The world’s energy and climate future increasingly hinges on whether emerging and developing economies are able to successfully transition to cleaner energy systems.
A new report by the International Energy Agency (IEA) is calling for a step change in global efforts to mobilise and channel the massive surge in investment that is required to address this.
The special report – carried out in collaboration with the World Bank and the World Economic Forum – sets out a series of actions to enable these countries to overcome the major hurdles they face in attracting the financing to build the clean, modern and resilient energy systems that can power their growing economies for decades to come.
Annual clean energy investment in emerging and developing economies needs to increase by more than seven times – from less than $150bn (€123bn) last year to over $1trillion by 2030 to put the world on track to reach net-zero emissions by 2050, according to Financing Clean Energy Transitions in Emerging and Developing Economies.
Unless much stronger action is taken, energy-related carbon dioxide emissions from these economies – which are mostly in Asia, Africa and Latin America – are set to grow by 5bn tonnes over the next two decades, according to the report.
IEA executive director Fatih Birol (pictured) said: “In many emerging and developing economies, emissions are heading upwards while clean energy investments are faltering, creating a dangerous fault line in global efforts to reach climate and sustainable energy goals.
“Countries are not starting on this journey from the same place – many do not have access to the funds they need to rapidly transition to a healthier and more prosperous energy future – and the damaging effects of the Covid-19 crisis are lasting longer in many parts of the developing world.
“There is no shortage of money worldwide, but it is not finding its way to the countries, sectors and projects where it is most needed.
“Governments need to give international public finance institutions a strong strategic mandate to finance clean energy transitions in the developing world.”
Recent trends in clean energy spending point to a widening gap between advanced economies and the developing world even though emissions reductions are far more cost-effective in the latter.
Emerging and developing economies currently account for two-thirds of the world’s population, but only one-fifth of global investment in clean energy, and one-tenth of global financial wealth.
Annual investments across all parts of the energy sector in emerging and developing markets have fallen by around 20% since 2016, and they face debt and equity costs that are up to seven times higher than in the United States or Europe.
Avoiding a tonne of CO2 emissions in emerging and developing economies costs about half as much on average as in advanced economies, according to the report.
That is partly because developing economies can often jump straight to cleaner and more efficient technologies without having to phase out or refit polluting energy projects that are already underway.
But emerging market and developing economies seeking to increase clean energy investment face a range of difficulties, which can undermine risk-adjusted returns for investors and the availability of bankable projects.
Challenges involve the availability of commercial arrangements that support predictable revenues for capital-intensive investments, the creditworthiness of counterparties and the availability of enabling infrastructure, among other project-level factors.
Broader issues, including depleted public finances, currency instability and weaknesses in local banking and capital markets also raise challenges to attracting investment.
Dr Birol added: “A major catalyst is needed to make the 2020s the decade of transformative clean energy investment.
“The international system lacks a clear and unified focus on financing emissions reductions and clean energy – particularly in emerging and developing economies.
“Today’s strategies, capabilities and funding levels are well short of where they need to be.
“Our report is a global call to action – especially for those who have the wealth, resources and expertise to make a difference – and offers priority actions that can be taken now to move things forward fast.”
These priority actions – for governments, financial institutions, investors and companies – cover the period between now and 2030, drawing on detailed analysis of successful projects and initiatives across clean power, efficiency and electrification, as well as transitions for fuels and emissions-intensive sectors.
These include almost 50 real-world case studies across different sectors in countries ranging from Brazil to Indonesia, and from Senegal to Bangladesh.
The report calls for a focus on channelling and facilitating investment into sectors where clean technologies are market-ready, especially in the areas of renewables and energy efficiency, but also laying the groundwork for scaling up low-carbon fuels and industrial infrastructure needed to decarbonise rapidly growing and urbanising economies.
It also calls for strengthening sustainable finance frameworks, addressing barriers on foreign investment, easing procedures for licensing and land acquisition, and rolling back policies that distort local energy markets.
The report underscores that clean energy investments and activities can bring substantial economic opportunities and jobs in industries that are expected to flourish in the coming decades as energy transitions accelerate worldwide.
It calls for clean energy transitions to be people‐centred and inclusive, including actions that build equitable and sustainable models for universal access to modern energy.
Spending on more efficient appliances, electric vehicles, and energy‐efficient buildings can provide further employment opportunities, and can especially support the role of women and female entrepreneurs in driving change and improved gender equality.