World leaders are meeting at COP28 in Dubai this month. Chris Jackson/Getty Images
- Heads of state and government will meet at the COP28 climate conference in Dubai this month.
- The path to financing the global transition to green energy remains unclear.
- Reducing the risk associated with green projects and expanding investments can help achieve net zero.
As world leaders, businesses and societal stakeholders gather at the COP28 conference in Dubai this month, the path to achieving net-zero greenhouse gas emissions by 2050 is becoming clearer, with clear milestones and technology-enabled solutions. However, it is not so clear how the world will finance this transition.
The estimated $2 trillion currently invested annually in the green transition is a far cry from the $5 to $7 trillion needed to trigger and sustain the next great sustainable revolution – a transformation from the current, fossil fuel focused model to a highly renewable, energy efficient model. Emissions system of production.
Financing the green energy transition is a trillion-dollar question. The answers lie in mobilizing new cost-reducing financing instruments that can significantly de-risk green projects, identify and reduce asymmetric cost structures between developed and developing countries, and unlock fair and equitable mechanisms for the transition away from fossil fuels.
In this way we can mobilize private investments and contribute to economic growth and climate neutrality.
The Deloitte report “Financing the Green Energy Transition” describes some key financial levers, starting with a basic financial principle: the riskier the project, the higher the cost of capital. The use of financial instruments is crucial to unlock private capital and finance green investments at the lowest possible cost.
The report estimates that doing this right could reduce financing costs by around $50 trillion by 2050. So what are the risks involved and what steps can we take to mitigate them and consequently reduce financing costs?
Reducing the risk of green projects
By identifying the types of risk, we can understand the scale of the problem but also the potential of the opportunity. Unreliable markets and buyers, political instability and unclear climate policy all contribute to increased financing costs for green projects.
Developing countries, where about three-quarters of green investments should be made to reach net-zero targets, face even greater challenges as public budgets for energy transition projects face tighter constraints.
A possible solution to reduce costs and create a level playing field between countries and regions is the introduction of blended and concessional financing – a loan issued on more favorable terms than the borrower could obtain on the market.
Blended financing can mitigate risk through different levels of repayment priority and protect investors from losses if a project encounters bottlenecks or financial difficulties.
Discounted public financing can have a multiplier effect. For example, $1 of concessional public financing can leverage more than $4 of commercial capital, more than half of which can come directly from private capital. At the same time, creating environmentally friendly product markets and financial markets can quickly reduce sales risk while maintaining price certainty. Offtake agreements can enable buyers to find environmentally friendly products and sellers to attract buyers.
Bridging the cost gap
The cost gap between green and fossil fuel projects is significant, but can be addressed through multiple mechanisms. Through innovation through research and development and investment grants, upfront costs can be minimized. This makes new technology projects more bankable – meaning their risk-return profile meets investors' criteria to mobilize sufficient capital – while also helping to build a skilled workforce.
At the same time, carbon pricing can help internalize the costs for society and create incentives for reductions. In addition, public revenue from carbon pricing can be redirected to climate-related initiatives. This would transfer revenues from fossil assets to their green counterparts, helping to mitigate the impact of lost fossil assets and lost jobs.
It is overwhelmingly clear that the coming transformation requires a rapid expansion of investment with coordination between governments, financial institutions and investors to jointly develop and agree mechanisms to promote bankability.
This is particularly acute and relevant in developing countries, where underinvestment directly correlates with private investors' risk perceptions and could lead to missed opportunities, as developing countries are critical to the success of the global clean energy transition.
If we get this right, we can achieve our shared net zero goals at the lowest possible cost through a just transition. Ultimately, the probability of this success corresponds to the bankability of projects.
Jennifer Steinmann is Deloitte Global Sustainability & Climate Practice Leader.
Pradeep Philip is Lead Partner, Deloitte Access Economics.
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