The impact of financing cost differences on global energy and industry decarbonization
Integrated assessment models provide important insights for policymakers to formulate climate policies. In these models, emission reduction in low-income countries is often cheaper than in richer countries, because current technologies on the ground have more room for efficiency improvement. These models generally assume an average cost of capital for the entire globe. In reality, however investors perceive investments in low-income countries as riskier and therefore charge higher financing costs. In the article ‘The impact of financing cost differences on global energy and industry decarbonization’ published in Nature Climate Change authors from ETH, Zürich and PBL Netherlands Environmental Assessment Agency evaluate the impact of using differentiated investment risks by country. This is done for eight energy and industry sectors in the integrated assessment model IMAGE.
The results show that properly accounting for these risk premiums in low-income countries means it less attractive to reduce emissions in these countries. This means that in cost-optimal mitigation scenarios, a higher share of reductions takes place in high-income countries in the mitigation effort. This automatically means that the overall mitigation costs for staying well-below 2oC are around 9% higher. The risk premium also reduces capital-intensive investments in developing countries (such as investments in the grid, renewables, and hydrogen production) shifting action to centralized heat production toward natural gas. In industries such as steel and cement, sector and country risks could hinder capital-intensive carbon capture and electricity-based technologies.
It is possible to reduce the impact of differences in the costs of capital by providing finance or insurance from high-income countries. Overall, this study reveals biases in modelling results from omitting country-specific financing conditions and highlighst the need for climate finance across many sectors.
Authors
Specifications
- Publication title
- The impact of financing cost differences on global energy and industry decarbonization
- Publication date
- 24 September 2026
- Publication type
- Article
- Publication language
- English
- Product number
- 6238
