Higher cost of finance exacerbates a climate investment trap in developing economies

Nadia Ameli (), Olivier Dessens, Matthew Winning, Jennifer Cronin, Hugues Chenet, Paul Drummond, Alvaro Calzadilla, Gabrial Anandarajah and Michael Grubb
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Nadia Ameli: University College London
Olivier Dessens: University College London
Matthew Winning: University College London
Jennifer Cronin: University College London
Hugues Chenet: University College London
Paul Drummond: University College London
Alvaro Calzadilla: University College London
Gabrial Anandarajah: University College London

Nature Communications, 2021, vol. 12, issue 1, 1-12

Abstract: 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.

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:nat:natcom:v:12:y:2021:i:1:d:10.1038_s41467-021-24305-3

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DOI: 10.1038/s41467-021-24305-3

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