Climate change

Africa to reach net-zero targets by a decade earlier with level access to climate finance

Africa could reach net-zero climate targets by a decade earlier than expected with level access to climate finance. According to a study by UCL Institute of Sustainable Resources researchers, affording funds needed for the clean energy transition to the poorer nation could see such countries achieve net-zero emissions a decade earlier.

Access to finance is important for the green energy transition needed to reduce global greenhouse gas emissions. But access to low-cost finance is uneven, with the cost of securing finances to help reach net-zero differing between regions.

The study was conducted by researchers from the UCL Institute of Sustainable Resources in collaboration with the UCL Energy Institute researchers. The study “Higher cost of finance exacerbates a climate investment trap in developing economies” has been published in the Nature Communications journal.

It makes the case for policy interventions to lower the Weighted average Cost of Capital (WACC) values for low-carbon technologies by 2050. This would allow Africa to reach net-zero emissions approximately 10 years earlier than if reductions in the cost of capital are not considered, so 2058 rather than 2066.

The study shows the road to decarbonization for developing economies is disproportionately impacted by differences in the weighted average cost of capital (WACC). This is a financial ratio used to calculate how much a company or organization pays to finance its operations, whether through debt, equity, or both. The lower the value, the easier the company or government can access funds.

The global warming in Africa is kept at 2°C. The current unfavorable WACC values will stunt Africa’s green electricity production by 35%.

The study describes that the ‘climate investment trap’ that developing economies are faced with in climate investments remains chronically insufficient. These regions already pay a high cost of finance for low-carbon investments. This is delaying the energy system transition and the reduction of emissions. 

The unchecked climate change would lead to greater impacts in the developing economies, raising the cost of capital and discouraging investment even further. The trap is so binding in itself that poorer countries will struggle to escape it. The covid-19 situation will compound the situation further.

While developing economies require the bulk of low-carbon investment, and developed countries are where the most financial capital is, with the developing nations appearing to be left out by the main current sustainable finance efforts and initiatives.

The authors of the report suggest that radical changes are needed such as helping to underwrite the perceived greater risks of low carbon investments in such regions.’ So that capital is more equitably distributed and all regions, not just those in the global north, can afford to work towards net zero at the rate needed to tackle climate change for the benefit of everyone.

International organizations and policymakers can all take responsibility for lowering the costs of capital in Africa.

Lead author Dr. Nadia Ameli (UCL Institute for Sustainable Resources) says that “our research shows how earlier action to improve financing conditions could have a significant impact on the speed and timing of the transition to renewable energy in lower and middle-income countries which, in turn, will significantly help to protect our planet.”

“We don’t believe it is fair that regions where people are already losing their lives and livelihoods because of the severe impacts of climate change also have to pay a high cost of finance to switch to renewables. Radical changes in finance frameworks are needed to better allocate capital to the regions that most need it. We should take the opportunity to reframe international market finance, where a lower cost of capital for developing economies would allow for low-carbon development at a more internationally equitable cost. The sooner we act the better.”

Professor Michael Grubb (UCL Institute for Sustainable Resources) says that “there is a growing belief that, with the dramatic decline in the global average cost of renewable, it will be much easier for the developing world to decarbonize. Our analysis shows that major obstacles remain, particularly given the difficulties that many of these countries have in accessing capital on the same terms. Appropriate international financial support remains vital to accelerate global decarbonization.”

Dr. Hugues Chenet (UCL Institute for Sustainable Resources) says “analysis shows the additional difficulty for least developed economies to access capital to finance their decarbonization. Sadly, we see that these countries are left aside by new sustainable finance policy frameworks such as the European Union Sustainable Finance Action Plan, which ignores parts of the world that need it most.”

 Dr. Matt Winning (UCL Institute for Sustainable Resources) said that “often developing economies are simply disadvantaged when it comes to decarbonization simply because they are that, developing. Even with abundant renewable resources, developing region capital costs can be higher simply because of the risks involved in investing there. Our results show that policies to achieve a more level playing field for climate finance for those economies can make a significant impact.”

Also read,


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