Financing Renewable Energy in Developing Countries: Mechanisms and Responsibilities
In order to halve current carbon emissions, the International Energy Agency (IEA) estimates that, globally, US$45 trillion needs to be invested in renewable energy by 2050. This equates to a little over US$1 trillion per year on average; in 2010 global investment in renewable energy reached a record high of US$243 billion (UNEP and Bloomberg New Energy Finance, 2011), roughly a quarter of what is needed.
While halving global emissions seems a daunting task, it is at the bottom of the range of what is required. In order to have a reasonable chance of keeping temperature increases below 2°C–2.4°C – the level beyond which scientists fear that feedback mechanisms could be triggered – the Intergovernmental Panel on Climate Change (IPPC) estimates that global emissions need to fall by between 50% and 85% by 2050. We are nowhere near on track to achieve this; global emissions would need to peak by 2015 and decline rapidly thereafter, but are still increasing at an accelerating rate. If current trends continue, the United Nations estimates that global temperatures could increase by more than 6°C over the course of the century, which is far beyond levels that human civilization has ever experienced (Hansen et al., 2008).
The situation is thus challenging to say the least. Of the estimated US$1 trillion of annual investment required, around half is needed for energy efficiency or to replace existing technologies (e.g. fossil fuel-based with renewable energy systems). Much of this is in the developed world, but US$530 billion per year is needed for newly installed capacity, mainly in developing economies. It is estimated that 85% of this total investment will need to come from private sources (IEA, 2009).
While this is daunting, particularly the target for private investment, it is not impossible. Annual fossil-fuel subsidies, for example, are around US$300 billion per year, which means that US$530 billion of investment in 2030 would represent only 3% of global investment.
Although many felt that the 15th Conference of the Parties (COP15) in Copenhagen in 2009 was a disaster, COP16 held in Cancún in 2010 gave grounds for more optimism about the possibility of reaching a global deal. Also, despite the difficulties in the intergovernmental negotiations, neither the financial crisis and recession, nor the failure at Copenhagen, was able to derail investment growth – global investments in renewable energy reached record levels in 2010. We remain well short of where we need to be, but investment is growing rapidly, and a range of incentivising instruments have been employed to support this investment. We now have a clearer understanding of the potential and limits of such instruments, and a range of proposals has emerged to fill gaps or address weaknesses in the current portfolio of tools available to policy-makers.
The purpose of this paper is to review the instruments we currently have, and to consider those that have been proposed but not yet fully employed. To do this, however, we need to understand why such instruments are needed in the first place, or, to put it another way, why investment is not already flowing to the extent required. Section 2 then reviews mechanisms in the light of this, while Section 3 considers international transfer mechanisms and concludes.