Financing High-Carbon Infrastructure in the Developing World

The carbon intensity of energy infrastructure in emerging markets and developing economies (EMDEs) is shaping the climate. To limit global temperature rise to 1.5 degrees Celsius from pre-industrial levels (the level scientists have identified as important), annual investment in renewable-energy infrastructure must more than triple from current levels. With more than 75 percent of global infrastructure yet to be built, the world needs to finance and build the next generation of low-carbon energy infrastructure. 

Financing High-Carbon Infrastructure in the Developing World 5
Angela Ortega Pastor (MA ‘21)

Financial institutions and countries alike have, this year, accelerated their climate pledges, notably their promises to achieve “net-zero” emissions by mid-century. But even with these pledges, current policies are projected to result in about 2.7 degrees of warming above pre-industrial levels. ​​Financing to meet escalating energy-infrastructure needs in EMDEs is short by many trillions, with developing economies receiving only one-fifth of global investment in clean energy despite accounting for two-thirds of the world’s population. 

In a peer-reviewed article we and Stanford colleagues published in November—the result of months of analysis as part of the policy practicum Stanford Climate of Infrastructure Project—we find that more than half of the new electricity generation financed in EMDEs from 2018 through 2020 is so carbon-intensive that it is not aligned, or consistent, with the goal of limiting global warming to 1.5 degrees.

Financial institutions, in the money they provide, are facilitating these too-carbon-intensive projects. How these institutions allocate and underwrite capital can make or break energy-transition efforts in a region. Thus, financial institutions must be held accountable for the carbon impacts of their investment decisions. 

Our analysis tracks financing instruments for every EMDE power plant included in two data sources assembled by the World Bank. We refined and expanded the World Bank data; our resulting database includes information about the institutions providing financing, the nature of their investments, and where they put that money. We then applied certain methodologies to impute each project’s likely carbon-emission trajectory. 

Financing High-Carbon Infrastructure in the Developing World 6
David Liou, JD/MBA ’23

We published our research in the journal iScience in a peer-reviewed article, “Hot Money: Illuminating the Financing of High-Carbon Infrastructure in the Developing World.” We conducted our research as part of the Stanford Law School Law and Policy Lab. Jeffrey Ball, scholar-in-residence at the Steyer-Taylor Center for Energy Policy and Finance, a joint initiative of Stanford’s law and business schools, led the work. 

By assessing the carbon intensity of each power plant—and thus of different financiers’ portfolios of power plants—our study illuminates which players and host countries are promoting low-carbon infrastructure and which ones are opting for high-carbon projects.

One of our key findings is that ending financing for new coal-fired power plants, though it would be a monumental achievement, would not itself be sufficient to achieve global climate goals. The problem, we conclude, is a dramatic increase in natural-gas-fired power plants.

Our data indicates that natural-gas-fired plants financed between 2018 and 2020 in EMDEs will account for 44 percent of projected emissions from all of the power plants financed during this period. And fully 80 percent of those new natural-gas-fired plants, we find, are misaligned with global climate targets. Indeed, if those natural-gas plants are not fitted with technology to capture and dispose of their carbon emissions—and the vast majority of them are not expected to be—they will, we estimate, emit annually almost as much CO2 as all the coal plants that were financed in the same period. 

Another important finding from our research is that much of the money financing climate-misaligned infrastructure is not foreign—the focus of much previous scholarship—but domestic. In other words, institutions within EMDE countries are, through their own decisions, shaping their countries’ carbon trajectories. This finding allows policymakers and regulators in these host countries to identify new and crucial levers to direct future infrastructure investment in EMDEs toward a lower-carbon path.

In addition, we highlight the influence that multilateral financiers wield beyond just the number of dollars they invest. The Asian Development Bank and the Japan Bank for International Cooperation, for example, commonly act as “keystone financiers”—anchor investors that also bring in numerous smaller banks to invest together in high-carbon infrastructure deals. These institutions’ decisions to finance high- or low-carbon infrastructure often de-risk and catalyze similar decisions by other institutions. As these keystone financial institutions work to implement their climate strategies and live up to their climate pledges, host countries would do well to focus on them as key levers in the bid to decarbonize infrastructure finance.

This peer-reviewed article caps just the first phase of the Stanford Climate of Infrastructure Project. The lab will continue, through additional work with additional Stanford students, to illuminate the drivers of the financing of high-carbon infrastructure in the places where significant infrastructure is being built: emerging and developing economies. The project’s goal is increased transparency of financial flows and, as a result, increased accountability for financiers. Infrastructure finance is a critical mechanism to decarbonize the developing world—and, in so doing, to keep global climate targets in sightSL

Angela Ortega Pastor (@angortegap), MA ’21, worked for the International Energy Agency before studying international finance at Stanford. She now works in climate finance. David Liou is a JD/MBA candidate who previously worked in project finance and corporate strategy.