The Financing Barrier in Developing Markets
Companies and projects in developing countries need access to finance. This is true now more than ever, as the world accelerates the path to net zero and the need to invest in climate change mitigation and adaptation grows. Yet, developing countries often struggle to access finance to support development and climate goals. This can most easily be observed in the high cost of capital demanded by investors in developing countries. A higher cost of capital means projects must deliver higher returns, reducing financial feasibility and limiting implementation likelihood, particularly for lower returning sectors like energy generation and transmission.
Case Study | The Article 6 Investment Solution
One solution we have trialed is the Article 6 Investment Model, which harnesses Article 6 of the Paris Agreement to mobilize carbon finance in exchange for emissions reductions. Unlike traditional carbon market approaches, where emissions reductions are typically sold after credits are generated, investors under our model provide up-front concessional financing in exchange for a share of future emission reductions. This solves two major challenges. First, developing countries access the up-front capital needed to get climate projects off the ground and generated emissions reductions in the first place. Second, by moving from a model of carbon credit “purchases” to “investment”, investors are able to mobilize capital at scale via equity, debt, and guarantee investment instruments.
Broader Investment Mobilization
Our work on the Article 6 Investment Model aligns with our broader efforts to mobilize private sector investment for the energy transition. Our focus is on developing blended finance approaches to lower the cost of capital for developing country projects and crowd in the private sector. This spans new mechanisms like Article 6, existing voluntary carbon markets, and more traditional climate finance approaches.