Unlocking climate finance for emerging and developing economies will require more than pledges
Financing realities challenge both development and climate goals
Today, only 15% of global clean energy investment is in emerging and developing economies (EMDEs) — excluding China. That may be surprising, considering most of the world’s population (66%) resides in these countries. Given their forecasted growth, they will soon represent the majority of energy demand and emissions as well. However, with over 700 million people globally (and over 400 million in Africa) living in extreme poverty, these regions also have much more urgent priorities — oftentimes prioritizing economic development over emissions reductions.
Given the critical need for significantly more investment in EMDEs for both development and climate goals, how can climate finance policy solutions help, and what additional measures might be necessary?
Scaling climate-friendly investment in EMDEs is challenging due a variety of conditions that are reflected in elevated costs of capital, typically two to three times higher than in OECD countries – i.e., the rich world. Factors that increase the cost of capital include currency exchange risk, project completion concerns, lack of regulatory certainty, contract enforcement risks, and asset expropriation risks. This can be further exacerbated by imperfect assessments of country risk premiums.
In newly published analysis on climate investments in Africa, CATF found that the weighted average cost of capital for projects in the power sector stands at an alarming 15.6% on the continent, making it prohibitively expensive for African nations, which already lack the fundamental energy infrastructure necessary for a transition, to prioritize decarbonization.
This elevated cost of capital is both a symptom of conditions and a barrier to development and climate action. Most global capital from pension funds and insurance companies are highly risk averse with limited investments in infrastructure and EMDEs. As such, the risks and costs often significantly limit availability. Where financing does occur, it is focused on export projects (e.g. oil) for global markets that lack local economic risks or projects that have credible offtake agreements or government guarantees. Many EMDEs, however, are already burdened by debt obligations and cannot afford guarantees. For others, challenges such as currency risks, lack of transmission infrastructure, local utility performance or labor capacity shortfalls, are equally challenging.
COP29 needs to produce credible plans beyond pledges
Much of the focus at COP29 will be on a new global climate finance goal. While wealthy countries need to significantly increase concessional funding that can lower risk premiums to unlock larger pools or private capital, most proposed solutions and strategies have not been evaluated for plausibility or scale.
Moreover, many climate finance discussions today center high-level targets or individual projects, often overlooking the infrastructure and energy challenges unique to developing countries. To enable realistic policy planning and effective implementation, these discussions need to be grounded in granular, country- and region-specific data.
Development finance and public capital in the EMDE region are currently limited and governed by a development cascade framework that prioritizes sectors typically not financed by private capital, such as education, health, and public goods. According to the World Bank’s annual survey, climate ranked only 12th out of 16 overall concerns, with fewer than one in five respondents citing it as one of their top six priorities.
Additionally, fiscal challenges and high public debt levels further constrain public resources in many countries already grappling with numerous development challenges. It is perhaps unsurprising then, that the Network for Greening the Financial System reports blended finance for climate mitigation and adaptation ranges from just $2-14 billion per year versus an estimated ~$1 trillion a year needed by EMDEs for clean energy investment.
After COP29
No matter what finance pledge is agreed on at COP29, world leaders and financiers will need to answer the following questions quickly:
- Are current proposed solutions sufficient to achieve such conditions, and if not, what other options exist?
- What development-compatible decarbonization pathways are most plausible for EMDEs?
- How can investment be optimized to unlock growth along with decarbonization?
Much greater focus needs to be placed on evaluating the scalability of proposed solutions and then working on additional strategies to achieve both development and decarbonization targets. Given the likely limits of international concessional financing, we must place more attention on bottom-up actions that improve local investment conditions and foster wealth in domestic markets. Doing so can enable climate action as part of development, not in spite of it.
This means policymakers need to expand their focus beyond one-off clean energy projects and include strategies that improve local conditions. This might include collaborating with local companies and stakeholders to build large-scale enabling infrastructure, such as transmission grids, that unlock future investments or working on enhancing utility and market performance to make them more attractive to investors.
Tackling these questions will surely raise hard questions about the political, economic, and social feasibility of the pace of change, the burden sharing between affluent countries and EMDEs, and the level of risk that governments will need to absorb to develop technologies more quickly. But failing to do so may increase the risk that such barriers will significantly lengthen the time it takes to decarbonize the global energy system – and delay the climate action we urgently need to protect people everywhere.
