Comment: While international public finance for coal, oil and gas has fallen by two-thirds, little of that money has gone to promote green energy in poorer countries
Natalie Jones is Policy Advisor for the Energy Program at the International Institute for Sustainable Development (IISD). She holds a PhD in International Law from the University of Cambridge.
It’s a quiet climate success story: over 40 countries and public financial institutions have cut their international public finance for fossil fuels by two-thirds over the past three years.
At the COP 26 climate talks in Glasgow, UK, 39 countries and public financial institutions launched the Clean Energy Transition Partnership (CETP). They pledged to end their overseas public support for fossil fuels and instead increase their support for clean energy. Joined by Norway and Australia at COP 28, the partnership now numbers 41.
Our research finds that the parties are largely fulfilling their promises. Collective fossil fuel financing by signatories in 2023 is $5.2 billion, a two-thirds reduction from the pre-CETP baseline. This is a historic achievement.
There are several laggards, such as the United States, Italy, Switzerland, and Germany, that either have yet to change their policies or have adopted substandard policies that leave large loopholes for fossil fuel financing. However, even among these signatories, fossil fuel financing is declining.
Clean energy for the rich?
That’s the good news. The bad news, however, is that the signatories have not increased their clean energy funding by nearly the same amount. States have funded $21 billion in clean energy in 2023, just a 16 percent increase from the pre-CETP baseline.
Some countries, such as Canada and Denmark, have significantly increased their clean energy funding. However, others such as France and Sweden have actually reduced their support for clean energy from 2021.
Moreover, clean energy funding did not go to the countries that needed it most. Among the top 20 countries receiving clean energy support from CETP signatories, most are high- and upper-middle-income countries. The only countries with lower middle income were Bangladesh, Angola and India, and low-income countries were not represented.
This is symptomatic of a larger problem. In 2023, China and the developed economies account for 90% new solar photovoltaic and wind installations, and 85% of the investment in renewable energy. The lack of clean energy investment targeting emerging and developing economies (EMDEs) outside of China is a worrying trend.
Accumulation of private investment
Public finances are critical to closing the clean energy investment gap. It can reduce risk for other investors as it is often provided at preferential prices below the market and longer time horizons. This could garner much larger flows of private investment for proposed projects.
International Energy Agency grades that to keep the world on track to 1.5°C, annual concessional financing in EMDEs from advanced economies and development finance institutions would need to reach $80-100 billion per year by 2030.
CETP signatories and other high-income countries and public financial institutions have an important role to play in increasing concessional financing for the energy transition in EMDE. They should adopt ambitious and quantitative targets to rapidly increase quality public financing for clean energy.
To meet the CETP clean energy commitment, signatories must at least aim to provide as much clean energy funding per year as their average fossil fuel support before the CETP. Ideally, policies should provide for much larger sums.
Avoiding greater debt stress
Policies should target low-income countries for financing to achieve universal energy access. The cost of capital is often higher in these countries due to a range of fiscal, socio-economic and climate risks. But this should not be an excuse for public development finance institutions not to invest, as they are not driven by the profit motive.
To be effective, funding must be of high quality. From 2020 to 2022, 83% of international clean energy financing from signatories to low- and lower-middle-income countries was provided through loans.
Clean energy financing should not put additional burdens on spending countries of the Global South almost half of their budgets debt service. Policies should ensure that a much larger proportion is provided through grants and highly concessional instruments.
Switzerland and Canada offer ways to expand climate finance donors
The story is not over with the diversion of public money away from fossil fuels. China, the Republic of Korea and Japan are not members of the CETP and together continue to provide an average of $21 billion annually in international public finance for fossil fuels. The next step is to bring these countries together with the G20 countries and multilateral development banks in the CETP initiative.
Domestic public funding for fossil fuels continues, as do fossil fuel subsidies. Globally, only fossil fuel subsidies have been exceeded 1.5 trillion dollars in 2022. Ending these subsidies could free up even more public funds to invest in solutions for people and the planet.
In the year of the new climate finance target to be agreed at COP 29 in Baku, Azerbaijan, every penny counts.