The International Monetary Fund (IMF) has warned that the governments in emerging markets and developing economies (EMDEs) will not be able to finance the large climate mitigation investment needs, but the private sector will have to cover a major share of this.
This was said in the October 2023 Global Financial Stability Report at the official kick-off of the IMF/World Bank annual meetings in Marrakech, Morocco yesterday..
Achieving the transition to net-zero emissions by 2050 requires substantial climate mitigation investment in EMDEs, which currently emit around two-thirds of greenhouse gases.
According to the International Energy Agency’s report in June, these countries will need about $2 trillion (R39trl) annually by 2030 to reach that ambitious goal, with most of that funding flowing into the energy industry.
This is a fivefold increase from the current $400 billion of climate investments planned over the next seven years.
The group of experts who co-authored a chapter on climate finance in the report were led by IMF head of the climate finance policy unit, Prasad Ananthakrishnan.
“We project that growth in public investment, however, will be limited, and that the private sector will therefore need to make a major contribution toward the large climate investment needs for emerging markets and developing economies,” read the report.
“The private sector will need to supply about 80% of the required investment, and this share rises to 90% when China is excluded, as shown in an analytical chapter of our latest Global Financial Stability Report.”
South Africa’s Just Energy Transition Investment Plan (JET IP) for the initial period of five years will mobilise an initial $8.5bn between 2023 and 2027, to accelerate the just transition and the decarbonisation of the electricity system, and to develop new economic opportunities such as green hydrogen and electric vehicles among other interventions to support South Africa’s shift towards a low carbon future.
The IMF said while China and other larger emerging economies had the necessary domestic financial resources, many other countries were missing sufficiently developed financial markets that can deliver large amounts of private finance.
It said attracting international investors also faced hurdles, as most major emerging market economies and almost all developing countries lacked the investment-grade credit ratings that institutional investors often require, while few investors had experience in these countries and are able to take the higher risk.
“Phasing out coal power plants, the single largest source of global greenhouse gas emissions, is another major challenge. Most power plants in emerging markets and developing economies are still relatively young. Retiring or repurposing them requires large amounts of private investment and public support,” it said.
“Some countries are highly dependent on coal and would need to develop alternative sources of energy relatively quickly. Beyond these challenges, climate policies and commitments at most major banks are still not aligned with net-zero climate targets, even when they do have policies intended to reduce emissions.”
As a result, the IMF said a broad mix of policies was needed to create an attractive investment environment and unlock the necessary private climate finance in emerging markets and developing economies.
It said carbon pricing could provide an important pricing signal for investors, but it faced political hurdles in implementing it on a broad enough scale.
“A broad mix of policies is needed to create an attractive investment environment and unlock the necessary private climate finance in emerging markets and developing economies,” it said.
“The use of sustainability labels is still lax, and regulators and supervisors should set clear rules and tighten enforcement. Many of the policies we recommend here will take time to implement and achieve their intended effects.”
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