Florence Jaumotte, Jaden Kim, Samuel Pienknagura, and Gregor Schwerhof from the International Monetary Fund provide insight into the challenge of raising green energy investments for emerging economies in order to meet the net-zero emission target by 2050. While developing countries already face the need for industrialization, financing costs for green energy seem higher than for advanced economies due to high borrowing costs resulting from country risks and a less developed banking system. Foreign direct investment is considered a potential solution to meet the financing need in the context of limited fiscal space and constrained domestic financial markets.
FDIs are estimated to be able to fill 40% of the missing investment in developing countries. In light of successful emerging economies strategies, the authors emphasize the significant influence of ambitious climate policies to reassure potential foreign investors. Setting emissions reduction targets can help solidify the role of green technologies within the energy industry. In addition, providing a legal framework accommodating technological advancements and creating a more efficient green energy market will help modernize the entire sector.
Global factors can also influence the flow of FDI. Countries that have joined the Just Energy Transition Partnership received substantially more FDI, highlighting the importance of their ecological ambition. Each technology, whether it be electrical vehicles, green hydrogen, solar, or wind technologies, requires a different set of policies that should also consider different national specificities.
Policies to Foster Green FDI: Best Practices for Emerging Market and Developing Economies (imf.org)
