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

Author

Listed:
  • Nadia Ameli

    (University College London)

  • Olivier Dessens

    (University College London
    University College London)

  • Matthew Winning

    (University College London
    University College London)

  • Jennifer Cronin

    (University College London)

  • Hugues Chenet

    (University College London
    Chair Energy and Prosperity, Risk Foundation Institut Louis Bachelier)

  • Paul Drummond

    (University College London)

  • Alvaro Calzadilla

    (University College London)

  • Gabrial Anandarajah

    (University College London)

  • Michael Grubb

    (University College London)

Abstract

Finance is vital for the green energy transition, but access to low cost finance is uneven as the cost of capital differs substantially between regions. This study shows how modelled decarbonisation pathways for developing economies are disproportionately impacted by different weighted average cost of capital (WACC) assumptions. For example, representing regionally-specific WACC values indicates 35% lower green electricity production in Africa for a cost-optimal 2 °C pathway than when regional considerations are ignored. Moreover, policy interventions lowering WACC values for low-carbon and high-carbon technologies by 2050 would allow Africa to reach net-zero emissions approximately 10 years earlier than when the cost of capital reduction is not considered. A climate investment trap arises for developing economies when climate-related investments remain chronically insufficient. Current finance frameworks present barriers to these finance flows and radical changes are needed so that capital is more equitably distributed.

Suggested Citation

  • Nadia Ameli & Olivier Dessens & Matthew Winning & Jennifer Cronin & Hugues Chenet & Paul Drummond & Alvaro Calzadilla & Gabrial Anandarajah & Michael Grubb, 2021. "Higher cost of finance exacerbates a climate investment trap in developing economies," Nature Communications, Nature, vol. 12(1), pages 1-12, December.
    • Handle: RePEc:nat:natcom:v:12:y:2021:i:1:d:10.1038_s41467-021-24305-3
    DOI: 10.1038/s41467-021-24305-3
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    Cited by:

    1. Perdana, Sigit & Vielle, Marc, 2022. "Making the EU Carbon Border Adjustment Mechanism acceptable and climate friendly for least developed countries," Energy Policy, Elsevier, vol. 170(C).
    2. Skare, Marinko & Gavurova, Beata & Sinkovic, Dean, 2023. "Regional aspects of financial development and renewable energy: A cross-sectional study in 214 countries," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 1142-1157.
    3. Femke J. M. M. Nijsse & Jean-Francois Mercure & Nadia Ameli & Francesca Larosa & Sumit Kothari & Jamie Rickman & Pim Vercoulen & Hector Pollitt, 2023. "The momentum of the solar energy transition," Nature Communications, Nature, vol. 14(1), pages 1-10, December.
    4. Donnelly, David & Fricaudet, Marie & Ameli, Nadia, 2023. "“Accelerating institutional funding of low-carbon investment: The potential for an investment emissions intensity tax”," Ecological Economics, Elsevier, vol. 207(C).
    5. Jorge M. Uribe, 2023. ""Fiscal crises and climate change"," IREA Working Papers 202303, University of Barcelona, Research Institute of Applied Economics, revised Feb 2023.
    6. Guilherme MAGACHO & Antoine GODIN & Etienne ESPAGNE, 2022. "Impacts of CBAM on EU trade partners: consequences for developing countries," Working Paper fd822de3-ffa0-44f3-8427-4, Agence française de développement.
    7. Soomauroo, Zakia & Blechinger, Philipp & Creutzig, Felix, 2023. "Electrifying public transit benefits public finances in small island developing states," Transport Policy, Elsevier, vol. 138(C), pages 45-59.
    8. Xia Li & Kevin P. Gallagher, 2022. "Assessing the climate change exposure of foreign direct investment," Nature Communications, Nature, vol. 13(1), pages 1-9, December.
    9. Monasterolo,Irene & Mandel,Antoine & Battiston,Stefano & Mazzocchetti,Andrea & Oppermann,Klaus & Coony,Jonathan D'Entremont & Stretton,Stephen John & Stewart,Fiona Elizabeth & Dunz,Nepomuk Max Ferdina, 2022. "The Role of Green Financial Sector Initiatives in the Low-Carbon Transition : A Theoryof Change," Policy Research Working Paper Series 10181, The World Bank.
    10. Li, Songran & Shao, Qinglong, 2022. "Greening the finance for climate mitigation: An ARDL–ECM approach," Renewable Energy, Elsevier, vol. 199(C), pages 1469-1481.
    11. Antoine GODIN & Guilherme MAGACHO & Achilleas MANTES & Devrim YILMAZ & Etienne ESPAGNE, 2021. "Developing Countries’ Macroeconomic Exposure to the Low-carbon Transition," Working Paper 987d9eb7-8fce-4eb0-8cb7-d, Agence française de développement.
    12. ElSayed, Mai & Aghahosseini, Arman & Caldera, Upeksha & Breyer, Christian, 2023. "Analysing the techno-economic impact of e-fuels and e-chemicals production for exports and carbon dioxide removal on the energy system of sunbelt countries – Case of Egypt," Applied Energy, Elsevier, vol. 343(C).
    13. ElSayed, Mai & Aghahosseini, Arman & Breyer, Christian, 2023. "High cost of slow energy transitions for emerging countries: On the case of Egypt's pathway options," Renewable Energy, Elsevier, vol. 210(C), pages 107-126.
    14. Mohammed Basheer & Victor Nechifor & Alvaro Calzadilla & Claudia Ringler & David Hulme & Julien J. Harou, 2022. "Balancing national economic policy outcomes for sustainable development," Nature Communications, Nature, vol. 13(1), pages 1-13, December.
    15. Timothy M. Lenton & Chi Xu & Jesse F. Abrams & Ashish Ghadiali & Sina Loriani & Boris Sakschewski & Caroline Zimm & Kristie L. Ebi & Robert R. Dunn & Jens-Christian Svenning & Marten Scheffer, 2023. "Quantifying the human cost of global warming," Nature Sustainability, Nature, vol. 6(10), pages 1237-1247, October.
    16. Egli, Florian & Orgland, Nikolai & Taylor, Michael & Schmidt, Tobias S. & Steffen, Bjarne, 2023. "Estimating the cost of capital for solar PV projects using auction results," Energy Policy, Elsevier, vol. 183(C).
    17. Marian Leimbach & Nico Bauer, 2022. "Capital markets and the costs of climate policies," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 24(3), pages 397-420, July.
    18. Majd Olleik & Hassan Hamie & Hans Auer, 2022. "Using Natural Gas Resources to De-Risk Renewable Energy Investments in Lower-Income Countries," Energies, MDPI, vol. 15(5), pages 1-22, February.

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