If you assume these trends will continue, they look more promising. Simply continuing to inflate current spending at current growth rates means that advanced economies and China will spend in the region $650 billion annually on clean energy over the remainder of this decade, writes the International Energy Agency — at the sight of $850 billion is oddly needed. To put the world on track to zero emissions by 2050:
The problem comes when you look elsewhere in the world. In emerging and developing economies (excluding China), investment in clean energy should grow 25% annually through 2030 if it reaches levels consistent with net zero. In practice, spending is still stuck at the levels it was in 2015, when the Paris Agreement was first signed.
It should come as no surprise that there is a dearth of money for carbon-neutral energy in developing countries—these countries get very little investment overall, and a lack of physical capital is one reason for their poverty. Since the 1970s, Indian politicians have complained that only rich countries have the money to pay for lower-income peers to reduce pollution. Prime Minister Narendra Modi’s call last year for a $1 trillion fund from developed countries to finance his country’s energy transition is just the latest example of this trend. The real amount could be as high as $12.4 trillion in India, with $94.8 trillion needed for emerging markets as a whole, according to Standard Chartered Plc.
It is a long-term problem that is likely to worsen in the short term. One of the advantages of renewable energy in rich countries is that almost all of their expenditures are up front, and most importantly, the cost of borrowing is determined. Funding accounts for about 60% of project expenditures for renewables, according to the International Energy Agency. On the other hand, oil, gas and coal consumers have a constant need to purchase their fuel in the volatile commodity market, which makes their long-term profits highly unpredictable.
And with rising interest rates, the cost of capital for clean energy is also rising. This is being felt most strongly in emerging markets, where the cost of capital is seven times higher than in developed countries, and interest rates are likely to rise along with the US Federal Reserve.
Solving this problem is known to be challenging. International investors remain reluctant to allocate their money to countries where the rule of law is often weaker and where the challenging nature of infrastructure such as power grids threatens to wreak havoc on energy projects before they are even delivered. State-owned utilities, as with India’s electricity distribution companies, are often dominant enough to deter private sector competition but weaker financially to provide the foundations that a vibrant clean energy sector needs.
It must be resolved, however. One of the most worrisome aspects of the International Energy Agency’s latest report is the extent to which coal, the dirtiest fuel, continues to suck up capital. While oil, gas and clean energy are receiving less investment at the moment than most IEA energy transition scenarios would suggest will be necessary for the remainder of this decade, coal is getting significantly more:
This is in large part because the world is now more aware of its energy security, awash with underutilized coal-fired power plants. In Pakistan, the cost of buying oil and gas from abroad has made the country once again dependent on cash from the International Monetary Fund to meet its international obligations. Domestic coal reserves are a tempting way to reduce dependence on imports, an attractive argument also in Indonesia, Vietnam, and especially India and China.
The only way to counter the fear of a world in which poverty and insecurity are driving globalization in the opposite direction is the opposite: to unleash a flood of pent-up capital in developed countries so that it can fund the clean, cheap energy that low-income countries need to develop. Rich countries can green their economies at will. If they did not provide the money to repeat the trick around the world, it would all be in vain.
More from Bloomberg Opinion:
• This charcoal plan offers only half a solution: Clara Ferreira Marques
• It’s Now Possible to Get Rich and Go Green: David Fickling
Coal is the junk food for global energy: Liam Denning
This column does not necessarily reflect the opinion of the editorial staff or Bloomberg LP and its owners.
David Fickling is a columnist for Bloomberg who covers energy and commodities issues. Previously, he worked for Bloomberg News, Wall Street Journal, and Financial Times.
More stories like this are available at bloomberg.com/opinion