Filling this ‘forgotten element’ of the energy transition is critical to net zero

An “alarming shortage” of clean energy and low carbon infrastructure projects in developing countries and emerging markets poses a major threat to meeting the global climate goals contained in the Paris Agreement, fresh research has warned.

Delivering on global climate finance goals requires a 30 percent increase in the number of low carbon projects that can attract private investment in developing nations by the end of the decade, yet the study warns the number of such projects is actually shrinking, with an average 10 percent reduction annually since 2015.

The research, published last week by the Tony Blair Institute for Global Change, highlights a significant shortfall in the number of investable low carbon projects in developing and emerging nations, which it estimates would need to increase seven-fold annually to meet climate finance goals.

It points to weak renewable energy markets in many developing economies, with data suggesting the size of wind, solar and other clean energy pipelines has been contracting overall in recent years, with growth concentrated in a handful of leading emerging economies.

Brazil, India and South Africa are collectively home to almost half all renewable energy projects that receive private investment in emerging and developing countries worldwide, according to the research.

Emerging and developing nations only receive around $85 billion to $114 billion from international sources of private investment.

The situation facing developing nations contrasts sharply with trends among Organization for Economic Development and Cooperation (OECD) economies. While investment in renewables projects in the former has fallen at an average annual rate of 11 percent, with the size of project pipelines following the same trend, it is rising by four percent annually in OECD nations, the research estimates.

As such, the authors warn that unless far more financing for green infrastructure projects is targeted towards emerging and developing nations, both richer nations’ climate finance goals, as well as the broader global net zero transition, are at risk of failure.

“Climate finance is key to turning commitments to climate targets into reality in a way that enables a just transition to net zero and recognizes the unique needs of emerging markets and developing countries,” the report states. “But there is a substantial shortfall in the investment needed to fund this transition, and what is available is often not aligned to deliver to the sectors and countries that need it most.”

Climate finance is again set to be a major issue of contention at the upcoming COP28 UN climate talks, which kick off at the end of this month in Dubai, with richer nations having to date failed to deliver on their $100 billion a year collective commitment.

There is an urgent need to secure more private sector investment and climate finance in developing and emerging countries.

Countries are also struggling to reach agreement over the establishment of a new Loss and Damage fund to support countries already facing the worst impacts of the climate crisis, and unless common ground can be found there are fears it could lead to climate talks collapsing altogether at COP28. A draft agreement was brokered over the weekend following a series of fraught negotiations, but poorer nations remain hugely frustrated over the failure of industrialized nations to come forward with a firmer commitment to supporting the new fund. Meanwhile, industrialized nations have expressed anger at the failure of the largest emerging economies to commit to paying into the new fund, with one diplomat reportedly noting that if Saudi Arabia can afford to pay millions of dollars a month to footballer Cristiano Ronaldo, it can afford to support the Loss and Damage Fund.

The broad view among diplomatic observers is that securing an ambitious outcome in the final COP28 text on mitigation — such as an agreed phase out deadline for fossil fuels — will also require richer nations to make good on climate finance commitments and ensure the establishment of a robust Loss and Damage Fund.

But as last week’s paper from the Tony Blair Institute also demonstrates, there is an urgent need to secure more private sector investment and climate finance in developing and emerging countries, as well as the capacity and skills base required to deliver investable infrastructure projects, if the world is to stand a chance of limiting average temperature rise to 1.5 degrees Celsuis or well below 2 Celsius.

Altogether, it estimates the required global annual climate spend from the public sector, international finance institutions and private sources combined ranges from $45 trillion to $69 trillion, which it notes is around seven to 11 times larger than the current annual spend of $630 billion.

But not only is there a major investment gap, significant portions of that funding also need to be targeted in countries that face a disproportionate climate change burden, the research warns.

The number of investable, climate-responsive renewable energy and low carbon projects needs to be 7 to 9 times larger than the current pipeline.

In order to keep pace with climate goals, it estimates developing, emerging and climate vulnerable economies should collectively receive $2.4 trillion annually, which equates to around 30 to 50 percent of total required global climate spending.

More specifically, it contends that — based on an analysis of current funding sources — around $780 billion of that $2.4 trillion in annual funding should be supplied by international sources of private finance, in addition to funding from public sources and financial institutions. At present, however, emerging and developing nations only receive around $85 billion to $114 billion from international sources of private investment.

Overall, therefore, the study authors estimate that in order to close the gap in climate funding and provide secure allocation for new investments, the number of investable, climate-responsive renewable energy and low carbon projects needs to be seven to nine times larger than the current pipeline.

That means around 3,200 new projects — including renewables, natural resources, utilities and waste management projects — that can welcome much needed private, foreign investment in developing and emerging countries in order to meet achieve the Paris Agreement goals, the report estimates.

Africa is in particular need of far more renewables development, both to provide access to electricity to millions of people that lack it, and to guard against the continent getting locked into carbon-intensive, fossil-fueled infrastructure development as its economies develop, the research points out.

Renewable energy sources such as wind and solar can promise to provide reliable sources of electricity at a far lower, and less volatile, price point.

The study authors describe the lack of investable low carbon projects in developing and emerging nations as “the forgotten element of the energy transition,” which they warn “has the potential to bottleneck financial action.”

“Emerging and developing countries have an urgent need to build investable project pipelines that attract private investments, as well as public-private partnership investments, in climate-related sectors,” the study states. “Bold action is needed today to reverse the current erosion trend and achieve the Paris Agreement goals together.”

The challenge of attracting much needed investment to accelerate the energy transition in emerging and developing countries — many of which have growing populations and energy needs, which if met using  fossil fuels would inevitably result in global climate goals being breached — has been an increasing source of frustration for political leaders across the Global South.

Not least because, in the wake of the global energy crisis, renewable energy sources such as wind and solar can promise to provide reliable sources of electricity at a far lower, and less volatile, price point.

Yet often the cost of capital attached to investing in low carbon projects in emerging and developing countries is far higher, resulting in a major barrier to green development in developing economies, and energizing calls for reforms to a global financial architecture that is dominated by institutions such as the World Bank and International Monetary Fund.

As such, the upcoming COP28 Climate Summit is set to be defined once again by calls from developing countries for both more climate finance and sweeping reforms to financial rules and institutions, with momentum building behind the Bridgetown Agenda championed by Barbados Prime Minister Mia Mottley. As the Tony Blair Institute paper makes clear, failing to overcome these challenges and build the necessary clean energy pipelines will ultimately result in major negative impacts for richer and poorer nations alike.