Solving The Climate Finance Equation For Developing Countries

To achieve net-zero emissions by 2050, it will be vital to mobilize sufficient capital to drive decarbonization in developing countries.

As climate change indicators continue to break records and global temperatures and extreme weather events advance, the urgency to act to ensure a sustainable future is mounting.¹ Achieving the goals of the Paris Agreement will require fundamental changes in energy and land-use systems worldwide, and developing countries are a key part of this transformation.²

Poised as they are for significant economic and population expansion, without support for decarbonization and green growth developing countries will likely increase their share of emissions over the coming decades. However, the climate conversation around these countries can often be focused on adaptation and resilience to withstand changes from climate change, rather than the decarbonization efforts that could mitigate its worst effects and position these economies for green growth. This could undermine global progress toward net zero and, ultimately, erode economic prosperity in developing nations.

In this article, we explore how economic growth, inclusion, and climate action are intimately connected and estimate the climate financing gap that needs to be bridged to ensure adequate financing of climate imperatives in Africa, Asia, and Latin America. Nine levers are highlighted that could help attract the private and public funding required to unlock investments to build a safer and more prosperous future, not just in these regions but for the world more broadly.

Developing countries have a critical role to play in the global transition to net zero

Over the next decade, the economies and populations in developing countries are projected to be among the fastest growing in the world. Between now and 2050, half of additions to the global population will likely be in Africa and about 30 percent in Asia.³ Furthermore, the International Monetary Fund (IMF) estimates that, compared to 2021, developing countries’ GDP could increase by 40 percent to more than $60 trillion by 2028, a per-capita increase of over 30 percent.⁴

However, climate change could limit or even derail this progress. Average temperatures have risen by about 1.2°C since the pre-industrial era and, globally, temperature and precipitation extremes are already 4.8 and 1.3 times more likely to occur, respectively.⁵ Developing countries are the most vulnerable to these impacts (Exhibit 1). In August 2022, for example, Pakistan experienced severe flooding that covered a third of the country, resulting in around 15,000 casualties and displacing 8 million people.⁶

Africa is considered the most climate-vulnerable region in the world owing to a high dependence on ecosystem goods (such as clean air, water, and fertile soil) for livelihoods, underdeveloped agricultural systems, limited infrastructure, a lack of social safety nets, and lower adaptive capacity (linked to weaker economies, institutions, and governance structures).⁷ In 2022, Niger and Nigeria faced one of the deadliest floods in recent history, damaging 300,000 homes, inundating half-a-million hectares of land, and resulting in more than 800 fatalities.⁸ In the Horn of Africa in the east of the continent, an acute drought has affected over 20 million people and led to the loss of over 2 million livestock in Kenya alone.⁹ Projections indicate further increases in such climate-related incidents, likely leading to a broad range of social and economic impacts.¹⁰

As a result of these risks, the climate conversation around developing countries, especially in Africa, can often be focused on adaptation and resilience rather than decarbonization. However, taking decisive decarbonization action in these countries would be needed to support the world’s transition to net zero and thus be vital to ensure that they avert the worst climate change impacts.

Developing countries already account for a sizable share of emissions and, given future population and GDP growth projections, this is set to rise. While the Organisation for Economic Co-operation and Development (OECD) countries have made some progress, reducing their emissions by 8 percent between 2010 and 2019, the rest of the world saw a 22 percent increase in emissions during this time.¹¹ At around 10 percent of the global total (when land-use emissions and all greenhouse gases are considered), Africa already accounts for more greenhouse gas (GHG) emissions than Europe; however, per capita emissions are still higher in Europe.¹² Indeed, as recent modeling work has shown, in a scenario where industrialized countries achieve a 1.5°C-consistent emissions trajectory but Africa, India, and Southeast Asia follow a “current policies” trajectory, global GHG emissions would remain substantial by 2050, leading to an increase in global average temperatures by 2100 of 2 to 2.3°C. This would miss the Paris Agreement goals and lead to substantially higher risks of triggering self-reinforcing warming feedback loops in the Earth’s system.¹³

In short, it is likely only possible to limit warming and achieve the Paris Agreement goals if developing countries achieve a green growth, low-carbon development pathway. Moreover, such a pathway also holds significant potential to deliver new economic opportunities to developing countries.

Setting a course for green growth

The stage is set for significant green growth in developing countries. Climate investments by industrialized countries have dramatically reduced the cost of many clean technologies—a trend that is likely to continue—making renewable energy the lowest-cost power source in large parts of the world.¹⁴ Many other clean technologies are also rapidly approaching tipping points where their costs are becoming lower than those of high-emission incumbent options. Choosing low-carbon technologies will soon be the economically rational choice across large parts of the global economy, further lowering costs and increasing productivity. In many cases, clean technologies also have significant co-benefits such as cutting air pollution, improving sanitation, increasing energy access, and more.

Developing countries have a significant opportunity to leverage these technologies to build low-carbon development pathways. McKinsey research has previously highlighted ten high-potential green growth opportunities for Africa centered around four key pillars—energy access and affordability, inclusive green growth, health and quality of life, and green exports—that could create jobs and bring new export revenue to the continent (Exhibit 2).

For example, thanks to its abundant renewable resources, Namibia is advantageously positioned to produce and export green hydrogen, a vital resource for decarbonization, especially in hard-to-abate sectors.¹⁵

Global hydrogen demand is expected to increase from 140 megatons per annum (Mtpa) of hydrogen equivalent in 2030 to 660 Mtpa in 2050, owing to its versatility and unique ability to connect power, gas, chemicals, and fuel markets.¹⁶ Namibia aspires to create an at-scale green hydrogen industry with a production target of 10 to 12 Mtpa hydrogen equivalent by 2050 for export to Asia and Europe. Capturing this opportunity could boost GDP by up to $6 billion by 2040—an increase of 50 percent on today’s GDP—and create up to 600,000 jobs by 2040.¹⁷

Indeed, as the Namibian example shows, the role of developing countries in the world’s energy transition can extend well beyond decarbonizing their economies. For instance, many countries in Africa, Asia, and Latin America are rich in the mineral resources essential for clean energy technologies and renewable resources that could enable the production of sustainable and clean energy, reducing environmental impact, and fostering long-term energy security (see sidebar “The role of developing countries in the net-zero transition extends beyond their domestic emissions”).

To see the complete report: Mckinsey.com