Officials at the United Nations climate summit in Dubai express growing concern over the impact of a global campaign to curb inflation, which is inadvertently steering developing countries away from renewable energy investments. While these officials support central bankers’ efforts to control rising prices by increasing interest rates, they worry about the unintended consequences for vulnerable nations grappling with climate change.
Wealthy nations and international agencies are urged to devise innovative strategies to channel funds to struggling countries in Africa, Asia, and beyond, coping with high interest rates. Failure to address this issue could hinder efforts to reduce future greenhouse gas emissions as these countries strive to lift millions out of poverty and increase power consumption.
Kristalina Georgieva, Managing Director of the International Monetary Fund, emphasizes the importance of international support during this challenging period. The concern is that rising interest rates disproportionately impact renewable energy projects, as the upfront investment in wind or solar farms faces greater strain compared to fossil fuel projects.
Developing nations, facing crises beyond their control, are finding it easier to invest in fossil fuels amid the current challenges. The cost of new gas plants is less affected by interest rate hikes compared to offshore wind farms or solar farms, where costs may rise significantly.
High interest rates not only strain government budgets in developing nations but also contribute to the devaluation of their currencies. This financial pressure coincides with the need for these nations to invest substantial sums in adapting to rising temperatures and expanding energy production to improve living standards.
The impact of higher rates extends beyond clean-energy projects, affecting global efforts to combat climate change. Clean energy projects, including offshore wind farms and nuclear plants, face increased costs, making it more challenging for homeowners to afford sustainable technologies like heat pumps and electric vehicles.
While renewable energy remains competitive with fossil fuels in the long term, higher rates pose challenges, particularly in the developing world. The cost of capital for utility-scale solar projects can be two to three times higher in sub-Saharan Africa, Latin America, and Southeast Asia compared to the United States or China.
The ongoing climate summit in Dubai, known as COP28, seeks to address these challenges. Leaders hope to triple the global installation of renewable power by 2030, but the surge in financing costs is making this goal more difficult to achieve. Officials from the IMF, other development agencies, and wealthy nations are announcing initiatives to facilitate investment in renewables in developing countries.
As the battle against inflation continues, leaders stress the need for progress in unclogging supply chains to alleviate pressure on central banks. Ngozi Okonjo-Iweala, Director of the World Trade Organization, emphasizes the intertwined nature of interest rates and trade, advocating for a comprehensive approach to ensure affordability for all and combat inflation.