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The G20 highlights ‘net-zero’ funding challenge

Developing countries need almost $6 trillion of support to meet environmental targets by 2030, according to the G20. The road to ‘net zero’ offers big investment opportunities but many challenges.

| 6 min read

Under the chairmanship of Indian Prime Minister Narendra Modi, the G20 reaffirmed some stretching goals for sustainable investment in general – and for the transition to net zero for carbon emissions in particular.

As we predicted last week, the summit was unable to make any breakthrough on Ukraine, given the very different views around a table that included the US, the European Union, China and Russia. Nor could it make much progress on the range of trade disputes that have broken out between the Chinese-led world and the US-led interests.

The leaders accepted language that agreed to disagree on the war whilst asking all to observe United Nations rules. “There were different views and assessments of the situation,” it said. They urged reform of the World Trade Organisation (WTO) to improve its capacity to resolve trade disputes. They called for the food trade from Ukraine to the developing world to be fully restored.

The summit united around support for the 2030 Agenda for Sustainable Development. Under Indian guidance, the communiqué called for big increases in financing investment in sustainable development and urged immediate action to tackle debt problems in some emerging market countries. “We will urgently accelerate our actions to address development and climate challenges, promote lifestyles for sustainable development and conserve biodiversity, forests and oceans.” It called for the voices of developing countries to be better heard and asked for more Multilateral Development Bank lending for investment.

The cost of a clean transition

The participants acknowledged the magnitude of the task to get in the necessary investment to hit the 2030 targets on the way to net zero. They identified a “need of $5.8-$5.9 trillion in the pre-2030 period required for developing countries, especially their needs to implement its National Determined Contributions (to carbon reduction), as well as the need of $4 trillion a year for clean energy technologies by 2030 to reach net zero by 2050.”

These are enormous figures which do recognise the magnitude of the task when the world is still 80% dependent on fossil fuel energy. With China, India and other emerging countries adding to their use of coal, oil and gas to sustain faster growth rates, it will indeed take massive investment in renewable ways of generating electricity. It also requires many changes to switch much more transport, industry, heating and other users of energy from direct use of fossil fuels to use of electricity.

The G20 thinks this transition will require accelerated use of new technologies and fuel options. They support the “acceleration of production, utilisation, as well as the development of transparent and resilient global markets for hydrogen produced from zero and low emission technologies”. The G20 wishes to double the rate of energy efficiency improvement by 2030. It sees biofuels playing a part.

The G20 believes the promised $100bn annual support for emerging countries agreed at previous global meetings will be achieved for the first time in 2023.

The communiqué noted it expected some countries to increase their nuclear power and mentioned the possibility of small modular nuclear technology. It forecasts a continuing fast expansion of renewable electricity. All of this requires strengthened multilateral development banks to offer a “quantum jump from billions to trillions of dollars for development”. The G20 believes the promised $100bn annual support for emerging countries agreed at previous global meetings will be achieved for the first time in 2023.

The difficulty in getting the advanced world to back up its commitments in principle to $100bn of supportive finance a year with the transfers of money for actual projects in emerging market countries shows how difficult to task is to increase decarbonisation investments quickly enough. The latest G20 summit lays much more emphasis on the multilateral development banks. These include the World Bank, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank and the European Bank for Reconstruction and Development.

To get to the vast numbers required will require substantial private sector investment of both equity capital and borrowings and additional support from government budgets. Commercial banks and financial markets have a big role to play in directing this much money.

No clear path to a cleaner future

As the G20 statement implies, there are still issues about how the differing technologies will be prioritised and rolled out. As the main thrust of changes in generation of electricity is from fossil fuels to renewables there needs to be complementary investment in big batteries to store power, or in hydrogen manufacture to store energy for times when the wind does not blow and the sun does not shine. Otherwise, there needs to be substantial backup and stand-by fossil-fuel generation.

There are those who think more nuclear should be part of the answer, providing more reliable power consistently as a baseload whatever the weather. There are similar issues with the technologies needed to convert more from using fossil fuels as the prime source of heat and energy to an electricity-based system. Will the battery car predominate? What role will hydrogen play in buses, trucks and heavy plants where battery use is more difficult? What will be the role of synthetic fuels in areas like aviation and marine, where again battery use is difficult?

It is likely the world will fall short of the G20 targets for the precise trillions of dollars of investment proposed this decade. There is a clear continuing commitment to the task and targets, which means it is likely there will be substantial growth in new renewables, hydrogen, new nuclear and synfuels.

In the run-up to the COP 28 UN climate change conference starting at the end of November, we can expect to hear much more about the investment opportunities and the economic challenges these ambitious targets create. The newer technologies still need government subsidy, regulation or other intervention to get them to a self-sustaining commercial position in the investment world.

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The G20 highlights ‘net-zero’ funding challenge

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