Despite almost doubling in the last decade, global climate finance remains insufficient to meet the annual USD 4.3 trillion needed by 2030, according to CPI’s Global Landscape of Climate Finance. The incentives to invest in green projects in emerging markets and developing economies are currently lacking, leaving investors to turn to other more lucrative investments in fossil fuels. Blending public and private sector finance may be the key to de-risking these investments for the private sector, reducing costs, and ultimately leading to a greener future.
In the Middle East, Saudi Arabia and the UAE are leading the region's fight against climate change and are singlehandedly producing 90 per cent of the Gulf's renewable energy. However, they have also ramped up their hydrocarbon production and revenues to respond to increased short-term demand. Green and blue hydrogen will play an important role in the GCC's shift toward clean energy, but hydrocarbon exports will remain an important part of the Gulf's economic power. Because of this, the two Gulf nations have been investing part of today’s fossil fuel windfall into the clean energy technologies of tomorrow and are making some of the world’s biggest bets on carbon capture and storage, renewables, and hydrogen.
Overall, Saudi Arabia aims to build 54gw of renewable capacity by 2032. This is being led by Saudi Aramco’s plans to develop the capacity to capture, store, and utilise 11m tonnes of carbon dioxide a year and to install 12 gigawatts (gw) of wind and solar power by 2035. The UAE, on the other hand, is eyeing 100gw of renewable energy capacity by 2030, both locally and abroad, up from a cumulative investment in 15gw worth of renewable capacity in 2021. This will make Masdar, the UAE’s state-controlled clean-energy outfit, the world’s second-biggest developer of clean energy.
Fortunately, governments around the world are increasingly treating private sector companies as key partners in tackling societal challenges, including climate change. In the past, governments have largely assumed they would need to dictate the terms of the transition to cleaner energy. While investors and corporate executives have become more aware of the threat climate change poses to their businesses, legislative attempts have repeatedly failed to dictate the terms of this transition. As a result, governments and non-profits are partnering with the private sector to do more.
Though private sector investment in climate finance has been increasing, it is not happening at the scale and speed required for a successful transition to a low-carbon economy. Between 2011 and 2020, global climate finance commitments reached a cumulative USD 4.8 trillion, or an annual average of USD 480 billion. We need at least USD 4.3 trillion in annual finance flows by 2030 to achieve the Paris Agreement’s goals of limiting global warming to below 2°C and pursuing efforts to limit it to 1.5°C.
One of the main reasons for this gap is the lack of sufficient incentives for investors to shift their investments towards green projects. Without robust carbon pricing, investors have plenty of other options to generate returns, including fossil fuels. Additionally, green projects in emerging markets and developing economies are currently perceived as too risky and unjustifiable.
The challenge of financing the transition to a low-carbon economy cannot be solved by the public or private sector alone. Rather, it requires a coordinated effort between the two. The public sector can play a critical role by investing equity or providing credit enhancements to improve the creditworthiness of projects. By doing so, the public sector can help reduce the risk for private sector investors, lowering the investment cost and attracting more private capital. This is particularly important in emerging markets and developing economies where green projects currently do not justify the political volatility risks and the higher sensitivity to global financial conditions, given the technology-heavy composition of many ESG indexes. By blending public and private sector finance, these investments can be de-risked and made more attractive to private investors, ultimately accelerating the transition to a low-carbon future.
Climate action requires an equitable transition that leaves no one behind. The poorest and most vulnerable communities are the most affected by the impacts of climate change, yet they have the least capacity to adapt. Therefore, climate action through private-public partnerships must prioritise the needs and rights of these communities. This includes providing financial and technical support to help them transition to low-carbon economies. Without a just transition, climate action risks exacerbating existing inequalities and creating new ones. It's time to prioritise people and planet over profit and ensure a fair and sustainable future.