As well as examining the cost of transition for all emerging markets our research examines the individual cost and impact for eight focus markets: China, India, Indonesia, Nigeria, South Africa, Malaysia, Kenya and the UAE.17
These markets will have very different journeys to net zero, but they all face a significant transition finance shortfall ranging from USD35.1 trillion for China to a USD300 billion for Nigeria.
17 For the purposes of this study, we have used the UNFCCC’s division of emerging markets and developed markets (referred to as ‘annex 1’ and ‘non-annex 1’ countries).
When it comes to climate policy and a net-zero transition, China occupies a unique space. It is the world’s highest emitter, but it is also a leader in renewable energy. China will aim to hit peak emissions before 2030 and for carbon neutrality by 2060, and the government has published detailed plans for curbing emissions. The US-China Joint Glasgow Declaration on Enhancing Climate Action in the 2020s restated both countries’ commitment to the aims of the Paris Agreement and stressed the importance of developed markets meeting their promise to provide USD100 billion climate finance per year to emerging markets. China is also making sizable green energy investments in other markets as part of the Belt and Road Initiative.
Our study estimates that China needs an additional USD35.1 trillion in transition finance to reach net zero by 2060. This accounts for over a third of the total transition finance gap for all emerging markets.
But should China be counted as an emerging market? The United Nations Framework Convention on Climate Change (UNFCCC) puts China in this category, so we have considered China a recipient rather than a provider of finance for the purposes of our study. But the reality is more complicated.
With healthy economic growth and a sophisticated financial market, China is arguably in a strong position to finance its own transition.
Unlike other emerging markets, China could find much of its net-zero investment domestically, supplemented by foreign direct investment on commercial terms. This could reduce the total amount of finance that the developed world needs to provide for emerging market transition from USD94.8 trillion to USD59.7 trillion, reducing the proportion of developed market GDP needed to fill the gap from 2.7 to 1.7 per cent.
But this could also be taken a step further, with China put on the other side of the equation. If China is considered a provider of finance, markets financing the transition would need to spend 1.4 per cent of their GDP on financing emerging market transition.
The role of China, therefore, has a huge impact on the journey to net zero. Reconsidering China’s position could substantially reduce the cost for the developed world and make net-zero goals feel much more achievable.
COP26 – short-hand for the 26th Conference of the Parties – was held in Glasgow between the 31st of October and the 12th of November 2021. COP meetings are attended by countries that signed the United Nations Framework Convention on Climate Change (UNFCCC) – a treaty agreed in 1994. Before the conference, 200 markets were asked for their plans to cut emissions by 2030. Under climate plans presented ahead of Glasgow, analysis showed that emissions in 2030 could put the world on track for 2.4⁰C of warming.
During the meeting, leaders revisited climate pledges made under the 2015 Paris Agreement, the global agreement to tackle climate change, which aimed to limit the global temperature increase in this century to 2⁰C while pursuing efforts to limit the increase even further to 1.5⁰C.
The key outcome of COP26 – the Glasgow Climate Pact – sets a challenge for nations to return in 2022 with improved 2030 targets in line with the Paris Agreement’s central goal to limit global warming. However, it also notes with ‘deep regret’ the failure of developed markets to so far meet the target to mobilise USD100 billion a year in climate finance and commits nations to deliver on their promises every year through to 2025.
Each of our focus markets have different emissions reductions pathways and different paces of transition. Yet for each market, a self-financing model would have a negative impact on household consumption.
The UAE is heavily reliant on fossil-fuel exports but has set a target of 2050 for carbon neutrality, becoming the first Middle Eastern and Gulf state to do so. During the UAE’s national address at COP26 in Glasgow, Dr Sultan Al Jaber, Minister of Industry and Advanced Technology and Special Envoy for Climate Change, called for “partnership and cooperation to find sustainable solutions, while creating incentives for economic growth.”
Nigeria – Africa’s largest oil producer – has committed to achieving net-zero carbon emissions by 2060. However, President Muhammadu Buhari has underlined the importance of gas as a transition fuel and called for financial assistance for Nigeria to achieve the target. Like the UAE, Nigeria needs to quickly transition to avoid becoming stranded as the world moves away from oil. At COP26, the president urged international leaders to help fund renewable energy and gas projects in Africa.
Kenya has been ahead of other countries in Africa with green finance initiatives and renewable technology. Renewable energy currently accounts for almost three-quarters of Kenya’s installed power generation capacity, and President Uhuru Kenyatta told the international community at COP26 that Kenya is on-course to achieve full transition to clean energy by 2030. But the Kenyan leader also called on the international community to invest more in research, innovation and technology transfer, and the use of public private partnerships in financing clean energy solutions.
South Africa is heavily reliant on coal for power generation and also exports coal. It is aiming to shift its economy away from heavy industry to the service industry as part of its net-zero transition journey. But South Africa has been hit hard by COVID-19, with economic hardship triggering social unrest and increased distrust of globalisation. Under a deal announced at COP26, South Africa is set to receive USD8.5 billion from wealthier nations to help end its reliance on coal.
India is the world’s third-largest CO2 emitter in absolute terms, but its huge population means its emissions per capita are much lower than other major world economies. India has pledged to achieve net-zero carbon emissions by 2070, the most distant net-zero
*Please refer to the section on China for more information and additional data.
target of any G20 nation. It is still heavily dependent on coal and will need significant investment to increase renewable energy capacity and improve efficiency. India has underlined the importance of climate finance from the developed world for achieving its goals.
Indonesia and Malaysia will also need assistance from the developed world. Malaysia's prime minister Ismail Sabri Yaakob has announced a goal for the country to become carbon neutral "as early as 2050." The Indonesian government has set an ambitious target of reducing emissions by 41 per cent by 2030 if international funding is provided (conditional, against the 2030 business as usual), compared to 29 per cent without. Indonesia plans to reach net-zero emissions by 2060 at the latest but has struggled to prioritise net-zero transition in its quest for economic development. Indonesia has also criticised the terms of a recent global deal to end deforestation by 2030, suggesting that it is unfair.
When I think about climate change, I think first of the opportunity for emerging markets. Transition to net zero involves investment in people, infrastructure, digitalisation, economies and countries. It is inclusive, creating a world that involves smaller, emerging economies and SMEs. There are of course challenges, and if we aren’t careful people in emerging markets will be left behind. We all own climate change and must recognise that the transition to net zero is a global issue – and we will only succeed if we all work together. If we don’t, parts of the world will be left further behind and this would be a tragedy.
