Alternatives to private finance: Role of fiscal policy reforms and energy taxation in development of renewable energy projects

The main obstacle to the development of Renewable Energy (RE) projects is lack of access to finance. Electricity tariff is often regulated by the government, hence, to increase the investment incentives the spill over effects originally created by energy supplies need to be used. Tax revenues are refunded to the investors in energy projects and such fiscal policy reform will increase the rate of return of energy projects. For smaller-size energy projects, this chapter provides a theoretical model for combining utilisation of carbon tax and a new way of financing risky capital, i.e., Hometown Investment Trust Funds (HITs). Because of the Basel capital requirement, and because most RE projects from the point of view of financers are considered to be risky projects, and thus many financers are reluctant to lend to them or they lend at high interest rates. This chapter theoretically shows that by taxing carbon dioxide (CO₂), sulphur dioxide (SO₂), and nitrogen oxides (NO_x) and allocating those tax revenues to HITs, RE projects will become more feasible and more interesting for hometown investors, hence the supply of investment money to these funds will increase.