Despite recent improvements, investment in renewable energy within Emerging Markets and Developing Economies (EMDEs) continues to lag behind investments in fossil fuels. This disparity is due to various challenges that diminish the appeal of renewable energy in these markets. A combination of policy uncertainty and higher risk premiums in EMDEs makes renewable energy financially less attractive compared to advanced economies. In some major emerging markets, the high cost of borrowing can more than double the cost of producing renewable energy. These factors collectively deter investment in renewable energy within EMDEs.
SITUATION
According to the World Bank, EMDEs currently account for three-fourths of the world’s 9,000 coal-fired power plants, with 90% of the global capital invested in these plants coming from EMDEs. The majority of capital investment remains focused on fossil fuels, exacerbating carbon lock-in risks and delaying diversification in the energy sector. Energy security concerns further complicate the transition to low-carbon alternatives in the short term. It is crucial that investments align with climate goals, particularly considering the limited potential for repurposing fossil fuel industry infrastructure. Despite a 300% increase in investments in low-carbon components and renewable energy sources between 2020 and 2022, these remain insufficient. The Climate Policy Initiative estimates that an investment of $4 to $5 trillion is necessary.
SOLUTION
To sufficiently and sustainably phase out coal, solutions must be tailored to each country’s unique characteristics, taking into account market dynamics, existing regulations, and national decarbonization policies. Estimates from Bloomberg NEF 2022 suggest that a global target ratio of approximately 1:4 for renewable energy over fossil fuel investment is required throughout this decade.
In order to achieve lasting transformative change, the financial and energy sectors play an integral role. They have the ability to redirect major investment streams, contributing significantly to groundbreaking transitions toward sustainability. However, the involvement of other sectors and entities is equally crucial in driving progress. As we approach the second half of the 2030 goals, businesses and individuals must increase their collaborativeness to fully realize the potential of green economies and renewable energies.
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