Critical assessment of financing needs estimates for Emerging markets and developing economies
Context
Finance is in the spotlight in international climate discussions. The recent difficult discussions and half-satisfactory outcomes on the New Collective Quantified Goal (NCQG) underscored just how critical this element is to climate action and global negotiations. However, country-level finance needs assessments are nearly always missing (I4CE 2024 forthcoming, Chimowu, Hulme and Munro 2019), while they should provide the factual basis of such discussions and actions.
Global financing needs estimates try to make up for this gap. However, due to the lack of base data to work with, they are forced to various assumptions. When combined with variations in the scope of instruments, the dimensions of climate, nature, and development actions considered, and other factors, this results in widely divergent estimates (See Fig 1).
Source: OECD 2024, based on (Climate Capital Partners, 2022; CPI, 2023; ETC, 2023; IEA/IFC, 2023; Songwe, Stern and Bhattacharya, 2022; McKinsey & Company, 2022; UNFCCC SCF, 2021; UNEP, 2023).
One of the key reference points for these assessments, serving as an anchor in international negotiations, is the 2022 estimate by the Independent High-Level Expert Group on Climate Finance (IHLEG). This report estimates that approximately US$2.4 trillion in investment are needed annually by 2030 to support a “just energy transition, adaptation and resilience, loss and damage, and the conservation and restoration of nature” in EMDEs (Emerging markets and developing economies), excluding China.
The IHLEG report synthesizes a broad range of studies, but its foundation lies in earlier G7 work aimed at delivering a significant investment push in EMDEs to accelerate post-COVID recovery. That G7 initiative, in turn, draws heavily from a 2016 report on sustainable infrastructure investment needs in EMDEs, which adopts a broad interpretation of sustainability.
This draws several reactions:
- Some figures and methodologies supporting this landmark IHLEG report may be outdated, or geared towards other goals (e.g. showing that there is room for a big investment push in sustainable development in a wider sense)
- Part of the work relies on top-down methodologies with sometimes crude assumptions on e.g. ratio-to-GDP proxies to come up with these aggregated figures. As a consequence, while such a report seemingly provides bottom-up estimates and country detail, most of it is not actually usable for national plans and domestic/international finance mobilization at country level
- The resulting figures are twice higher for investment needs in the Global South than similar figures for the Global North, and so is the forecasted cost of capital
Figure 2: estimated investment needs and capital cost in a selection of countries
Objectives
Given the high profile of these figures in international talks, this project will explore
- The potential methodological sources of investment needs under- / overassessments
- How to facilitate comparison with alternative needs estimates such as e.g. CPI, McKinsey, UNFCCC SCF, IEA…
- If the data limitations that forced the IHLEG into a series of hypotheses and ad hoc methodological developments still stand; if yes, which are the most critical and which can be most easily reduced; as a result of these two questions, which global and / or national data limitations should deserve most attention in the short term.
This research project draws upon I4CE’s expertise in transition financing plans and national-level finance needs assessments to support the CEPR-Bruegel report on “Accelerating the Transition and Protecting Nature in EMDEs.” The work will include desk reviews, direct bilateral interviews, and potentially discussion workshops, conducted in late 2024 and the first half of 2025.
Partners
Bruegel; Center for Economic Policy Reasearch
Period
December 2024 – June 2025
