4.4.3.4 Accelerating renewables investment in the Global South

While issues related to finance are central for the Global South in the face of climate change, these countries are essentially ignored by ‘sustainable finance’ due to the limited role of financial markets in their economies. In developing economies, policy support can help to overcome climate investment traps due to high costs of accessing finance (Ameli et al., 2021). Financial constraints, including underdeveloped capital markets and limited capital stock, prevent these countries from obtaining sufficient funds for low-carbon investments. This creates a self-reinforcing cycle where high risk-perceptions lead to increased capital costs, delaying the transition to cleaner energy systems and carbon emission reductions. Climate change impacts exacerbate the situation, causing adverse impacts on production systems, economic output, unemployment, and political stability (Figure 4.4.6). 

To address this challenge, a reinforcing feedback cycle has the potential to function in the opposite (desirable) direction with the right changes in action. For instance, appropriate policies that reduce capital costs can act as tipping elements in facilitating the low-carbon transition. Measures like credit guarantee schemes can shift risk away from private investors, resulting in lower capital costs. This would enable developing economies to achieve higher levels of low-carbon electricity deployment and faster emissions reduction in the order of a decade earlier than without such reductions (Ameli et al., 2021).

Additionally, the flow of international capital into renewable projects in developing countries is influenced by path-dependency, creating a tipping element in the scaling up of renewable investments (Rickman et al., 2023a). Countries with a track record of renewable investments are more likely to attract future investments, leading to positive feedback loops within renewable energy markets (Figure 4.4.6). As countries build a track record in renewables, market confidence grows, bringing down financing costs and attracting further investments in a virtuous cycle. Indeed, there is a nonlinear relationship between the probability of private investment and a country’s track record in renewables (Rickman et al., 2023a). Once a significant capacity base of around 1GW (of wind or solar) is installed, a tipping point is reached and the attractiveness of a market for new investment increases sharply (Figure 4.4.7). However, this also results in an ‘investment lock-in, where historical inequalities in financing across countries and income groups persist over time. To escape this investment lock-in, developing countries must mobilise sustained investment to build a renewables track record that can attract private finance at scale. Low-income developing countries often fall below this threshold, highlighting the need for sustained investment in holistic energy roadmaps to unlock private finance. Innovative financial and policy mechanisms that target the evolution of a renewables sector can initiate path-dependent flows from private sources and leverage tipping elements in the renewable finance ecosystem.