How to finance developing countries to achieve net zero: Beyond existing investment frameworks

The International Energy Agency (IEA) analyzed the commitments made before and at the United Nations Climate Change Conference (COP28) to reduce carbon emissions by 2030, and found that the world will reduce carbon emissions by just 3%. The conclusion was reached that only a one-fold reduction could be achieved. This is necessary to limit global warming to 1.5℃.

According to the IEA, fossil fuel emissions will need to be cut and investment in clean energy will need to triple to achieve the needed reductions. The need for increased financing is even greater in emerging market and developing countries. Current investment in clean energy in these markets is about $260 billion per year, but the IEA concludes that by 2030, they will need to invest about $2 trillion per year.

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Reducing emissions in developing countries is critical to achieving the goal of net-zero greenhouse gas emissions by 2050. Developing countries have historically contributed a very small share of greenhouse gas emissions, but today they emit almost half of all greenhouse gas emissions, and one. One third of energy sector emissions. Without the necessary funding, achieving the 1.5 degree goal will be nearly impossible.

Historically, the World Bank Group and other multilateral development banks (MDBs) have played a major role in providing investment financing and guarantees to developing countries. They have supported catalytic projects, built capacity and provided grants, loans, equity loans and guarantees to the poorest countries. They also developed the concept of blended finance, where the public and private sectors work together to invest.

However, despite these important achievements, MDBs have failed to attract significant levels of private investment in developing countries. Their processes are too slow, their financial regulations too narrow, and their bureaucracy too heavy for governments to attract the trillions of dollars in investment needed to meet their emissions reduction goals. Governments cannot afford it; only private investors can provide it. Although MDBs are working on process reforms, existing structures, mandates, and limitations make it highly unlikely that these reforms will fully open the spigot for private investment unless innovative new financing structures are developed. is.

Therefore, innovative new approaches and institutions are needed to meet emissions reduction targets. The best way to attract private investment to developing countries is to provide a level of assurance that will qualify the project as investment grade in the minds of private investors, and the actual risks of those investments as perceived. There is a growing consensus that the key is to reduce the risk of Guarantees provide the most efficient way to leverage public financing because the cash required is only the amount needed to cover expected losses on the investment. Unexpected losses are protected by balance sheet backup to cash provided to cover expected losses.

A number of assurance proposals are being considered and implemented. To achieve the desired effect, one or more proposals would need to establish a system that would provide at least $500 billion in financing guarantees for loans and possibly equity over a 10-year period. Sovereign nations, and perhaps very large foundations and private corporations, would fund this facility.

This proposal is very ambitious, but it won’t cost as much as you might think. For example, if the facility concludes that the risk of loss is too high (say 10%), donor countries would have to set aside $50 billion in cash over 10 years, or $5 billion per year. If 10 sovereign funds invested in the facility, each country would have to contribute an average of $500 million a year. This is a significant commitment, but it is an actionable amount, especially given that developed countries have pledged to lend developing countries $100 billion a year. Additionally, facilities may be ramped up slowly and required contributions will be lower in the early stages.

The facility will be structured to attract private institutional investors by establishing a simple and efficient process for evaluating investments and approving guarantees. It will ensure projects within an investor’s investment portfolio and pre-set standards regarding due diligence, environmental review and community engagement (ESG). Investors are responsible for conducting due diligence and enforcing standards. The facility conducts unannounced due diligence and implementation checks, but does not conduct independent reviews. A very small investment fee will be required to raise funds for EMDE capacity building.

This facility comprehensively insures all risks necessary to execute the project, including political and operational risks. It would provide guarantees in the amount necessary to enable investors to internally rate projects as investment grade. Although it does not guarantee currency risk, it says it will work with partner organizations to cover that risk. They will charge interest and fees at very low preferential rates.

This structure therefore allows investors to invest in the same way as regular investments, without the need for additional vetting, approvals, or bureaucratic procedures. Guarantees reduce the risk of an investment, allowing investors to provide financing at much lower interest rates and capital without having to pay a premium on returns to cover the risk. This results in more financially viable projects and lower costs for consumers.

In most parts of the world, it is cheaper, in some cases much cheaper, to produce renewable energy than fossil fuel-based energy, so lower interest rates will allow developing countries to compete economically. It also contributes greatly. Lower interest rates would also contribute to achieving equity between developed and emerging and developing countries, as investment costs converge, rather than making investments in developing countries significantly more expensive. .

Achieving 2030 carbon reduction targets in developing countries will require support from different types of financial institutions. In collaboration with Ian Callaghan, founder of the UK Climate Finance Accelerator, we, along with co-author George Fragton, Distinguished Research Fellow at the Atlantic Council Global Energy Center, are proposing a new facility, the Emerging Markets Investment Compact (EMCIC). Did. Meets all of the above criteria. EMCIC or similar types of facilities will complement financing provided by multilateral development banks and governments and play an important role in helping developing countries meet their carbon reduction targets.

Ken Berlin He is a Senior Fellow at the Atlantic Council Global Energy Center and Director of the Financing and Cost-Competitive Climate Solutions Project.

frank willie I am a project assistant at the Atlantic Council Global Energy Center.

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