Does Environmental Policy Uncertainty Hinder Investments Towards a Low-Carbon Economy?

CIES Research Paper 74 | July 2022

Joëlle Noailly, Laura Nowzohour, Matthias van den Heuvel 

We use machine learning algorithms to construct a novel news-based index of US environmental and climate policy uncertainty (EnvPU) available on a monthly basis over the 1990-2019 period. We find that the EnvPU index spikes during the environmental spending disputes of the 1995-1996 government shutdown, in the early 2010s due the failure of the national cap-and-trade climate bill and during the Trump presidency. We examine how elevated levels of environmental policy uncertainty relate to investments in the low-carbon economy. In firm-level estimations, we find that a rise in the EnvPU index is associated with a reduced probability for cleantech startups to receive venture capital (VC) funding. In financial markets, a rise in our EnvPU index is associated with higher stock volatility for firms with above-average green revenue shares. At the macro level, shocks in our index lead to declines in the number of cleantech VC deals and higher volatility of the main benchmark clean energy exchange-traded fund. Overall, our results are consistent with the notion that policy uncertainty has adverse effects on investments for the low-carbon economy hindering progress to address the urgency of climate action.

The role of Venture Capital and Governments in Clean Energy: Lessons from the First Cleantech Bubble

National Bureau of Economic Research (NBER) Working Paper 29919 | April 2022

Matthias van den Heuvel and David Popp  

After a boom and bust cycle in the early 2010s, venture capital (VC) investments are, once again, flowing towards green businesses. In this paper, we use Crunchbase data on 150,000 US startups founded between 2000 and 2020 to better understand why VC initially did not prove successful in funding new clean energy technologies. Both lackluster demand and a lower potential for outsized returns make clean energy firms less attractive to VC than startups in ICT or biotech. However, we find no clear evidence that characteristics such as high-capital intensity or long development timeframe are behind the lack of success of VC in clean energy. In addition, our results show that while public sector investments can help attract VC investment, the ultimate success rate of firms receiving public funding remains small. Thus, stimulating demand will have a greater impact on clean energy innovation than investing in startups that will then struggle through the “valley of death”. Rather than investing themselves in startups bound to struggle through the valleys of death, governments wishing to support clean energy startups can first implement demand-side policies that make investing in clean energy more viable

Essays on the Role of Policy and Venture Financing in Clean Technology Innovation

École polytechnique fédérale de Lausanne | March 2022

Matthias van den Heuvel  

This thesis aims to provide novel analyses and data that improve the understanding of the financing of investments in clean technologies. In particular, this thesis explores the role that private and public actors play in supporting young innovative firms.

A new index of environmental policy using newspapers

CIES Research Brief 9 | November 2021

Laura Nowzohour,

Matthias van den Heuvel, Joëlle Noailly


We introduce a novel index measuring the salience of US environmental policy over the 1981-2019 period on a monthly basis and on various sub-topics. The index captures the evolution of the relative share of news articles discussing environmental and climate regulations over the last four decades. Our analysis finds a meaningful empirical association between more news on environmental policy and growing opportunities for clean investments.

Heard the News? Environmental Policy and Clean Investments 

CIES Research Paper 70 | October 2021

Joëlle Noailly, 

Laura Nowzohour,

Matthias van den Heuvel


We build a novel news-based index of US environmental policy and examine how it relates to clean investments. Extracting text from ten leading US newspapers over the last four decades, we use text-mining techniques to develop a granular index measuring the salience of US environmental policy (EnvP) over the 1981-2019 period. We develop further a set of additional measures, namely an index of sentiment on environmental policy, as well as various topic-specific indices. We validate our index by showing that it correctly captures trends and peaks in the evolution of US environmental policy and that it has a meaning- ful association with clean investments, in line with environmental regulations supporting growing opportunities for clean markets. In firm-level estimations, we find that the salience of environmental policy in newspapers is associated with a greater probability of cleantech startups receiving venture capital (VC) funding and reduced stock returns for high-emissions firms most exposed to environmental regulations. At the aggregate level, we find in VAR models that a shock in our news-based index of renewable energy policy is associated with an increase in the number of clean energy VC deals and in the assets under management of the main benchmark clean energy exchange-traded fund. Overall, our EnvP index provides a lot of substantial information on environmental policy and can help assist the policy and financial community in understanding how these regulations are perceived by investors — providing many avenues for future research.

Can adjustment costs in research
derail the transition to green growth?

CIES Research Paper 67 | May 2021

Laura Nowzohour

Adjustment costs are a central bottleneck of the real-world economic transition essential for achieving the sizeable reduction of greenhouse gas (GHG) emissions set out by policy makers. Could these costs derail the transition process to green growth, and if so, how should policy makers take this into account? I study this issue using the model of directed technical change in Acemoglu, Aghion, Bursztyn, and Hemous (2012), AABH, augmented by a friction on the choice of scientists developing better technologies. My results show that such frictions, even minor, materially affect the outcome. In particular, the risk of reaching an environmental disaster is higher than in the baseline AABH model. Fortunately, policy can address the problem. Specifically, a higher carbon tax ensures a disaster-free transition. In this case, the re-allocation of research activity to the clean sector happens over a longer but more realistic time horizon, namely around 15 instead of 5 years. An important policy implication is that optimal policies do not act over a substantially longer time horizon but must be more aggressive today in order to be effective. In turn, this implies that what may appear as a policy failure in the short-run — a slow transition albeit aggressive policy — actually reflects the efficient policy response to existing frictions in the economy. Furthermore, the risk of getting environmental policy wrong is highly asymmetric and ‘robust policy’ implies erring on the side of stringency.

