Financing the transition: why we need leadership
Under the Paris Agreement, countries have set ambitious 2030 emission reduction targets. And by February 2025, new nationally determined contributions for the period through to 2035 will be announced by each party to the agreement.
However, regardless of ambition, the Global Stocktake in 2023 showed that current plans and action on reducing emissions are far from enough: the current trajectory of global emissions is not consistent with limiting the global temperature rise to 1.5°C, even if all plans to meet the NDCs were implemented.
For many countries, meeting a target that represents their “highest possible ambition” will be difficult. But
decarbonisation will be especially difficult for countries that need significant investment in order to meet the clean energy needs of their growing populations, as well as to decarbonise existing energy assets.
Sources of emissions have changed radically over the past 20 years, moving from developed to developing countries. And history shows that energy demand in developing economies increases rapidly as development accelerates and populations move into higher income bands, resulting in large increases in per capita emissions.
Because of this, in addition to progressing their own domestic transitions, countries like the United Kingdom and the United States must lead global efforts to support the use of clean technologies and facilitate the allocation of finance and investment to support this deployment in developing economies. Otherwise we risk seeing significant spikes in global emissions in the future.
The world already has most of the solutions needed for global decarbonisation, and technologies – both new and existing – continue to develop. The cost of producing electricity using solar and of batteries have both fallen rapidly and are cost-competitive with coal and natural gas plants in India and China respectively. More than $1 billion is being spent every day on solar deployment. There are also new solutions being developed for a number of other challenges, and further innovation may make these more widely deployable. For example, powered by artificial intelligence, scientists are even making huge strides in accelerating the development of fusion.
However, in Africa and South-East Asia, private investment in clean power is actually declining. While global finance flows are increasing, they remain small in the context of the scale of investment needed to limit temperature rises to less than 2°C while allowing sustainable development. Moreover, the gap between the costs of deploying clean energy in the Global North and South is wide, and further action is needed to bridge the
divide. Finally, investment into activities driven by fossil fuels remains consistently high, especially when subsidies for fossil fuel use are included.
To address this, the climate strategies of countries like the UK should emphasise both domestic execution and accelerating the global transition through technology and investment in regions such as Africa and South-
East Asia.
In these regions, the challenge is not only securing unprecedented levels of investment but doing so at terms that households and businesses can afford. Many of these countries are competing internationally for business and investment to drive economic growth and create jobs. To do so, the cost of their energy matters. Recent international efforts to drive investment have tended to take a project-centric view with a focus on headline investment numbers. What is needed is a focus on creating markets that can drive investment at greater scale but that can also deliver lower costs.
The UK is uniquely placed to drive this change. It is a global financial centre and has led the way in
areas such as regulation and market creation (for example, the offshore wind regime). It also has an
influential voice in development through its in-country presence, influence with the multilateral development banks and its world-leading development finance institute. These assets can be leveraged to deliver key changes, including to drive a shift from international partners supporting individual projects to the creation of markets into which capital can flow at scale.
Brokering partnerships between developing and emerging economies, MDBs and institutional investors,
countries like the UK need to lay the foundations for capital to truly flow. These foundations include policy, regulation and market creation in emerging markets, policy and regulatory changes in the Global North (using the City of London as an exemplar), and changes to MDBs and DFIs so they take the risks the private sector will not.
These efforts need to complement and catalyse private capital rather than competing and crowding it out.
Country leaders also need to put in place the demand side for green energy and products that will drive investment. Much of the energy consumption in emerging and developing economies is to service exporters, and, as a result, well-designed trade policy such as the EU’s carbon border adjustment mechanism (albeit with some tweaks such as supporting countries to advance the investments needed to comply) can
support this market development.
Finally, countries need to accelerate international carbon markets, using new technologies to restore faith in transparency and integrity. This will be critical for Article 6, which has significant potential to channel finance to the Global South while maximising least-cost decarbonisation options that benefit the climate globally.
The solutions lie with the power of technology, and the investment needed to deploy it. Countries that lead the way in driving this investment could secure a share of the trade in clean technologies in the years to come – so it’s a win-win for countries as well as for the climate.
