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Kailhao Cai, Thibault Lemaire, Andrea Medici, Giovanni Melina, Gregor Schwerhoff, and Sneha D Thube
Sub-Saharan Africa needs to significantly accelerate its electricity generation. While hydropower is prominent in some countries, solar and wind power generation has lagged other world regions, even though sub-Saharan Africa has some of the most favorable conditions. A mix of domestic and external financing can increase both renewable electricity generation and GDP. In a scenario where about $25 bn in climate finance flows are allocated annually to renewable energy, renewable electricity production could be up to 24 percent higher than in a scenario excluding this financing, and annual GDP growth would be boosted by 0.8 percentage point on average over the next decade, accompanied by stronger labor demand in the electricity sector. Policies can help catalyze climate finance. An ambitious package of governance, business regulations, and external sector reforms is associated with a 20 percent increase in climate finance flows and a 7 percent increase in electricity generation over five years. In addition, implementing climate policies is linked to increases in green foreign direct investment announcements and green electricity production.
Florence Jaumotte, Jaden Kim, Samuel Pienknagura, and Gregor Schwerhoff
Meeting COP28 goals requires a substantial increase in clean energy investment by 2030, including in emerging market and developing economies (EMDEs). Amid domestic financial constraints, foreign direct investment (FDI) could play a key role in EMDEs’ ability to close their renewable energy investment gap and finance green projects, more broadly. This Note finds that strengthening climate policies boosts FDI into renewable energy in EMDEs, especially in those with solar power potential, while less clear effects are found for FDI into EVs and green hydrogen possibly due to their recent emergence. Closing the average climate policy gap with respect to AEs could secure 40 percent of the private finance needed for renewable energy investment in EMDEs, helping overcome the impact of high financing costs. Strengthening the macro-structural framework, such as through improving trade and capital account openness and institutional quality, would also raise green FDI inflows, complementing climate policies. Case studies show that countries that attracted FDI into renewable energy put in place a large and diverse set of policies in the electricity sector, including those that secure a revenue stream for investors in the initial phases, such as power-purchase agreements/feed-in tariffs, renewables targets, and complementary investments. Countries that successfully attracted FDI into EVs relied on the development of national sectoral strategies including production and adoption subsidies, prior comparative advantage in the sector, and bilateral alliances with key players in the EV market. Finally, comprehensive national hydrogen strategies that leverage international efforts to boost production, and good conditions for production of renewable energy, were key drivers of green hydrogen FDI. Global initiatives such as the Just Energy Transition Partnerships and the EU strategy for green hydrogen are benefitting FDI to EMDEs.
Gregor Schwerhoff
Electricity production is the sector with the largest share of global emissions and there are many options for decarbonizing it. Identifying the lowest cost option for achieving decarbonization (and full reliability) is a complex optimization problem at the intersection of economics and engineering. Key determinants are the cost of individual technologies, the geographical potential, the complementarities between energy sources and supporting infrastructure like electricity grids and energy storage. This paper reviews the literature on the subject and draws high-level conclusions from the abundance of specialized analyses. It finds that energy-economy models have strongly changed projections of the optimal electricity mix in recent years. While the models differ in detail, models project that the share of renewable energy, mostly solar and wind power, increases steadily in a “below 2°C” scenario and becomes the dominant source of energy by 2050. An electricity system based on solar and wind power can use flexibility options as a complement instead of baseload energy. Models vary by the degree to which renewable energy is supported by carbon capture and storage, bioenergy, and nuclear energy.
Mitali Das, Manuel Linsenmeier, and Gregor Schwerhoff
Climate policy at the subnational level is sometimes framed as being counterproductive, because climate change is considered a collective action problem that can be best addressed in a coalition that should be as large as possible. Using comprehensive data from US states on climate policy and policy outcomes, we show that state-level policy is effective in accelerating the adoption of solar energy. Crucially, however, state policies also have positive spillovers to other states, by making it more likely that neighboring states adopt climate policy as well. By proportionally attributing the spillover effects, we find that many US states achieve more climate benefits through the spillovers to other states than within their own jurisdiction. In a further step, we distinguish between climate policies in the energy sector and policies addressed either at other sectors or greenhouse gas emission (GHG) reductions generally. We find that climate policies in the energy sector are distinct from other climate policies in two ways: They have a significant effect on solar capacity growth and they diffuse more broadly.
Chen Chen, Koralai Kirabaeva, Christina Kolerus, Ian W.H. Parry, and Nate Vernon
This paper assesses the Brazilian economy's exposure to climate change focusing on two key areas: agriculture and hydropower. While climate vulnerabilities are significant and recent patterns of land-use further amplify climate change risk, Brazil's opportunities for green growth are vast. Given geography and existing infrastructure, notably the very green energy mix, Brazil can boost its economic potential while mitigating a potential tradeoff between energy use, emissions, and growth. Policy options to address key vulnerabilities and leverage opportunities include boosting the Amazon's resilience via fiscal incentives for forest protection, investing in climate smart agriculture and insurance guided by sustainable feebates, continuing the diversification of renewable power generation, and stimulating green growth while greening the financial sector.