions using the WITCH model (World Induced Technical Change) developed at FEEM. All investment decisions – in the energy sector, in the overall macroeconomy and in R&D – are endogenous in the model, making it possible to study their optimal distribution across space and time. Energy demand is not given in the model and endogenously adapts to the policy scenarios. It is thus possible to study complex interactions and substitution effects.

The possibility to simulate climate policy both via carbon taxes and cap-and-trade systems allows exploring the dimension of “carbon” funds. With the WITCH model we assess if these “carbon” funds will be able to provide a regular and adequate flow of resources to ease the transition towards low carbon economies. For example, we study if “carbon funds” can be used to finance R&D investments, or to insure investors in new risky technologies.