Public sector reforms and private sector innovation could help unleash $4tn in extra low-carbon investment in emerging markets by 2050, according to a report released by US investment giant Blackrock two days ahead of a UN climate summit where a showdown over finance showdown is widely expected.

As world leaders gather in Dubai for the COP28 event, the multi-trillion-dollar question of how to pay for the green energy that will be needed to reach net zero is expected to be a key point of contention.

The BlackRock Investment Institute released a report it believes could go some way toward answering this question, with suggestions on how to help unlock $4tn in extra investment in developing countries between 2030 and 2050.

Emerging markets will account for over half of energy demand and carbon emissions by 2050, it said.

However the greater investment risk broadly perceived in these emerging economies means that transition-related investment will be “notably lower than what they need”.

Excluding China and Russia, the report found that low-carbon investment in emerging markets has held flat – and that their needs could be up to 27 times higher than recent public commitments from developed markets.

Step up World Bank

“Closing the gap would require significant public sector reforms and private sector innovation, resulting in greater ‘blending’ of public and private capital – or blended capital,” the report said.

There are “two key shifts” the report argues are needed for multilateral development banks and public financial institutions like the World Bank to play a bigger role in the low-carbon transition.

First, their role needs to “evolve to facilitate private financing and backstop initial losses” on emerging market infrastructure investments, “particularly climate-related projects.”

“Second, their toolkits need to move beyond tackling country-level crises to addressing these interconnected, global challenges,” it said.

Hybrid capital

Tight government finances worldwide mean that institutions will “face pressure to mobilise meaningfully more private sector capital,” believes BlackRock, increasing the “risk-burden sharing with private investors.”

“A crucial element” is “hybrid capital,” said BlackRock, “guarantees from government shareholders that can absorb losses in adverse scenarios.”

Modelling from BlackRock suggested a base case with a significant rise in emerging market low-carbon energy infrastructure investment, potentially tripling by 2040 and reaching $1.1tn annually by 2050.

“In our upside case, we find successful reforms could see low-carbon investment in emerging markets increase, on average, by an additional $200bn a year” between 2030-2050 – “or $4tn overall.”

“Conversely, a scenario of stagnant investment could see post-2030 investments drop by an average of $50bn yearly,” it said, “resulting in a total reduction of over $1tn.”

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