The Intergovernmental Panel on Climate Change (IPCC) Sixth Assessment Report emphasizes finance as a crucial enabler for climate action. However, access to finance is unevenly distributed, hindering mitigation and adaptation investments in developing countries. Renewable energy sources (RES) in these countries face high investment risks, resulting in high costs of capital (CoC). This disparity poses a significant challenge to mobilizing private funding for the energy transition in the developing world. This issue is central to policy relevance, financial fairness, and energy justice, particularly concerning equitable access to renewable energy for low-income populations. Public support, including low-cost finance and financial de-risking, is necessary to address this, especially given recent global interest rate hikes. Current IPCC-reviewed models often fail to adequately represent these CoC and de-risking policies, which are key for a just climate transition. This study addresses this gap by empirically estimating and incorporating real-world CoCs into five integrated assessment models (IAMs), improving their representation of investment conditions. Previous models assumed uniform CoCs across countries and technologies, introducing bias. RES deployment is influenced not only by physical factors and costs but also by varying investment risks across countries, technologies, and time. The capital intensity of RES makes them more susceptible to high financing costs than fossil fuel-based plants. This methodological improvement allows exploration of the effects of a stylized policy of international convergence to equitable finance for the energy transition.

This paper contributes to the literature on energy justice in modern energy access and cost-effective global mitigation investments, as well as the inclusion of realistic financial costs and barriers in energy and climate transition models. It builds upon previous research demonstrating the importance of modeling differentiated CoC values and the benefits of their exogenous reduction on transition costs and climate outcomes. This study extends the existing literature by providing evidence on the energy justice implications of a financial transition scenario.

This study leveraged an ensemble of five coupled climate-economy models (GCAM, IMACLIM, IMAGE, TIAM, and WITCH) under different climate policies. A multi-model approach reduces bias inherent in single-model frameworks. The models encompass various approaches, capturing a range of uncertainties. Empirical CoC values for electricity generation technologies were derived using two main approaches: for fossil fuels and hydro, CoCs were derived from financing costs of major energy utilities; for non-hydro RES, costs of debt and equity were determined at country, sector, and technology levels. The CoC was deconstructed into components (country risk, technology risk) to impute costs where data were unavailable. The developed world exhibited the lowest CoC values, with industrialized Asian countries having lower CoCs than other high-CoC countries, which were the study's focus. Countries were aggregated into three macro-regions based on CoC. The models were recalibrated using region- and technology-specific CoC values and a time dimension through financing experience curves, representing the learning process of finance providers. In models with endogenous learning, the CoC reduces with technology uptake. The main scenario of interest, the 'CoC-convergence' scenario, assumed the CoC for energy generation in developing countries converges to that of developed countries by 2050, affecting only the country risk component. The impact was evaluated under two climate policies: a nationally determined contributions (NDC) scenario and a 1.5°C warming scenario. Additional scenarios, including risk spillover between countries, were included for robustness. The CoC was calculated using a weighted average cost of capital (WACC) formula, incorporating the cost of debt and equity, weighted by the leverage ratio and tax rate. For renewable energy, the cost of debt and equity was estimated by adding components reflecting the global risk-free rate, country risk, technology risk, and equity market risk premiums. For utilities, WACC was derived from balance sheet data.

The study found that financing costs are key determinants of the effectiveness and fairness of the climate transition. International convergence in the CoC substantially reduces emissions and fosters access to affordable energy in developing countries, significantly contributing to a just transition. The main effect of CoC convergence is making renewable energy cheaper than fossil fuels, leading to increased renewable energy generation and reduced electricity prices in high-CoC countries. Figure 1 shows the projected CoC for technologies and scenarios, the percentage difference in electricity prices between the CoC-reference and CoC-convergence scenarios, the difference in electricity generation, and additional electricity generated by energy source in high-CoC countries. In the NDC scenario, fossil fuel generation decreased while renewable generation increased. In the 1.5°C scenario, renewable generation growth was maintained, but fossil fuels were excluded due to high carbon pricing. CoC convergence leads to lower emissions, particularly in developing countries, primarily due to the higher cost-efficiency of renewables. Figure 2 illustrates the percentage difference in carbon intensity and policy costs between scenarios. In the NDC scenario, CoC convergence reduces carbon intensity, while in the 1.5°C scenario, it lowers policy costs. CoC convergence lowers energy expenditures in developing countries, improving energy justice by decreasing inequality in energy access and expenditure. Figure 3 shows the percentage change in energy expenditure as a proportion of GDP, the percentage difference in the 80:20 ratio of per capita renewable electricity generation, and Lorenz curves of renewable capacity, all demonstrating the equity benefits of CoC convergence. In the NDC scenario, the renewable electricity gap is filled on average by 30% and the fossil fuel phase-out gap is filled by 10% by 2050. In total, convergence lowers energy spending by 5% in Africa and Latin America and by 2.5% in India+

The results demonstrate that international convergence in the CoC for energy financing is a significant solution for enabling the greening of the energy system and enhancing the justice of the transition. The study's primary contribution is exploring the effects of a policy creating a level playing field in terms of country risk premia. This policy is justified on both justice and efficiency grounds; efficient global renewable energy plans should prioritize regions with the highest potential, while a just system should fairly distribute both benefits and costs. Fair finance should flow from developed to developing countries, even if country-level risks are barriers, because modern energy access is crucial for sustainable development. Policies promoting CoC convergence offer a triple dividend: increased energy access, enhanced social and economic benefits, and advancement of climate goals. The challenge of achieving CoC convergence requires addressing factors such as institutional quality, macroeconomic stability, and financial sector maturity, while also leveraging policy levers such as energy system support policies, auctions with multilateral guarantee mechanisms, and the role of multilateral development banks.

This study unequivocally shows that international CoC convergence in energy financing is crucial for greening energy systems and ensuring a just transition. The simulated policy creating a level playing field in country risk premia yields significant benefits. The results justify policymaker investigation into tools to achieve CoC convergence. Methodologically, this approach can be adopted by models evaluating national and international climate policies to better represent financial dynamics.

The study's limitations include the absence of potential risk spillovers to the CoC of the Global North, although a sensitivity analysis was conducted. The focus on the power sector limits the scope, and future research should consider financing for infrastructure such as grid transmission, energy storage, and hydrogen. The simplifying assumptions inherent in coupled energy-economy-climate models, such as technology cost development constraints, the granular representation of storage technologies, and the treatment of variable renewable energy, are noted. The lack of explicit focus on financing enabling infrastructure is also a limitation. While this study's general policy approach is useful, future research will need a more detailed, case-by-case analysis of policies focused on access to and deployment of energy finance.