If they want African governments to abandon fossils faster, donor countries should change the prices they face.
Caveats: this is my personal opinion and has nothing to do with my employer. I originally wrote this in the hope someone might pick up the idea and use it at COP.
When should African countries make new fossil fuel investments? It would be nice to answer: never. The world faces a climate emergency. But Africa also faces a poverty emergency. Around 2.5 million children under 5 die each year in sub-Saharan Africa each year. Africa must tackle both emergencies.
A high standard of living requires a high level of energy consumption. The average person in a high-income country consumes just north of 9000 kwh of electricity annually. The average resident of sub-Saharan Africa consumes just under 500 kwh. Unlike the governments of OECD countries, whose job is to take an already high-energy economy and decarbonise it, Africa must go green whilst also increasing power generation many times over.
The good news is that renewable power generation is increasingly the cheapest option, in which case there is no trade-off between fighting poverty and fighting climate change. And with innovations in grid-scale energy storage, the prospect of 100 percent clean energy is coming ever closer.
We are not there yet. Power networks have technical requirements that intermittent sources of clean power cannot yet entirely meet. If African countries are going to rapidly increase electricity generation, some countries’ optimal transition plans will include some new fossil investments in the medium run, even if that is just replacing older coal or HFO plants with newer more efficient gas turbines. For this and other reasons, the Paris Agreement recognises that carbon emissions in less developed countries are going to need to rise further before they start falling towards zero by 2050.
In theory massive investments in energy storage and complementary upgrades to transmission and distribution networks could meet the technical demands that power system planners currently turn to gas for, but it would come at a higher price. The problem is that African governments are in no position to pass higher costs onto consumers, nor to cover them from general taxation.
Starting from the premise that less developed countries are not going to sacrifice their economic development for the sake of emissions reductions, Willem Buiter recently argued that “the only way to square the circle is to extend financial aid … so that they can afford to internalize the GHG externality through an appropriately steep tax on emissions.”
Receiving more aid would certainly make paying higher prices to go green more affordable, but it would not guarantee governments choose to do so. They have other priorities. Conditions could be imposed so that the additional aid is more likely to be spent as the donor intends, but that creates other problems. There is another way.
Rather than hand money to governments and hope they will choose to spend it on more expensive power, with suitable encouragement, it would be more effective to rely on governments choosing the cheapest option but to offer them subsidies that change the prices that they face. It is not the solar panels and wind turbines themselves that need subsidising, it’s the investments that increase how many solar panels and wind turbines the grid can absorb. A subsidy is needed to push back the constraints to how quickly power networks can go fossil free and tip the balance in decisions where fossil fuels would currently be chosen.
The world already has an array of climate funds, but they are not getting the job done. Grants and concessional finance are generally hard to access and negotiated on a project-by-project basis. Development finance institutions are tying themselves in knots worrying that the use of concessional capital by government-backed organisations is crowding-out private investors and holding the market back. Civil society observers are also unhappy with how subsidies are allocated. This is all wrong. We want to provide subsidies to help poor countries go green, and we want to do it in a way that is open to everyone: governments, development banks, private project developers and investors.
We need something simple, transparent and powerful. I do not know what a sensible number would be, but something like an open offer of $50 towards every kWh of battery storage installed, for example. Real expertise would be needed to design the subsidies. The important thing is that they must be available to anyone building power infrastructure in African countries (and other countries in a similar situation). If the subsidy is available to all on equal terms, it will not distort the market by having developers with access to concessional development finance out-compete those who don’t. The idea here is to change the prices that African governments face, no matter who finances and implements the project.
Making batteries cheaper won’t solve every problem and subsidies such as these will not eliminate fossil fuel investments at a stroke. The intention is to bend countries’ transition paths towards zero carbon, faster. As the technological frontier moves, so too can the choice of subsidy.
As things stand, development banks have little ability to internalise climate costs. They can reduce the cost of capital for renewable investments somewhat, within their existing mandates that require them to make a financial return, and whilst they can refuse to finance them, they cannot make investments in fossil fuels more expensive because governments will simply go elsewhere for the money. Most governments have the option of borrowing on international bond markets and financing plant construction themselves, if necessary.
Campaigners want development finance institutions to stop all investment in fossil fuels, immediately. It’s easy to understand why, and it makes sense for the most polluting fuels. But a complete moratorium would will not help African economies on those occasions where investments in new gas generation is the right choice for them.
Those DFIs who operate in the poorest countries and are willing to weather the public relations storm from financing gas have a difficult task identifying when gas is the right choice. The answer is something like: “when it’s better technically better than the alternatives and part of an optimal transition plan towards net zero that also meets the country’s development needs”. That’s hard to verify. It is a bit like asking whether you can eat a donut when you’re on a diet: quite possibly, but you won’t find the answer by inspecting the donut. It depends on what else you plan to eat. These decisions would be easier to take if African governments have easy access to subsidies for the green alternatives that roughly reflect the social cost of carbon. If they still choose gas after that, we can be more confident it is the best decision.
A bold offer to subsidise investments in such things as inter-connectors or grid-scale energy storage, that can raise the limit to how much renewable power a network can absorb, would be a tremendous initiative from donor countries at COP 26. One of the existing climate funds could be the vehicle, or a new entity could be created. It should be a low overhead affair with the necessary safeguards against fraud but without politicised decision-making. If pre-determined criteria are met, money should be disbursed. We need not overthink the pricing of the subsidy — it is more important to apply pressure in the right direction than get it exactly right.
The same idea could be applied to hydrogen-fuelled furnaces for steel production, solar cement kilns, or sustainable saltwater desalination for agriculture, and anything else where the prices that governments in lower income countries face do not reflect social costs and benefits.
I am going to duck the question of where the money should come from. Whether Official Development Assistance should be used for climate mitigation is long-standing debate. UK government policy is that it should be. Adair Turner has suggested that rich countries could raise funds by imposing a border tax on carbon emissions embodied in imports, which could be transferred to help developing countries finance their transition to a zero-carbon economy. Or perhaps some existing climate finance commitments — $100bn per year — could be channelled through this instrument.
The main thing is to shake up how the international community offers concessional finance for green investments, so that African governments who want to provide desperately-needed power to their citizens as cheaply as possible will get zero faster.
Full disclosure: my employer CDC would invest in transmission infrastructure and energy storage, so this idea could be said to benefit CDC. That’s not why I wrote this. The point is to encourage investments that will benefit African countries and global climate change mitigation.
