Financing Clean Energy Transitions in Emerging and Developing Economies
The world’s energy and climate future increasingly hinges on decisions made in emerging and developing economies
This very diverse grouping – spanning countries in Africa, Asia, Europe, Latin America and the Middle East – includes the world’s least developed countries as well as many middle-income economies, emerging giants of global demand such as India and Indonesia, and some of the world’s major energy producers. On a per capita basis, energy consumption in these countries is generally low, but expanding economies and rising incomes create vast potential for future growth. The challenge is to find development models that meet the aspirations of their citizens while avoiding the high-carbon choices that other economies have pursued in the past. The falling cost of key clean energy technologies offer a tremendous opportunity to chart a new, lower-emissions pathway for growth and prosperity. If this opportunity is not taken, and clean energy transitions falter in these countries, this will become the major fault line in global efforts to address climate change and to reach sustainable development goals.
Covid-19 has widened the huge gap between investment needs and today’s flows
Developing and emerging economies account for two-thirds of the world’s population but only one-fifth of investment in clean energy – and just one-tenth of global financial wealth. Annual investments across all parts of the energy sector in developing and emerging markets have fallen by around 20% since 2016, in part because of some persistent challenges in mobilising finance for clean energy projects. The Covid-19 pandemic has weakened corporate balance sheets and consumers’ ability to pay, and put additional strains on public finances. The effects have been felt most severely in emerging and developing economies, and the impacts on public health and on economic activity are far from over, undercutting the prospects for a swift recovery and the means for a sustainable one.
Today’s development pathway for emerging and developing economies points to higher emissions
Emerging and developing economies are set to account for the bulk of emissions growth in the coming decades unless much stronger action is taken to transform their energy systems. With the exception of parts of the Middle East and Eastern Europe, their per capita emissions are among the lowest in the world – one-quarter of the level in advanced economies. In a scenario reflecting today’s announced and existing policies, emissions from emerging and developing economies are projected to grow by 5 gigatonnes (Gt) over the next two decades. In contrast, they are projected to fall by 2 Gt in advanced economies and to plateau in China.
But a massive surge in clean energy investment in the developing world can put emissions on a different course
An unprecedented increase in clean energy spending is required to put countries on a pathway towards net-zero emissions. Clean energy investment in emerging and developing economies declined by 8% to less than USD 150 billion in 2020, with only a slight rebound expected in 2021. By the end of the 2020s, annual capital spending on clean energy in these economies needs to expand by more than seven times, to above USD 1 trillion, in order to put the world on track to reach net-zero emissions by 2050. Such a surge can bring major economic and societal benefits, but it will require far-reaching efforts to improve the domestic environment for clean energy investment within these countries – in combination with international efforts to accelerate inflows of capital.
The transformation begins with reliable clean power, grids and efficiency
Transforming the power sector and boosting investment in the efficient use of clean electricity are key pillars of sustainable development. Electricity consumption in emerging and developing economies is set to grow around three times the rate of advanced economies, and the low costs of wind and solar power, in particular, should make them the technologies of choice to meet rising demand if the infrastructure and regulatory frameworks are in place. Societies can reap multiple benefits from investment in clean power and modern digitalised electricity networks, as well as spending on energy efficiency and electrification via greener buildings, appliances and electric vehicles. These investments drive the largest share of the emissions reductions required over the next decade to meet international climate goals. Innovative mechanisms with international backing to refit, repurpose or retire existing coal plants are an essential component of power sector transformations.
An international catalyst is needed to boost clean energy investment in emerging and developing economies
Transitions in these economies will falter without more international engagement and support. Actions by policy makers within their countries to address the challenges and seize the opportunities will not, on their own, generate sufficient momentum. Supportive international actions will be essential to catalyse the necessary investments in critical areas and to support longer-term reform processes, starting with the commitment by developed economies to mobilise USD 100 billion per year in climate finance. The current international financial architecture offers some support for sustainable development around the world. However, today’s strategies, capabilities and funding levels do not yet answer the call for a fundamental transformation of the energy sector in emerging and developing economies. The international financial system lacks a clear and unified focus on financing emissions reductions and clean energy – particularly in the developing world. This needs to be done across multiple aspects of energy transitions, with co‑ordinated finance from donors and the provision of technical assistance on the ground. Increasing the effectiveness of the delivery channels for investments is critical.
A clear set of priority actions must guide strategies and accelerate transitions
This special report proposes a clear set of priority actions to mobilise the necessary capital to finance clean energy transitions. This is based on detailed analysis of successful projects and initiatives, including almost 50 real-world case studies – across clean power, efficiency and electrification, as well as transitions for fuels and emissions-intensive sectors – in countries ranging from Brazil to Indonesia and from Senegal to Bangladesh. The priorities focus on financing sectors that are market-ready, based on technologies at mature and early adoption stages, such as renewables and efficiency. They also examine options for financing transitions in fuels and emissions-intensive sectors where decisions taken over the next decade can lay the groundwork for the integration of new technologies – or could potentially lock in emissions for decades to come. We focus on actions that need to be taken between now and 2030 – a pivotal decade for economic recovery, for the realisation of the UN Sustainable Development Goals and for climate action.
Read the report below