Reducing cost of capital to finance the energy transition in developing countries: a multi-model analysis

Climate stabilisation requires mobilising significant investments in low- and zero-carbon technologies, especially in emerging and developing economies. However, access to stable and affordable finance varies dramatically across countries. Models used to evaluate the energy transition do not differentiate regional financing costs and therefore cannot study risk-sharing mechanisms for renewable electricity generation. Here, we first incorporate empirically estimated cost of capital (CoC) differentiated by country and technology in an ensemble of five global climate-energy-economy models (GCAM, IMACLIM, IMAGE, TIAM, and WITCH), which allows us to identify results robust to structural uncertainty. Subsequently we add a time dimension through financing experience curves, i.e. a learning-by-doing process for CoC. This realistic costs of capital imply higher financing costs for developing regions compared to others, so we explore a scenario of reducing these costs: the CoC of electricity generation in developing countries converges to that of the global North by 2050, i.e. a future world in which international access to energy financing is equal. We explore scenarios under two climate policy scenarios, in which the world follows Nationally Determined Contributions or is 1.5°C compliant.
The effects of the modelled cost of capital convergence policy are multifaceted. The direct outcome is the significant reduction of CoC in the global South. This produces interesting dynamics in the climate-economy and in the equity domains. Within the former, more renewable electricity is generated in developing countries, which increases mitigation or reduces its cost, depending on the climate policy scenario. Moreover, these changes clearly improve the energy justice of the green transition, by decreasing inequality along dimensions like energy expenditure and access to modern electricity generation.
Therefore, we find significant climate and equity benefits of alleviating financial constraints. The proposed methods can help to model financial constraints more realistically and opens up new avenues for shaping international climate policies.