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A strategic path to closing the climate finance gap

As COP 29 draws closer, the discussion around climate finance becomes increasingly pivotal. Access to climate finance plays a decisive role in enabling countries to meet their Nationally Determined Contributions (NDCs), many of which hinge on external support, write Navdeep Gupta and Sunil Dayal.


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Sustainable Initiatives
 
October 29 2024
 
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“Finance is the oxygen for climate action. Without it, achieving our global targets remains an unfulfilled aspiration,” said Kristalina Georgieva, underscoring the urgency of scaling global climate finance. As the International Energy Agency (IEA) highlights, meeting the net-zero targets by 2050 requires annual investments of approximately $4 trillion, yet Bloomberg reports that global climate finance flows reached only $850 billion in 2023. This enormous shortfall jeopardises the path toward meaningful climate action.

As COP 29 draws closer, the discussion around climate finance becomes increasingly pivotal. Access to climate finance plays a decisive role in enabling countries to meet their Nationally Determined Contributions (NDCs), many of which hinge on external support. However, climate finance is not merely about emissions reductions—it is a lifeline for building resilient communities, ensuring inclusive development, and promoting a just transition to sustainable economies.

Global cooperation to align financial flows with the needs of the most vulnerable countries is essential. The COP 29 Presidency has rightly positioned climate finance as a cornerstone of its agenda, demanding an integrated, global response to close the financing gap. Only a coordinated mobilization of resources will enable meaningful progress, fostering equity and protecting our planet.

The Current State of Climate Investment

The global economy faces a substantial investment gap in clean energy and sustainable development. The International Energy Agency (IEA) estimates that current policies will only cover two-thirds of the investment required to triple global renewable energy capacity by 2030, leaving an annual gap of around $400 billion. This implies a total annual need of approximately $1.2 trillion for renewable energy investment alone. The situation is even more critical in emerging markets, where the broader clean energy transition—including renewable energy, infrastructure upgrades, and policy frameworks—will require $2.4 trillion annually by 2030, representing a more comprehensive need beyond just renewables​. 

Without substantial public and private financing, these economies will struggle to achieve sustainability goals, further delaying global progress. The financial burden on developing nations—aggravated by high debt and insufficient market access—underscores the need for innovative solutions that bridge the investment gap and accelerate the energy transition.

Common Barriers to the Energy Transition

High Cost of Capital: The cost of capital for renewable energy projects in emerging markets is prohibitive. Market volatility, policy uncertainty, and underdeveloped infrastructure increase risks, making borrowing expensive. According to the Climate Policy Initiative (CPI), the financing costs in emerging economies can be up to seven times higher than those in developed nations due to inflation risks, currency fluctuations, and unstable financial systems.

Loan servicing absorbs much of the climate finance pledged to these economies. The IEA reports that emerging markets often face interest rates 700 to 1,500 basis points higher than their developed counterparts, leading to a vicious cycle of debt dependency and constrained growth.

Limited Budgets and Public Debt Constraints: Public budgets in developing countries are often stretched by competing demands, limiting their ability to allocate sufficient funds for clean energy initiatives. High public debt further restricts access to private financing. As the World Bank notes, these countries face a “triple penalty”—higher electricity costs, limited access to clean energy, and ongoing dependence on fossil fuels, which traps them in environmentally and financially unsustainable systems.

To break this cycle, multilateral development banks (MDBs) must step in with concessional financing. Without decisive action, these countries risk locking themselves into long-term fossil fuel dependency, undermining global climate goals.

Regulatory Hurdles: Inconsistent regulatory frameworks and policies pose significant challenges to the implementation of renewable energy projects. Outdated policies, complex permitting processes, and fragmented regulations across jurisdictions create uncertainty and increase costs, deterring investment and innovation.

The IEA’s Regulatory Energy Transition Accelerator (RETA) aims to address these challenges by aligning global policies, streamlining regulatory processes, and accelerating the shift to cleaner energy systems.

