Transitioning to a low-carbon economy

By Vince Chong

SMU Office of Research Governance & Administration – Among the four standout recipients of a 2025 Singapore Management University (SMU) Research Staff Excellence Award was economist Maria Teresa Punzi, a senior researcher at the Lee Kong Chian School of Business at SMU.

"It meant a great deal to me to see my work recognised in such a broad context," Dr Punzi says. "Beyond the personal honour, the award is particularly meaningful because it contributes to the visibility and impact of the Singapore Green Finance Centre (SGFC), whose mission and work I am deeply committed to."

The SGFC is a Centre of Excellence for sustainable finance, a joint initiative between SMU and Imperial College London, with support from the Monetary Authority of Singapore and seven leading global financial institutions.

Dr Punzi was first drawn to economics at high school where she excelled in mathematics and analytical subjects. She became fascinated by how rigorous logic could be used to understand real-world outcomes.

"Economics offered the ideal combination of formal reasoning and policy relevance," she says. "Today, my work focuses on climate change from a macroeconomic perspective, analysing how climate risks and the transition to a low-carbon economy affect growth, financial stability and policy design." 

In line with her research focus, Dr Punzi is co-author of the recent journal article: The effects of financing green and brown sectors: What do theories and evidence say? 

Green finance

Global investment in clean technologies now surpasses investment in fossil fuels, yet there remains a considerable shortfall in the capital required to finance the energy transition and meet net-zero targets. This seems surprising given that global financial markets are reputedly awash with excess capital.

"The apparent paradox arises because the problem is not a lack of capital in aggregate, but a mismatch between where capital is available and where it is needed, and under what risk-return conditions," Dr Punzi says. 

"Global financial markets may be awash with liquidity, but most capital is short-term, risk-averse and benchmark-driven, whereas the energy transition requires large-scale, long-horizon and often policy-dependent investments."

Support for the growth of a green economy sees capital channelled towards green sectors, industries that advance environmental goals and reduce emissions. This is the crux of green finance.

"Green finance has been essential in scaling clean technologies, but it has clear limits. It mainly funds activities that are already green, while most emissions come from existing carbon-intensive sectors," Dr Punzi says. 

"On its own, green finance does not guarantee that dirty production is phased out, and divestment-driven approaches can even raise emissions by encouraging asset-sweating and short-term behaviour in brown firms. Without complementary policies and transition finance, green finance can clean portfolios faster than it decarbonises the real economy."

A more pragmatic and inclusive strategy requires transition finance for brown sectors to support their decarbonisation trajectories, crucial for economies heavily reliant on carbon-intensive industries.

"Transition finance is essential because most emissions come from existing carbon-intensive sectors. Financing their transformation delivers faster emissions cuts and avoids the economic and financial disruption that comes from simply excluding them from capital markets," Dr Punzi says. 

"To scale it up, policymakers need clear transition standards, credible policy signals such as carbon pricing and phase-out pathways, and risk-sharing tools, such as guarantees and blended finance that make these projects bankable for private investors."

Asia can lead

Does Dr Punzi sees unintended macro-economic trade-offs of both carbon tax and capital-cost adjustment policies?

"Carbon taxes raise energy prices, which can be inflationary in the short run; reduce real incomes, especially for lower-income households; and depress output in carbon-intensive regions if revenues are not recycled effectively," she says. 

"Capital-cost adjustments, such as higher financing costs for brown firms, can restrict investment and accelerate asset stranding, potentially leading to credit tightening, employment losses and financial-stability risks."

And what is the role for carbon credits?

"Carbon credits are not a silver bullet, but they are not a distraction either. They work best as a complement, not a replacement, to carbon pricing, regulation and transition finance," Dr Punzi says.

"Used properly, carbon credits can accelerate abatement and mobilise capital. Used poorly, they simply shift responsibility and delay the transition. The policy challenge, especially for leading hubs such as Singapore, is to ensure high integrity, limited use and clear alignment with real-economy decarbonisation." 

Dr Punzi believes that Asian economies are well-positioned to lead the global effort to align economic growth with environmental responsibility.

"Asia is where the future of global growth and emissions will be determined. Unlike advanced economies, many Asian countries are still building energy systems, cities and infrastructure, so they can leapfrog to cleaner technologies rather than retrofit old ones," she says.

"At the same time, the region combines strong state capacity, long-term planning, and deep pools of savings with rapidly expanding green and transition finance markets. This creates a unique opportunity to integrate climate objectives directly into growth strategies, rather than treating them as a constraint."

A just transition

A lack of bankable, low-risk transition opportunities creates structural challenges for deploying transition finance in Asia.

"Currency risk, limited project pipelines and gaps in project preparation further deter long-term investors," Dr Punzi says. "In addition, hard-to-abate sectors dominate emissions, yet lack clear, credible pathways that financiers can price."

Policymakers could address Asia’s transition-finance challenges by reducing uncertainty and sharing risk.

"This means setting credible, time-bound transition standards so investors can price progress; aligning carbon pricing, regulations and phase-out pathways to create clear demand signals; and scaling up de-risking tools such as guarantees, blended finance and FX-hedging facilities," Dr Punzi says.

"Just as importantly, governments need to invest in project preparation and market infrastructure so transition projects are ready to absorb long-term capital. Regional hubs such as Singapore can play a catalytic role by standardising frameworks, mobilising global investors and channelling capital efficiently across Asia."

And what would a just transition to a low-carbon future in Asia look like?

"An effective just transition in carbon-intensive Asian economies requires combining decarbonisation with jobs, social protection and regional development, so climate action strengthens, rather than undermines, economic inclusion," Dr Punzi says. 

"A just transition is not only about reducing emissions, it’s about managing economic change."

Dr Punzi will be continuing her research with a strong macro-financial focus.

"A key priority is understanding how policy design can reduce emissions while avoiding disorderly transitions and social costs. This work is closely linked to applied policy research through the SGFC, where the aim is to translate academic insights into tools that policymakers, regulators and investors can actually use," she says.

Back to Research@SMU February 2026 Issue