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Building the World's Clean Infrastructure Takes a 7X Investment Increase. Who's Up?

A minigrid using solar shines via Nigeria's initiative

In Brief

The International Energy Agency says the developing world needs a sevenfold increase in clean-energy finance. 

In a webinar outlining a trio of new reports, a lead IEA author warned of developing nations' high cost of capital imperiling projects with steep upfront costs. 

Experts on the webinar urged the major development banks, to accelerate guidance to entrepreneurs in sub-Saharan Africa, the Middle East, Latin America and Asia outside China. 

Over the past year, many learned folks posit that the Covid-19 crisis prepared the world for addressing the climate crisis. Businesspeople, scientists, government leaders and everyone else changed behavior in a flash, marshaled billions for science, and forged a path to a more normal, even more appreciative kind of life. 

A June 21 webinar from the Brookings Institution burned holes in both ends of the analogy. Heralding three reports on global investment imbalance, International Energy Agency head Fatih Birol deployed another favorite metaphor. "If [nations] don't all cross the finish line," he reckoned, "then nobody wins." 

A lead report author, Michael Waldron, spelled out how the rest of the world sees roughly $150 billion in clean-energy finance from the United States and Europe, a seventh of what the IEA says it needs. Compounding trouble, he said, developing countries tend to rely on costly equity and public bureaucracies to advance clean energy infrastructure, sending them further from their goals to decarbonize. 

Waldron noted in his slides that these investment levels look mainly stuck since 2015, the year before the Paris Climate Agreement, absent a small bump in 2020 that may reflect investors switching from embattled fossil-fuel investments. Given that the 2016 global agreement should have spurred countries to invest through multilateral development banks toward their commitments, unleashing capital seems a tricky challenge. 

The premise here focused on the cost of capital. As nations try to build clean energy infrastructure, Waldron explained, their energy economies become more "capital-intensive." 

This creates a spiral. With 90 percent of countries that need clean energy finance also working with "underdeveloped banking systems," Waldron continued, international lenders should "tackle cross-cutting issues" by supporting financial innovation for carbon innovation. They should also push for developing clean power while improving energy efficiency,  which would make each unit of new energy more economically productive. A correspondingly efficient capital mix would see private sources providing around 70 of resources, he added. Today that number hovers closer to 60 percent.

Some panelists saw capital as only part of the deficit. The moderator asked Rachel Kyte, now dean of Tufts University's Fletcher School and formerly the head of a global green-energy organization, whether declarations from recent meetings of the G7 could spark more capital. 

"I'm not sure the multilateral development banks need a strategic mandate," Kyte said. "They have one, and it's called the Paris Agreement." Rather, she suggested that the "warm milk" from G7 communiques about how these lenders need to do more and spell out how they'd apply more capital could, with the right emphasis, spark "urgency" in technical assistance and deal development. 

The communique actually backpedals from the Paris agreement, vowing to try to keep Paris' 1.5-degree temperature increase "within reach" just before nodding to "strengthening adaptation and resilience to protect people from the impacts of climate change."  In setting targets, the states take broad aim: "We commit to each increase and improve our overall international public climate finance contributions for this period and call on other developed countries to join and enhance their contributions to this effort."  

To Kyte this has to mean finding and nurturing projects- "expecting Goldman Sachs and others to be walking around the Sahel looking for projects isn't going to happen anytime soon" - and tailoring incentives so that intensity about the pace of climate danger "wash over" decisionmakers in the bureaucracies.  If cultures remained as they are, she and other panelists would repeat their warnings in a panel 20 years later. 

According to Birol's metaphor and to climate math, though, 20 years of clean energy development at today's pace would lead to a finish line of a magnitude we really don't want to see.