Key Recommendations to Accelerate the Energy Transition

Develop a Comprehensive Clean Energy Strategy

Most critical need of the hour is to develop a comprehensive clean energy strategy. This clean energy strategy is essential for robust actions to phase out fossil fuels and avoid new fossil fuel infrastructure, which is fundamental in meeting climate goals. Leveraging the energy demands of existing industries can help finance new renewable projects, creating a sustainable cycle of growth. The strategy’s success relies on involving a broad range of stakeholders, including governments, regional development banks, and the private sector. National development banks must provide long-term capital and reallocate fossil fuel financing towards clean energy projects. Effective implementation requires stakeholder mapping, structured engagement, and regular monitoring to ensure collaboration, innovation, and sustainable growth.

Advance Structural and Regulatory Reforms

Supportive policies, regulations, and institutional reforms are essential for capital flow toward climate actions. Without them, investments in climate actions can stall, especially in countries where institutional, structural, and political barriers stall changes. Policymakers must tackle regulatory barriers that impede clean energy investments by modifying financial regulations to account for climate risks and revising the prudential framework to favor long-term investments. Streamlining regulatory frameworks across states, standardizing contracts, and ensuring long-term policy stability are essential for reducing costs, accelerating project implementation, and enhancing investor confidence. These actions will help build more efficient, resilient, and sustainable energy systems, crucial for achieving global climate goals.

Address the Debt Challenge in Developing Economies

Debt restructuring is essential for enabling long-term investments in clean energy. Key strategies include:

  • Restructuring Debt for Growth: Loans with extended tenures can reduce liquidity risks and promote sustainable growth.
  • Establishing Joint Development Funds: Regional infrastructure funds can diversify risks and lower borrowing costs, as seen with the EU’s Just Transition Mechanism.
  • Blended Finance Models: Collaborative efforts between MDBs and private investors—such as the Climate Investment Funds (CIF)—can reduce project risks.
  • Local Currency Loans: Offering loans in local currencies minimizes exchange rate risks, ensuring the financial viability of clean energy projects.

Promote Innovative Financing Mechanisms

By expanding the issuance of green bonds, countries can attract a wider range of investors who are interested in supporting sustainable projects, thereby increasing the availability of capital for renewable energy initiatives. Special Purpose Vehicles (SPVs) further enhance financial cooperation by pooling resources and sharing risks. A case in point is the North Sea Wind Power Hub, which integrates wind energy across multiple European nations. Additionally, public-private partnerships (PPPs), such as India’s Rewa Solar Project, demonstrate how collaboration can deliver affordable clean energy solutions.

Rethink Public Financing and Multilateral Development Banks (MDBs)

MDBs must take a proactive approach by providing low-interest loans, streamlining project approvals, and promoting efficient fiscal frameworks. Greater coordination among MDBs will reduce duplication and improve project outcomes. MDB participation also encourages private investment by mitigating risks, fostering confidence, and enabling sustainable economic growth.

Mobilizing Private Sector Investment

Scaling private investment is crucial for financing the energy transition. Governments must create a favorable investment climate through clear regulatory frameworks and risk-sharing mechanisms. Institutional investors play a vital role by funding large-scale renewable projects, contributing both to climate goals and financial returns. Concessional finance and blended finance models can further enhance the risk-return profile, making climate projects more attractive to private investors.

Success at COP 29 in Baku, Azerbaijan, hinges on bridging the climate finance gap. The path forward requires a comprehensive overhaul of financial systems to enable swift access to funds and double concessional finance commitments from developed nations. Public finance should be strategically leveraged to attract private capital, and carbon markets must expand to unlock further investments.

Global leaders must act decisively to align climate finance architecture with the scale of the challenge. As Kristalina Georgieva reminds us, without the oxygen of finance, the aspirations for a sustainable future will remain unfulfilled.

Co-authored by Navdeep Gupta and Sunil Dayal

Navdeep Gupta is an expert in the Indian renewable energy sector with over 18 years’ experience in business consulting the renewable energy industry. He currently serves ReNew, leading strategic business development and policy affairs for Green Hydrogen business.

Sunil Dayal is an Energy & Climate Finance Specialist with over 18 years of experience in investment, advisory, and development roles across the energy transition sector. He currently serves the World Bank, advising on energy storage, power sector financing, climate finance, decarbonization strategies, and electric mobility.

Disclaimer: The opinions expressed in this article are personal views of the authors and do not represent the views of the organisations they represent.