Venture competitions could help spur
the cleantech revolution in Switzerland

CIES Policy Brief 7 | Spring 2021

Matthias van den Heuvel

Massive amounts of investments in clean technologies (e.g., solar energy, electric vehicles) are needed in order to limit global temperature rise below 2°C. Experts estimate that the world needs to invest $12.1 trillion globally over the next 25 years. To put this figure in perspective, it would require increasing the current level of investment by $210bn per year, a bit less than Portugal’s GDP. Yet, the current funding of clean technologies is hindered by an unattractive risk/return profile compared to other types of technologies. It takes high amounts of both capital and time to prove the commercial viability of a cleantech startup (Nanda et al., 2015). To tackle this issue, it is crucial to develop a better understanding of novel financing tools available to startups. One of these new financing tools, which we study in our recent research, is venture competitions.

Certification or Cash Prize: The Heterogeneous Effect of Venture Competitions

Paper | 3 November 2020

Gaétan de Rassenfosse and Matthias van den Heuvel

Venture competitions usually reward winners with a certification of their startup’s quality and a cash prize. We model and estimate the impact of these rewards on startup performances using original data on about 1000 startups that have participated in a highly-regarded venture competition. We find that winning in the competition improves startups' performances on average. However, it does not affect all technology types equally. Startups in sectors where quality can be more objectively assessed enjoy a long-term benefit from the certification's effect. By contrast, startups with low running costs and whose quality is harder to evaluate only benefit temporarily from having received a cash prize, with no long-term effect. We also show that the competition's certification provides valuable information to both entrepreneurs and outside investors. This information accelerates the termination of low-quality startups and improves external funding opportunities for high-quality startups. Our results highlight sector-specific heterogeneity in startups early-stage support needs, which bears implications for the design of entrepreneurial programs.

What do investors in electric vehicles technologies want?

CIES Policy Brief 6 | Autumn 2020

Eva Bortolotti, Bettina Kast and Joelle Noailly

With 25% of worldwide emissions due to road transport, the deployment of electric vehicles (EVs), full battery electric vehicles and plug-in hybrid electric vehicles – presents many promises to mitigate climate change. Despite its rapid growth, the market share of EVs vehicle remains low in Europe. Norway leads the EV market with 10% of total vehicle stock, followed by Iceland (3.3%), the Netherlands (1.9%) and Sweden (1.6%) (IEA, 2019). This Policy Brief presents the results of a survey among European cleantech investors examining which policy instruments and design can best mobilize private investments to advance e-mobility technologies.

Policy uncertainty and renewable energy
investments in Romania

CIES Policy Brief 5 | Autumn 2020

Mihnea-George Filip

Mobilizing private investments for the renewable energy transition requires credible policy support over the long-term. This Policy Brief discusses how Romania’s abrupt policy changes and inconsistent policy signals over the last decade have deterred private investments in the renewable energy sector. The example of Romania provides key policy lessons for other countries engaged in the energy transition.

Investors’ Preferences for E-Mobility Policies:
An Analysis of European Investors

CIES Research Paper 62 | 2020

Bettina Kast

Despite their potential for urgently needed emission reduction, electric vehicles account for a small fraction of the European vehicle fleet. Large scale deployment of electric vehicles requires considerable investments. While public policies are crucial for leveraging such financing, when ill-designed, they risk being ineffective or might even crowd-out investments. This study sheds light on investors’ policy preferences in the e-mobility sector. Based on behavioural finance literature, I propose that various a priori beliefs and investors’ country-contexts affect their evaluation of e-mobility policies. The policy preferences of European investors are examined through an adaptive conjoint analysis. The results indicate that policy preferences are dependent on investors’ belief in government intervention and the effectiveness of e-mobility technology. Furthermore, the existence of a domestic car manufacturing sector and the size of electric vehicle fleets affect investors’ policy evaluations. These behavioural aspects should, therefore, be incorporated into future policymaking processes.

What Drives Them to Invest in the Sustainable Mobility Transition? Evidence from a Conjoint Experiment on European Investors’ Policy Preferences

CIES Research Paper 61 | 2020

Eva Bortolotti

Substantial private investment is required if public policy objectives aim to increase the market share of Electric Vehicles (EVs) and prevent locking-in emissions-intensive development pathways. To maximize the effectiveness of future policies and successfully attract private capital, policy makers need to gain a better understanding of how investors behave, and of how policy design can drive investments decisions. This paper leverages an adaptive conjoint analysis (ACA) method to investigate the policy preferences of 41 European investors affiliated with different investment institutions. Findings reveal that investors’ characteristics as institution type and size of assets under management affect investors’ preferences over different e-mobility policy attributes. Furthermore, this study shows that behavioral factors, namely investors’ a-priori beliefs on the impacts of climate change and the COVID-19 crisis, play a role in determining investors’ policy preferences. By providing an analysis of investors’ behavior, this research can support policymakers to design more effective policy instruments to attract investments in electric mobility during and after the COVID-19 crisis.

Clean Energy Innovation and the Influence
of Venture Capitalists' Social Capital

CIES Research Paper 60 | 2020

Till Fust

This study contributes to the understanding of the enabling role that venture capitalists can play in bringing new innovative technologies to market, with a focus on clean energy technologies. Applying the structural model introduced by Srensen (2007) that allows to control for a potential sorting bias, I estimate the in influence of venture capital investor's social capital on startups' funding and exit performance, with social capital defined as the investors' eigencentrality and constraint within the network of investors. Looking at startups' first venture capital funding rounds in California between 2001 and 2019, this study finds a positive and signicant in influence of the lead investor's eigencentrality on the funding amount raised and the exit probability of the firm. Furthermore, a less constrained lead investor also increases the chance of the startup's eventual exit. But no differentiated effect for cleantech startups compared to other industries is found.