By Izak Atiyas
The world is significantly behind in meeting the Paris Agreement targets. Emissions continue to increase, and investments in climate transition are falling short, as evidenced by a shrinking carbon budget. Developing economies are currently receiving a small share of climate investments, despite their future prominence as major emitters.
This paper delves into why current strategies have not met expectations, explores barriers to private investment, and highlights the vital role governments must play in driving large-scale decarbonization.
- To boost climate investments in emerging markets, a key strategy has been to leverage private sector funding through blended financial instruments. The idea was to use public funds to reduce risks and attract private investors. However, this approach has not yet yielded the desired results. In 2022, less than half of climate investments in developing countries came from private sources, and the use of blended instruments remained low.
- Climate finance for emerging market and developing economies (EMDEs) faces several challenges. Despite declining renewable costs, regional differences and additional costs for transmission, storage, and flexibility measures are significant. Countries may prefer public ownership of transmission, limiting private investment. To boost private sector involvement, government support to reduce earnings volatility is often necessary, though such measures can incur costs. In coal-dependent or fossil-fuel-favorable regions, public funds are needed for stranded costs and transition expenses. Ongoing investments in coal plants, along with research indicating that phasing out coal and replacing it with renewables could result in net losses for many coal-dependent countries (while wealthier nations benefit from reduced emissions), suggest that wealthier countries might need to provide more financial support.
ricardo gomez via unsplash