Call for clean energy investment in emerging and developing economies to be a top global priority

The world’s energy and climate future increasingly hinges on whether emerging and developing economies are able to transition to cleaner energy systems, calling for a step change in global efforts to mobilise and channel the massive surge in investment that is required, according to a new report by the International Energy Agency (IEA).

The 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 more than seven-fold – from less than $150bn last year to over $1tn by 2030 to put the world on track to reach net zero emissions by 2050, according to the report. Unless much stronger action is taken, energy-related CO₂ 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.

'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,’ notes Fatih Birol, Executive Director, IEA. ‘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,’ adds Birol. ‘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 emission 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 US 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.