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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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