A global campaign to tame inflation is hurting the fight against climate change by steering developing countries away from renewable energy, raising anxieties among the officials gathered at the United Nations climate summit in Dubai.
Those officials say they support efforts by central bankers to bring down rising prices by raising interest rates.
But in interviews in recent days, they worried about the unintended pain those efforts are inflicting on poor countries that are most vulnerable to climate change and face critical choices about what sort of energy systems they will invest in.
Wealthy nations and international agencies must find more creative ways to steer money to countries in Africa, Asia and beyond that are struggling with high interest rates, officials say. Otherwise, the world could miss an opportunity to hold down future greenhouse gas emissions as millions of people in those countries rise out of poverty and consume more power.
“It is a very tough time for many countries,” Kristalina Georgieva, an economist and managing director of the International Monetary Fund, said in an interview on Monday. “This is why international support is absolutely paramount. Helping them to stay ahead is in the interests of the countries but also in our interests, everybody’s interests. Because where are our emissions growing? These countries.”
Central banks around the world, including the U.S. Federal Reserve, have raised interest rates quickly and steeply in an effort to combat what was the sharpest spike in price growth worldwide in nearly 30 years. Inflation has cooled this year, but rates are expected to remain elevated for years to come.
When borrowing costs soar, renewable energy projects tend to get hit harder than fossil fuel projects. That’s partly because most of the cost of a wind or solar farm is in the upfront investment, whereas a large portion of the spending in a coal- or gas-fired power plant is in fuel costs, which are spread over time.
High interest rates are also straining government budgets in developing nations in Africa, Asia and beyond, while pushing down the value of their currencies.
Those challenges come as developing nations need to spend hundreds of billions of dollars to adapt to warming temperatures while they are expanding energy production in an effort to raise living standards.
That combination has alarmed political, economic and nonprofit leaders who are gathered at the United Nations climate summit, known as COP28, in Dubai, United Arab Emirates.
“The big issue right now is that developing countries are facing crises that they have no control over,” said William Asiko, the vice president for Africa at the Rockefeller Foundation. The effect of those crises, he said, is that “it’s easier to invest in fossil fuels today.”
If interest rates were to rise to 7 percent from 3 percent, the cost of a new gas plant would rise only marginally, one recent analysis found. But the cost of a new offshore wind farm or new solar farm would rise by roughly one-third.
Many renewable developers also sign long-term contracts to sell electricity at a set price before beginning construction, making them particularly vulnerable to rising interest rates and inflation.
Higher rates have already driven up costs for clean-energy projects all around the world, the International Energy Agency said recently. That includes offshore wind farms, new nuclear plants and efforts to upgrade electric grids. They have also made it more expensive for homeowners to borrow money to buy heat pumps and for electric-vehicle shoppers to afford auto loans.
The S&P Global Clean Energy Index, which includes stocks from many of the world’s largest renewable energy companies, has declined 28 percent since January. In the United States, higher rates have been blamed, in part, for a scuttled nuclear project in Idaho and projections that the nation’s residential solar market could shrink in 2024, the first time that has happened in years.
Orsted, a Danish company, recently canceled plans for two huge offshore wind farms off the coast of New Jersey. The company blamed supply chain delays, but it also said that high inflation and rising interest rates meant that the projects no longer looked as profitable as they did a few years ago.
“The world has, in many ways, from a macroeconomic and industry point of view, turned upside down,” Mads Nipper, Orsted’s chief executive, said in November.
Many officials and analysts say they remain confident that high rates won’t stop the growth of renewable energy in the long term. Even with the recent uptick in costs, solar and wind power remain competitive with fossil fuels after more than a decade of sharp price declines.
Forecasters still expect renewable energy to overtake coal as the world’s largest source of electricity by the end of the decade. And places like Europe are still eager to shift away from Russian gas and other fossil fuels, if only to lessen their vulnerability to sudden price spikes.
But higher rates are hitting renewables particularly hard in the developing world, with potentially long-lasting consequences for the climate.
In many parts of sub-Saharan Africa, Latin America and Southeast Asia, the cost of capital for a typical utility-scale solar project can be two to three times as high as it is in the United States or China, according to data from the United Nations. Lenders often demand a premium for what they see as riskier investments.
Higher global interest rates compound that risk problem.
“It’s making a lot of renewable energy projects less bankable and have lower return on investment, and therefore less investment appetite from investors, because they know that the return on investment is shrinking,” said Jessica Obeid, head of energy transition at SRMG Think Research and Advisory, a consulting firm that issued a study on Monday at COP28 detailing the challenges of financing climate spending in the Middle East.
When central banks in wealthy nations, like the Federal Reserve, raise rates, one side effect is that investment dollars are pulled out of developing countries. High rates make it more attractive to invest in things with low perceived risk, like U.S. Treasury bonds. That outward flow of investment has the effect of making a poor nation’s currency less valuable.
At the summit in Dubai, many leaders are hoping delegates will adopt a goal of tripling the amount of renewable power such as wind and solar installed around the world by 2030. But the surge in financing costs makes that goal tougher to achieve, said Sumant Sinha, chief executive of ReNew Energy, the largest renewable energy developer in India.
“The need for renewable energy is going up, the targets are going up, but the ability to deliver is going down,” Mr. Sinha said.
Officials from the I.M.F., other development agencies and some wealthy nations have announced a variety of new efforts in recent days to help speed the flow of investment dollars to renewables in Africa and other nations.
The World Trade Organization has pushed for corporate and government leaders to do more to finish unclogging the supply chains that were a major source of pandemic inflation that spurred the rate-raising cycle in the first place.
In an interview on Monday, the organization’s director, Ngozi Okonjo-Iweala, said that continued progress on supply chains would relieve pressure on central banks and help to eventually bring down rates, easing the strains on renewables in Africa and elsewhere.
“Interest rates are high but ultimately, as an economist, I think we have to bear with that for a little while longer to see inflation come down,” she said. “You need central banks to do the initial job. Then you need trade to keep it where it is affordable for everybody, inflation down. So, they go hand in hand.”