Financing the Energy Transition: Lower capital costs matter

Following the efforts to phase out coal, many countries joined forces to pursue the more ambitious goal of ending dependence on fossil fuels. At the last Climate Summit, 82 countries endorsed such commitments—including many lower- and middle-income. In April, representatives of 57 of those countries met in Santa Marta, Colombia, to advance this process, while initiatives such as the Beyond Oil and Gas Alliance (BOGA), the Fossil Fuel Treaty Initiative, and the Coalition on Phasing Out Fossil Fuel Incentives Including Subsidies (COFFIS) continue to expand highlighting momentum for international cooperation on transition issues. 

This emerging coalition is notable both for its geographic diversity, bringing together countries from all continents, including both fossil fuel exporters and importers, but also for the scale of the challenge it has set itself. Fossil fuels are deeply embedded in their economies, shaping everything from transport and industry to plastics, agriculture, and food systems. Transitioning away from them therefore requires far more than an energy transition. It raises broader questions about investment and ultimately societal and economic transformation. How to mobilize this financing at a cost that can be sustained by domestic political constituencies and how to distribute its costs and benefits fairly, all topics that were at the centre of the debate in Santa Marta.

Fossil fuel dependence can thus become financially locked in, not because renewable alternatives are unavailable, but because international financial systems reward short-term extractive revenues over long-term sustainable development.

 

Progress Has Been Made—Yet severe structural obstacles remain

Over the past years, the global economy has entered a period of macroeconomic tightening. Rising global interest rates, slower growth, currency pressures, and heightened debt vulnerabilities have hit developing economies especially hard. Many countries are simultaneously dealing with post-pandemic fiscal stress, higher food and energy prices, and increasing costs of servicing external debt. Under these conditions, financing long-term green investments becomes extremely difficult.

At the same time, however, one of the most important technological developments of recent decades is a silver lining and makes room for ambitious forward-looking action: the dramatic decline in the cost of renewable energy technologies, especially solar panels and battery systems. Much of this cost reduction has been driven by Chinese industrial policy and manufacturing capacity. Chinese production has transformed solar energy from an expensive niche technology into one of the cheapest sources of electricity in most parts of the world.

This shift has enormous implications. Even without accounting for externalities such as air pollution and greenhouse emissions, renewable energy systems are increasingly economically viable even in many lower-income countries. Moreover, they offer an excellent alternative to provide electricity to parts of the population that have no grid connection and face energy poverty. 

In other words, the question is no longer whether countries can technically build and profitably operate a renewable energy-based system, but whether they can mobilize the capital necessary to do so at sufficient scale and speed. Building out these systems requires large-scale investment over several decades. It is, in many respects, a generational challenge. Historically, apart from mobilizing domestic savings, societies have relied on borrowing to finance such transformations. In that sense, debt is one of the key financial instruments that allows future benefits to be brought forward to finance investment today.

The challenge, however, is that not all countries can borrow on similar terms.

Why Debt and International Financial Structures Are Central

Sovereign debt is one of the available mechanisms for financing to facilitate such large-scale structural transformations. Yet, most lower- and middle-income countries face borrowing costs far above those of rich economies. While European governments may finance green investments at relatively moderate interest rates, many countries in Latin America, Asia and Africa often face high borrowing costs in international capital markets. This creates a deeply unequal global system. 

Countries that are often least responsible for historical emissions must pay the highest price to finance climate action.

The asymmetry becomes even sharper when climate ambition itself is interpreted as a fiscal or financial risk. Colombia offers a revealing example. When the government reaffirmed ambitious climate and net-zero commitments in early 2024, rating agencies raised concerns about fiscal implications and economic adjustment costs. This contributed to higher financing costs. In other words, countries attempting to pursue ambitious climate policies can effectively be punished by financial markets. 

This is especially the case in countries that produce and export fossil fuels like Colombia, since the fossil fuel sector provides fiscal revenues and export earnings, which financial markets still consider as positive for the fiscal sustainability and macroeconomic stability of a country. This is despite growing uncertainty regarding the long-term outlook for fossil fuel revenues as global demand is expected to decline. 

Such dynamics create problematic and vicious cycles. Governments facing high refinancing costs and debt distress, or countries with fiscal and export income from the fossil fuel sector, may delay or weaken climate action simply to maintain investor confidence. This in turn can worsen their financial position, creating exposure to volatile fossil fuel prices for importers and high exposure to declining revenue streams for exporters. 

Fossil fuel dependence can thus become financially locked in, not because renewable alternatives are unavailable, but because international financial systems reward short-term extractive revenues over long-term sustainable development. This is why climate policy cannot be separated from questions of sovereign debt and international financial reform.

A Path Forward

If the global community is serious about enabling an equitable energy transition, then coordinated international efforts will be required to reduce the cost of capital for lower- and middle-income countries. This includes expanding concessional finance, scaling up multilateral lending, deploying public guarantees and risk-sharing instruments, creating new finance solutions for green investments, and strengthening coordination through alliances such as BOGA and COFFIS. These initiatives can play an important role not only in climate diplomacy, but also in mobilizing finance, coordinating policy frameworks, and strengthening political support for transition strategies.

At the same time, some of the countries most vulnerable to climate change are also among the poorest and most heavily indebted. For this relatively small group of highly vulnerable countries, lower borrowing costs alone will not be sufficient. Meaningful debt relief is needed to reduce debt service burdens and restore fiscal space for development and climate change adaptation. Such relief should be justified on debt sustainability and development grounds within existing international frameworks, rather than being made conditional on climate or green policy commitments.

This article was originally published on June 22, 2026, in Surplus. Reprinted in English with permission from Surplus.