Funding the Global Energy Transition Remains a Major Challenge

• Despite plenty of progress being made, the cost of transitioning to renewable energy is rising.
• Developed countries are supposed to help developing countries with climate finance, but some have been providing loans with high interest rates instead of grants.
• It is unclear how the trillions of dollars needed for climate finance will be raised.

Last month, the Organisation for Economic Co-operation and Development announced that the world's richest nations had finally hit a target of $100 billion in annual transition funding in 2022.

In fact, they had "materially surpassed" that target by over $15 billion, the OECD said. Even so, the ultimate target of mobilizing trillions in green finance over the coming couple of decades remains as elusive as ever.

Popularly known as climate finance, the money that various forecasting agencies say we need to spend every year in order to shift away from hydrocarbons and into alternative sources of energy is certainly no small potatoes.

In fact, the price tag of the transition has been swelling consistently over the past few years. By the time the OECD hit its annual climate finance target of $100 billion, in other words, it was already not enough to advance the transition agenda per plans. And the bill may keep rising, too.

The Executive Secretary of the UN Framework Convention on Climate Change, Simon Stiell, said earlier this year that the world needed to find and channel $2.4 trillion annually into the energy transition by 2030.

"It's clear that to achieve this transition, we need money, and lots of it - $2.4 trillion, if not more," he said at the time. What was not clear—and is still not clear—is where all that money would come from. Not only that, but it recently emerged that those wealthy nations that were supposed to be shouldering the weight for all the poor countries that could not afford to spend billions on solar subsidies and EVs had taken advantage of climate finance mechanisms.

An investigation by the Big Local News journalism program at Stanford University revealed that G7 members of the OECD had routinely provided so-called climate finance to poor nations in the form of loans rather than grants, with market-rate interest attached to them rather than the discount interest typical of such loans. The loans also came with strings attached: the borrower had to hire companies from the lender country for the projects that were financed.

The investigation did not make the splash it should have made. Still, not all is as pristine in climate finance as it should be. It is in this non-pristine context that countries are discussing raising the climate finance investment target ahead of the next conference of the parties, scheduled for November—because the cost of the transition has been on the rise, too.

Per a recent Reuters overview of where things stand, the Arab countries have suggested an annual investment target of $1.1 trillion, of which $441 billion would come from developed countries. The suggestion of over $1 trillion in annual investments also has the support of India and African countries. It makes sense that the potential beneficiaries of that annual trillion dollars would support the idea. It makes less sense for the potential providers of that trillion to sign off on the plan—because they are not exactly flush with cash.

There is no G7 nation right now that is not experiencing a degree of financial trouble. From the U.S.'s runaway debt to Germany's nonexistent GDP growth to Japan's budget deficit, the G7 is not doing well. Yet it is G7 that is expected to shoulder the bulk of the climate finance weight. Even so, the U.S. and the EU have already agreed that they need to mobilize more than $100 trillion annually for the transition to have a chance of taking place. The "How" of it remains the million, or rather the trillion-dollar question.

Publicly, G7 leaders have been talking a lot about more private finance. More of that is needed to flow into transition projects to supplement government policies aimed at making such flows profitable for the investors. Yet those governments providing the support are not omnipotent and have been unable to guarantee that profitability, making investors reluctant to go all in on the transition to supply those necessary billions in climate finance.

EVs are a case in point. The European Union has been doing everything it can to support greater adoption, including tax incentives for buyers, punitive taxes for ICE car owners, and a splurge on charging infrastructure. However, as national governments start to phase out subsidies for electric vehicles, sales are taking a plunge, and none of the above matters. Short of making EVs mandatory, the EU is really out of options.

Solar and wind in the United States are also a case in point. The amount of capacity getting installed across the country is rising fast—but so is opposition to these installations from local communities. In February, USA Today reported on a survey that found 15% of U.S. counties had successfully stopped the construction of utility-scale wind and solar projects. While the report described the trend as a negative one, those communities often have quite sound reasons for their opposition, such as environmental destruction or energy supply reliability issues.

If we are to believe the UN's climate chief, the world needs to spend $2.4 trillion annually to keep the global average temperature from rising by more than 1.5 degrees Celsius from pre-industrial times by 2050. If we are to believe BloombergNEF, the price tag for the transition rose by 19% or $34 trillion from earlier estimates. How those in charge would find this money and how it would be distributed remains a mystery with no solution in sight.

By Irina Slav for Oilprice.com

More Top Reads From Oilprice.com:

• Trade War Concerns Loom Over US and UK Elections
• Uzbekistan's Bid for WTO Membership Hinges on Major Trade Reforms
• Inflation in China is Finally Beginning to Stabilize