Unlocking the Green Future: How Equitable Financing Drives Renewable Energy Expansion in the Global South

The transition to a sustainable energy future is a global imperative, and finance plays a crucial role in accelerating this transformation. However, the higher upfront costs of renewable energy compared to fossil fuel-based alternatives have created a barrier to widespread deployment, particularly in developing countries. A new international research effort led by CMCC scientists has shed light on how financial policies can ensure a just and equitable energy transition by reducing the cost of capital for clean energy technologies in the Global South.

Unlocking the Green Potential: The Power of Fair Financing

Bridging the Financing Gap

The research paper, published in Nature Energy, delves into the intricate relationship between financing costs and the equity and efficiency of the energy transition. By empirically estimating the cost of capital for various technologies across different countries and incorporating these findings into five coupled energy-climate-economy models, the study provides a comprehensive understanding of the impact of financing on the global energy landscape.The researchers found that in a "fair-finance policy" scenario, where risk premia around the world reach the levels of mature economies by 2050, the quantity of renewable electricity generated in developing countries increases significantly. This scenario accounts for 30% of the renewable electricity needed in the Global South to keep global warming under 1.5°C and 10% of the fossil fuel reduction.

Fostering Energy Equity and Affordability

The study also reveals that the fair-finance policy scenario has a positive impact on the equity and affordability of the clean energy transition. On aggregate, developing countries reduce their energy expenditure to GDP ratio by up to 5%, and inequality in per-capita renewable energy generation is reduced by 2-4%. Moreover, electricity becomes cheaper by an average of 10% after mid-century, making it more accessible to low-income communities."All this increases global equity of the clean energy transition: inequality is reduced in per-capita renewable energy generation by 2-4%, and electricity also becomes cheaper by an average of 10% after mid-century," explains Matteo Clacaterra, the lead author of the study.

Unlocking the Greening Potential

The research findings have significant implications for policymakers, as they highlight the crucial role that equalizing the cost of capital in the energy sector can play in accelerating the transition to renewable energy sources. By addressing the financing barriers, this approach can not only green electricity generation but also improve the overall equity and affordability of the clean energy transition."We showed that fair financing is a key enabler of energy availability, affordability and equity at a global level. We hope that this research will help promote a fair and effective climate transition," says Massimo Tavoni, the director of the European Institute on Economics and the Environment at CMCC and a co-author of the study.