Switching towards coal or renewable energy? The effects of financial capital on energy transitions

- Financial capital supports transitions towards more capital-intensive energy types.
- For lower-income countries, financial capital contributes to increases in coal share of energy.
- For high-income countries, financial capital contributes to increases in wind share of energy.
- Bank credit and domestic private debt both support transitions towards wind energy.

Does a country's stock of financial capital affect its ability to achieve energy transitions? This paper uses data for up to 137 countries for the period 1998-2013 to investigate the importance of financial capital for changes in the use of each energy type. I find that financial capital supports transition to more capital-intensive energy types. For high-income countries, financial capital facilitates transitions from fossil fuels to modern renewable energy sources, especially wind. Both private credit from banks and domestic private debt securities support greater shares of wind energy. For lower-income countries, financial capital supports progression from biomass towards fossil fuel energy sources such as coal. I also find that countries with larger stocks of financial capital are more likely to move to more capital-intensive electricity generation systems.