Environmental policies and risk finance in the green sector: Cross-country evidence

• Risk-finance in the green sector is likely to face more challenges than in other hi-tech sectors.
• Supply and deployment policies are associated with more investments relative to fiscal policies.
• FITs have a positive effect, but in the solar sector very generous FITs discourage investments.

This paper provides a detailed description of venture capital investment in the green sector across 29 countries over the period 2005–2010, and identifies the role that policies might play in explaining observed cross-country differences. The analysis is based on a deal-level database of businesses seeking financing, combined with indicators of renewable policies and government R&D expenditures. The econometric analysis relates the number of deals and their volumes in a country to deployment and supply policies using count data and limited dependent variable (Tobit) models. The results suggest that both supply side policies and environmental deployment policies, designed with a long-term perspective of creating a market for environmental technologies, are associated with higher levels of venture capital relative to more short-term fiscal policies. When focusing on policies related to renewable energy generation, the results confirm the positive association of generous feed-in tariffs (FITs) with venture capital investment. However, in the solar sector excessively generous FITs tend to discourage investment, perhaps reflecting a lack of credibility over the longer term. Thus, both sets of results point to long-term policy stability, sustainability and credibility as important policy features to ensure Venture capital backing of innovative and risky ventures in a country's green sector.