A climate investment trap in developing economies

Abstract Finance is vital for the green energy transition, but the access to low cost finance is uneven as the cost of capital differs substantially between regions. This study shows how modelled decarbonisation pathways of developing economies are disproportionately impacted by assumptions around their cost of capital (WACC). For example, representing regionally specific WACC values indicates 35% lower green electricity production in Africa for a cost-optimal 2°C pathway. Moreover, results show that early convergence of WACC values for green and brown technologies in 2050 would allow Africa to reach net-zero emissions approximately 10 years earlier than when convergence is not considered. A “climate investment trap” arises for developing economies when climate-related investments remain chronically insufficient. Elements of sustainable finance frameworks currently present barriers to these finance flows and radical changes are needed so that capital is better allocated to the regions that most need it.