banks to channel credit to strategic export industries at subsidised rates. Because the economies were export-oriented and earning revenues in US dollars, foreign investors also faced far less currency risk than they would lending to a domestically focused economy. Many of these coun- tries also pegged their currencies to the US dollar, further compressing borrow- ing costs. The result was a virtuous cycle: cheap capital enabled industrial growth, which generated export earnings, reduced risk and attracted more capital. THE CHALLENGE AHEAD Africa today lacks these advantages. Domestic savings rates are far lower. At the same time, a combination of energy security and energy transition concerns means that the continent’s required investments are in clean energy technol- ogies such as solar and wind, as well as grid investment in transmission and dis- tribution. These projects generate revenue in local currency, creating risk for foreign investors; unlike oil or mineral invest- ments, which trade globally in dollars, electricity cannot be exported to offset local currency exposure. Nonetheless, Africa’s demographics make it central to global growth, as well as to lifting millions out of poverty. The con- tinent’s population is projected to reach 2.5 billion by 2050, accounting for more than half of global population growth over the next quarter century. A more prosper- ous Africa would be the single largest new source of demand for goods and services in the world economy, just as a wealthier Asia was in the decades after the Cold War. The Songwe-Stern Independent High- Level Expert Group on Climate Finance estimates that developing countries need one trillion dollars a year in cross-border financing for the energy transition alone. This capital would be deployed in elec- tric vehicle factories and battery makers, in rural electrification and productive uses of energy, thereby powering agricul- “The G7 can address a key imbalance in developing economies as a powerful means of reducing global macroeconomic risk: tackling the high cost of capital in emerging markets”
ture, services, telecommunications and the other building blocks that turn a pop- ulation into participants in a prosperous economy. ARTICLE 6 AND CLIMATE FINANCE There is no silver bullet to drive down bor- rowing costs in developing countries. Foreign exchange risk is a key challenge. However, there are promising proposals from the Bridgetown Initiative, amongst others, to offer hedges on volatile local currencies. Reform of multilateral devel- opment banks could also unlock more capital. Another promising avenue comes from Article 6 of the Paris Agreement, which creates a framework for international carbon trading. Article 6 allows coun- tries and companies in the Global North to fund emissions reductions in the Global South and claim those reductions toward their own climate targets or, in certain cir- cumstances, to pay their carbon taxes. After nearly a decade of negotiation, the operational rules were finalised at COP29 in Baku. For wealthy countries strug- gling to meet ambitious climate pledges, Article 6 offers a significantly cheaper pathway than domestic decarbonisa- tion; it costs far less to abate a tonne of carbon in a developing country than at home. For developing countries, Article 6 can channel finance into projects that build productive capacity. Private sector firms are already using Article 6 to raise lower-cost capital for projects across the Global South, including in Africa. There are various options for the G7 to consider to lower the cost of capital for infrastructure in developing countries. Some, such as mitigating currency risk and reforming the Bretton Woods institu- tions, would take years; others are easier. Leaders at Évian should commit to using Article 6 credits towards their nation- ally determined contributions under the Paris Agreement, creating the demand signal that carbon markets need to scale. They should also consider allowing firms’ spending on credits to count for some carbon taxes, including the EU’s carbon border adjustment mechanism. Article 6, of course, will not close the global financing gap, but it does align the interests of developed countries’ cli- mate compliance with emerging markets' capital needs, and therefore offers a prac- tical starting point for leaders looking to act now rather than wait for institutional reform.
// ELY SANDLER Ely Sandler is a Managing
Partner at Article Six Group. He previously worked at Morgan Stanley across investment banking, capital markets and senior management, and also served as a senior consultant to the World Bank. In his private sector work, Ely has led infrastructure projects, working across the world in energy, agriculture and water technology. In his academic work, Ely is a Research Fellow at the Harvard Kennedy School, where he teaches the Master’s course Financing the Clean Energy Transition and leads research on energy policy and infrastructure finance.
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