By Maurizio Bezzeccheri, Head of Latin America Region, Enel Group, Arianna Checchi, Manager, Relations with International Organizations, Public Affairs, Eni, and Marta Martinez, Head of Analysis, Climate Change and Alliances, Iberdrola
The path towards net zero by 2050 is narrow but brings huge benefits. Transformation of the global energy system – responsible for around three-quarters of greenhouse gas emissions worldwide – holds the key to averting the worst effects of climate change. Emerging markets are set to be amongst the worst-affected by the climate disaster and thus have most to gain from collective climate ambition – provided they can harness the necessary investment from the private sector.
Investing in the green economy in emerging markets is one of the most cost-effective ways of tackling climate change: the average cost of reducing emissions in these economies is estimated to be around half the cost in advanced economies. The economic crisis presents an opportunity for emerging markets to define recovery measures aligned both to the SDGs and decarbonisation targets. However, given current budget constraints in the public sector, the private sector has a critical role to play in generating and channelling additional finance towards the clean energy transition.
Mobilising sufficient financing will require supportive public policies and commitment from business to build the green economy while simultaneously phasing down emissions. Regional collaboration can help ensure that national plans promote decarbonisation through policies that support renewable energy, digitalised power grids and electrification of end uses; energy security and access to clean and affordable energy; and carbon-pricing schemes to eliminate distortions while taking into account the needs of vulnerable communities. Moreover, training and reskilling workers will be key to an inclusive transition and particularly relevant in emerging and developing economies.
Given their access to capital and expertise in large projects, traditional energy businesses can play an important role in transforming the oil and gas sector. Potential synergies between traditional high-emission sectors and clean-energy solutions could support the transition, including diversifying into other parts of the energy supply chain where skill-sets overlap and may provide a good fit for handling emerging lower-carbon fuels and technologies. The need for experience managing large projects, such as off-shore wind infrastructure, could also be a suitable match for the oil and gas industry.
Emerging and developing economies relying mainly on public funding for new energy projects and industrial facilities will need to reform, strengthen and streamline their policy and regulatory frameworks to attract more private investment to strategic sectors like renewable energies and the expansion of network access. Investment in these areas is particularly timely given the increased competitiveness of renewable energy and existing technologies for deep decarbonisation. Given the long lead times of energy investments, it is urgent to attract investments now.
Governments should also provide greater visibility on the policy targets. Certainty about a pipeline of potential projects, and the use of public, competitive tenders to foster competition and reduce costs, would enable investors to invest in capacity building while balancing risk and return over an extended period of time, often in situations of low liquidity. More evidence-based data can play a critical role in building familiarity and investor confidence in projects, standards and protocols. Progress on ESG criteria, increasingly seen as a competitive factor, can reduce the risk perception of investments.
The cost of capital, generally higher in emerging markets than advanced economies, is often the main cost of renewables, compared to relatively low variable costs of running a solar plant or wind farm. This creates barriers to affordable finance, particularly for micro, small and medium-sized enterprises (MSMEs), despite being key drivers of green and inclusive growth. Financial instruments can help to maximise the use of limited public and development funds. Thus far, emerging and developing markets, excluding China, have contributed only around 10% of the global issuance of clean-energy related sustainable debt. In the last 20 years, most issuance has come from Latin America, Southeast Asia and India, a rapidly booming market. The use of these financial instruments could be strengthened; to this end, appropriate regulatory frameworks should be established at national level.
The catalytic role of Development Finance Institutions (DFIs) will be critical to attract capital to emerging markets and maximise innovative energy technologies. Better use of blended finance can mobilise additional private capital and foster a pipeline of “bankable” projects. DFIs can work on risk-transfer mechanisms to provide clarity about outcomes at project level, promote stronger partnerships and innovate to address gaps in emerging markets. A dedicated green finance concessional facility could address access to long-term debt, lower transaction costs and reduce perceived risks, particularly for least developing countries in debt distress or at risk thereof. Such facilities play a pivotal role in providing local currency debt for projects that are not able to access affordable finance.
Progress to support the mobilisation of private finance could have significant benefits beyond the energy transition. Climate action can also address challenges associated with rapid urbanisation across emerging and developing economies, which coupled with rising energy demand – cities account for 85% of growth in global electricity demand – contributes to worsening air pollution and is inflicting large-scale damage on biodiversity. Ambitious policies can reduce emissions by almost 70% in 2050 compared to 2015 by improving energy efficiency, shifting to sustainable transport modes and scaling-up use of electric vehicles, low-carbon fuels and biofuels.
There are several successful examples of smart cities in Asia and they are rapidly taking off in Latin America, São Paulo for instance, through joint ventures to promote public electric transportation with nearly 1 000 electric buses in Santiago and Bogotá. Circular business models will be key to a sustainable urbanisation process and create further opportunities for the private sector. In this context, cities can facilitate much needed access to finance and broaden the range of financial instruments for the private sector, including schemes to offer subsidised loans or credit guarantees to companies following circular economy principles.
Meeting the challenge of creating a green economy across emerging markets will require innovative and collaborative models between the public and private sectors, whether to underpin a green transition or build and modernise sustainable infrastructure and circular cities. The work of the OECD and the IEA, cited throughout this blog, provides practical initiatives and evidence-based analysis to support these efforts. As Co-Chairs of the Emerging Markets Network (EMnet) Working Group on Green Economy, we stand ready to contribute to and share this valuable work, and to engage with emerging and developing countries in support of the green transition.