To successfully combat climate change, it is crucial to reduce carbon dioxide emissions worldwide, including in middle-income and developing countries. These places require significant financial support to transition from coal plants to cleaner energy sources, improve electrical infrastructure, and retrain workers, among other measures. Just Energy Transition Partnerships (JETPs) aim to provide funding from wealthier nations to developing-world emitters to facilitate their shift away from fossil fuels.
JETPs recognize that middle-income countries face challenges such as rising energy demands, insufficient infrastructure, limited government finances, and heavy reliance on coal. They require financial support and incentives to prioritize decarbonization alongside economic development, in a manner that considers historical advantages enjoyed by wealthier countries without environmental constraints. JETPs were introduced at the United Nations-led climate talks in Glasgow in 2021 to address these objectives.
The funding required for clean energy investments in emerging markets is enormous. BloombergNEF estimates that Indonesia alone may need up to $3.5 trillion to achieve net-zero emissions by 2050. JETP and related initiatives, though only covering a fraction of this amount, act as catalysts to attract private finance and reach the desired funding levels. However, investments need to increase rapidly. In the past decade, solar and wind investments in Indonesia accounted for just 0.03% of the global total.
The focus on coal is essential because it remains the single largest source of electricity generation, contributing to over 36% of the world’s electricity in 2022. While coal plants in Europe and the US are approaching the end of their lives, those in Asia have an average age of below 15 years. If these plants continue to operate for as long as those in the West, they would emit a large portion of the remaining carbon budget required to meet global warming targets established in the Paris Agreement.
Progress on the first JETP in South Africa serves as a cautionary tale. Despite an $8.5 billion package commitment from various countries, the country’s old coal-fired plants still dominate energy production, causing blackouts and making South Africa one of the largest greenhouse gas emitters. Political turbulence and energy poverty have hampered the transition process, undermining public support and raising concerns about energy security.
Similar initiatives are being pursued in Indonesia, Vietnam, Senegal, and India. These plans involve a blend of public and private financing, with banks facing challenges related to investing in coal and concerns about loopholes allowing new coal plants to be built. India, in particular, is participating in discussions regarding future JETP deals but remains resistant to phasing out coal.
Private capital is crucial to meeting climate investment needs, but significant obstacles remain. Investing in emerging markets presents inherent risks due to unpredictability and limited transparency. Institutional investors, even those committed to green initiatives, have fiduciary duties to shareholders that may impede risk-taking. Furthermore, many institutions have restrictions on investing in fossil fuels.
In conclusion, JETPs and similar financing mechanisms play a vital role in supporting clean energy transitions in middle-income countries. However, significant funding gaps persist, requiring increased private capital investment. Additionally, addressing challenges related to risk and institutional policies is necessary to unlock the full potential of these initiatives to combat climate change.
