Meeting the Paris goals of limiting global warming to 1.5°C by the end of the century, while pursuing climate-resilient development, will require an unprecedented mobilisation of all sources of finance, public and private. The financing needs to meet these goals are particularly acute in emerging and developing economies. The scale and complexity of the challenge is compounded by Covid-19 recovery needs, as well as longer-term development needs under the 2030 Agenda for Sustainable Development. Meanwhile, there remain myriad long-standing barriers to infrastructure investment and the mobilisation of wider climate finance, and the use of scarce public finance to effectively mobilise commercial capital remains far below its potential.
The scale of the challenge is such that all sources of finance – public, private, domestic and international – need to be mobilised at scale. In particular, the huge stocks of global capital need to be mobilised at scale towards more productive uses. Blended finance – the strategic use of development finance for the mobilisation of additional finance towards sustainable development in developing countries – has a critical role to play in this endeavour. In light of these challenges, the OECD’s Development Assistance Committee (DAC) has agreed a set of comprehensive principles to support development actors to most effectively leverage commercial capital through public development finance[1].
While finance will need to be mobilised to support climate mitigation and adaptation in all sectors, the energy sector – which accounts for around three-quarters of global greenhouse gas emissions[2] – will require the lion’s share of investment towards climate mitigation: clean energy investment in emerging and developing economies will need to grow from USD 150bn in 2020 to over USD 1 trillion per annum by the end of the decade to keep the world on track to a 1.5°C pathway[3]. The sector also faces a set of additional constraints to investment, compounding long-standing risks to infrastructure investment that exist across traditional infrastructure assets.
Given the scale of the challenge, the urgency of the required mobilisation of finance, and the unique challenges of the sector, the international donor community is making clean energy a central pillar of their development strategies, as part of their wider efforts to support the development and implementation of robust nationally determined contributions (NDCs) to emissions reduction. The DAC committed in October 2021 to align development cooperation with the goals of the Paris Agreement, including by prioritising support for technologies focused on accelerating progress towards net zero systems, in particular renewable energy and energy efficiency.
In light of these commitments and recommendations, there is now a renewed need to develop bespoke guidance for the deployment and mobilisation of blended finance for clean energy. This guidance would build on the existing OECD DAC Blended Finance Guidance and Principles, in particular on Principle 2: designing blended finance to increase the mobilisation of commercial finance, whilst recognising the interdependencies of the wider principles.
[1] The OECD DAC Blended Finance Guidance: Best Practices in Development Co-operation
[2] IEA, Net Zero by 2050: A Roadmap for the Global Energy Sector
[3] IEA, Financing Clean Energy Transitions in Emerging and Developing Economies