Higher cost of finance exacerbates a climate investment trap in developing economies

Ameli, Nadia; Dessens, Olivier; Winning, Matthew; Cronin, Jennifer; Chenet, Hugues; Drummond, Paul; Calzadilla, Alvaro; Anandarajah, Gabrial; Grubb, Michael

doi:10.1038/s41467-021-24305-3

Cited by 82 publications

(52 citation statements)

References 64 publications

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“…They are particularly high for smaller projects in unfamiliar geographies and with fragmented financing windows, uncertain governance landscapes, and limited project preparation expertise. These risks make capital costs higher in developing countries (UNDP, 2014), which exacerbates the investment gap (Ameli et al 2021), especially in the post-pandemic period where there are a growing number of countries with low creditworthiness (BFT, 2018a).…”

Section: A Structural Problem: the Infrastructure Investment Gapmentioning

confidence: 99%

Accelerating the speed and scale of climate finance in the post-pandemic context

Hourcade

Dasgupta²,

Ghersi

2021

Climate Policy

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In this paper, we examine how to trigger a wave of low-carbon investments compatible with the wellbelow 2°C target of the Paris Agreement in the current post-pandemic context of increasing private and public debt. We argue that one major obstacle to catalyzing global excess savings at sufficient scale and speed on climate mitigation, and to 'greening' economic recovery packages, lies in the upfront risks of low-carbon investment. We then explain why public guarantees should be the preferred risk-sharing instrument to overcome that obstacle. We outline the basic principles of a multilateral sovereign guarantee mechanism able to maximize the leverage effect of public funds and massively redirect global savings towards low-carbon investments, with the double benefit of bridging the infrastructure investment gap in developing countries and reducing tension between developed and developing countries around accelerated funding for low-carbon transitions. We carry out numerical simulations demonstrating how the use of guarantees from AAA-rated sovereigns, calibrated on an agreed-upon 'social value of carbon', is compatible with public-budget constraints of developed countries. In summary, the use of such guarantee mechanisms provides a new form of 'where flexibility', which could turn real-world heterogeneity into a source of reciprocal gains for both developed and developing countries, and contribute to meeting the USD 100 billion + pledge of the Paris Agreement. Key policy insights Catalyzing excess world savings through low-carbon investments (LCIs) would secure a safer and fairer economic recovery from the COVID-19 crisis and avoid locking developing countries into carbon-intensive pathways. Public policy instruments focused on creation of public guarantees can reduce the up-front financial risks associated with LCIs, mobilize private money and increase the leverage of public finance. A multi-sovereign guarantee mechanism would yield financial support from developed to developing countries in cash grant equivalent and equity inflows two to four times higher than the 'USD 100 billion and more' commitment of the Paris Agreement, and provide greater confidence in meeting this commitment equitably and effectively with benefits for all.

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Section: A Structural Problem: the Infrastructure Investment Gapmentioning

confidence: 99%

Accelerating the speed and scale of climate finance in the post-pandemic context

Hourcade

Dasgupta²,

Ghersi

2021

Climate Policy

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“…Given this logic, the goal of lower-income countries would be to attract renewable energy investments from oil and gas companies at reduced WACC. This enables them to break the "climate investment trap" [17] and helps them achieve their renewable energy targets. The presence of major energy companies familiar with the lower-income countries and with previous experience in capacity building, knowledge transfer, and institutional support also contributes to overcoming the other barriers typically faced by lower-income countries.…”

Section: Energy Companymentioning

confidence: 99%

“…These barriers result in an increased perception of risks for such investments and accordingly make access to finance either impossible or very costly [16]. Lower-income countries can therefore easily get stuck in "a climate investment trap" [17]. High-risk perceptions induce a high weighted average cost of capital (WACC), which delays green investments.…”

Section: Introductionmentioning

confidence: 99%

“…This results in lowering the country's risk and the investment WACC [18]. Yet, the guarantee schemes available, among other sustainable finance frameworks, fall short of the needs of developing economies [17]. Matthäus and Mehling propose a new global guarantee mechanism to reduce risk premia for renewable energy investments in regions with adverse financing conditions and estimate savings reaching 1.5 trillion USD until 2030 [20].…”

Section: Introductionmentioning

confidence: 99%

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Using Natural Gas Resources to De-Risk Renewable Energy Investments in Lower-Income Countries

Olleik

Hamie²,

Auer

2022

Energies

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Combatting climate change necessitates a substantial global increase in renewable electricity capacity. Many low-income and lower-middle-income countries suffer from unfavorable green financing conditions. Fifteen of these countries possess substantial natural gas reserves. To overcome green financing constraints in such countries, we propose an integrated energy contract that awards a renewable energy project in parallel with an upstream natural gas project to interested energy companies. The state returns from the natural gas project provide a guarantee for renewable energy investments, reducing their associated risks. We conduct Monte Carlo simulations for each of the targeted countries after populating the input parameters for the upstream natural gas and renewable energy projects, including forecasting country-specific natural gas prices. When accounting for 10% of their existing natural gas reserves in the proposed contract, Nigeria, Myanmar, and Indonesia can achieve more than 60% of their 2030 renewable energy target capacity additions while countries with low access to electricity can significantly upscale their installed capacities. The guarantee mechanism provides protection levels exceeding 96% on renewable energy investments. The proposed contract enables the considered countries to increase their renewable energy capacities while inducing economic development.

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“…In a study that adresses the climate investment trap in developing countries,Ameli et al (2021) compute country risk premiums based on bond yield differences.…”

mentioning

confidence: 99%

Capital markets and the costs of climate policies

Leimbach

Bauer

2021

Environ Econ Policy Stud

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Globalization is accompanied by increasing current account imbalances. They can undermine the positive impacts of increasing international cooperation and trade on economic growth and income convergence. At the same time, climate change challenges the global community and requests for co-operative action. Regional energy transformation due to climate policies and the resulting regional mitigation costs are key variables of climate economic analysis. This study is the first that include current account imbalances and imperfect capital markets to investigate potential market feedback mechanisms between climate policies, energy sector transformation and capital markets. Furthermore, it answers the question whether the capital-intensive transformation towards zero-carbon economies increases the policy cost of mitigation under the condition of imperfect capital markets. First results demonstrate a dominant baseline effect of capital market imperfections on macroeconomic variables, and moderate effects on mitigation costs in global climate policy scenarios. For some regions (e.g. Middle East) estimates of relatively high mitigation costs are revised downwards, if imperfect capital markets are considered.

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Higher cost of finance exacerbates a climate investment trap in developing economies

Cited by 82 publications

References 64 publications

Accelerating the speed and scale of climate finance in the post-pandemic context

Accelerating the speed and scale of climate finance in the post-pandemic context

Using Natural Gas Resources to De-Risk Renewable Energy Investments in Lower-Income Countries

Capital markets and the costs of climate policies

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