Regional impacts of energy technologies’ cost of capital on decarbonisation

Energy-sector decarbonisation, which is a prerequisite to tackling climate change, entails major low-carbon technology investments across the globe. However, currently only a fraction of those investments is directed towards emerging and developing economies, partly due to large disparities in financing conditions and perceived investment risks. Modelling exercises underpinning decarbonisation strategies typically do not consider how costs of capital may evolve across regions and technologies, which can have a strong impact on resulting policy insights. We explore the impacts of various plausible, expert-informed, long-term trends of (de-)risking investments in clean energy versus fossil-fuel technologies on decarbonisation pathways on top of an empirical dataset of costs of capital, differentiated by technology and country. We also assess the effects of a ‘corrective justice’ policy of risk underwriting for low-carbon investments, whereby corporate windfall profits are taxed, and the revenues redistributed as subsidies towards higher-risk regions. Results indicate considerable mitigation and investment potential in better informed planning with plausible long-term cost-of-capital projections, which could contribute towards bridging the emissions gap between efforts reflecting the ambition embedded in Nationally Determined Contributions and longer-term climate targets, as well as possible underestimation of the risk entailed in bioenergy-based negative emissions technologies in mitigation scenarios for developed nations.