BloombergNEF on the emerging markets net zero challenge

Over the last few decades, China has been topping the league table among emerging markets in terms of energy transition investment. But what role will other emerging markets play in achieving net zero targets by 2050?

To answer this question, the Glasgow Financial Alliance for Net Zero’s Workstream on Mobilizing Capital to Emerging Markets and Developing Economies commissioned BloombergNEF to produce the Emerging Markets Energy Investment Outlook 2024. Victoria Cuming, head of policy at BloombergNEF and author of the report, offers insight into the key findings and what emerging markets need to do to hit net zero targets.

Responsible Investor: What was the thinking behind the report?

Victoria Cuming: The report is based on findings from our New Energy Outlook 2024, BNEF’s energy and climate scenarios, published in April. While the NEO models 19 individual markets, this latest report marks the first time we have specifically looked at emerging markets as a group, especially those economies outside China.

Over recent years there has been a significant rise in energy transition investment in China, especially in renewables and electric vehicles. However, other emerging markets have severely lagged in terms of investment, not only in the overall energy system, but also for low-carbon solutions. However, these markets are set to see rapid economic and population growth in the coming decades. Thus, without urgent action in these economies, the world will fail to realise the goals of the Paris Agreement.

The report focuses on the energy system investment needed to get China and other emerging markets on track, and the progress made so far.

We look at these issues through the lens of two energy system and climate scenarios. The economics-driven base case – known as the economic transition scenario – sees a 27 percent fall in emissions to 2050, implying 2.6C of warming by 2100. The net zero scenario shows a pathway to global net zero emissions by mid-century, consistent with 1.75C of warming stipulated in the Paris Agreement.

RI: How much progress is being made?

VC: Emerging markets – which we define as low-and middle-income economies based on the World Bank’s ratings – invested $2.2 trillion in their energy systems in 2023, marking a 35 percent rise from 2020. While they outpaced the 10 percent increase to $2.6 trillion seen in high-income economies, emerging markets outside China will need to accelerate growth to meet the projected rise in energy demand.

In addition, these markets will need to direct much more investment toward energy transition technologies. China and high-income economies have increased low-carbon investment in the last four years. Low-carbon solutions accounted for 49 percent of China’s total energy investment last year, up from 20 percent in 2020. This jump has largely been driven by renewables and electric vehicles.

In 2023, emerging markets outside China attracted $1 trillion in energy transition investment – up 52 percent on 2020. However, this comprised just 14 percent of their overall energy-system spending last year.

RI: What insight can we glean from the differing scenarios?

VC: Under our net zero scenario, China would need $46 trillion in total energy system investment by 2050, whereas other emerging markets would need $69 trillion. This compares with $100 trillion for high-income economies. In our economic transition scenario, for emerging markets outside of China, the figure would be $63 trillion.

So, there’s not a massive difference in terms of the two scenarios in dollar investment. The biggest challenge is where that investment goes. Under the economic transition scenario, investment is relatively evenly split between fossil fuel and low carbon, but the net zero scenario will require 87 percent of investment to go to low-carbon solutions.

This means that under a net zero pathway, emerging markets outside China invest $2.2 trillion per year on average to 2050. This compares with $1 trillion in the economics-driven base case and $0.2 trillion on average over 2020-2023.

RI: What are the priorities for achieving the net zero targets?

VC: On the supply side of the energy system, low-and middle-income economies outside China must significantly scale up investment in renewables and power networks. In the net zero scenario, these economies invest $0.6 trillion per year on average to 2050 in these technologies. This is five times the historical average over 2020-23 and twice as much as in the base case to 2050.

Achieving this would require significant policy support, including introducing mechanisms such as renewable targets, tariffs and auction schemes, as well as public investment and incentives for private-sector companies to develop electric vehicle charging infrastructure. These will need to be rapidly expanded. A clean power fleet needs to be in place before there can be wholesale electrification of end-use sectors, especially in transport.

A lot of emerging markets are already in need of significant investment in the electricity grid. And this need will grow in the coming decades as they expand power generation and storage capacity. These economies also need to invest more in electric vehicle charging infrastructure, not least because the biggest component of projected investment on both demand and supply sides is electric vehicles. Under a net zero pathway, emerging markets outside China spend an average of $1.4 trillion on energy demand systems like cars and heat pumps to 2050 – of which $1.2 trillion is for EVs.

Interestingly, these economies spend less on demand systems in the net zero scenario compared with the base case, because the former requires a faster transition to EVs, which are increasingly cheaper than vehicles with an internal combustion engine. In contrast, for China and high-income economies, it’s more expensive to reach net zero because they also need to scrap existing ICE vehicles to speed-up decarbonisation of existing fleets.

RI: How does progress compare around the world?

VC: It really does vary by region. Brazil has seen significant growth in recent years, especially in renewables thanks to its good hydropower and wind resources as well as policy support like its rooftop solar program. As a result, it raised renewables investment by 41 percent on a compound annual basis over 2020-2023. India has been slower, at 20 percent, but other markets are even further behind – Indonesia actually saw a decrease of 20 percent.

Some emerging markets are making progress with renewables, but most, other than China, have huge room for improvement in terms of adopting electric vehicles; there needs to be a considerable ramp-up in consumer spending, and governments need to start putting policies in place such as EV purchase subsidies and support targeted at low-income consumers. It’s much more cost-effective to ramp up investment now, rather than wait a few decades, so governments need to start putting in place more stringent policies such as fuel economy mandates and carbon pricing.

While countries such as India and Indonesia have plans to introduce or tighten such compliance schemes, the timelines are slow. Moreover, governments tend to introduce enormous concessions to ease the transition, but then leave them in place for too long, fearing a backlash when they remove them. If governments offer concessions, they should have a timeframe for phasing them out as well.

The path to net zero provides an incredible investment opportunity and I remain quietly optimistic that we can get back on track. I’m hoping that this report provides some idea of the scale of financing that will be needed. We need to start ramping up investment now and governments have a huge role to play in creating the environment to attract that investment. We can’t wait a few decades in the hope of making a last-minute dash to net zero by 2050.

This article was reproduced from Responsible Investor.