Bridging the Gap How to Finance the Net Zero Transition 2025

Image credit style 2: Location or name hereFeed-in tariffs (FiTs) FiTs provide long-term payment guarantees to renewable energy producers, encouraging investment in clean energy technologies. FiTs guarantee a fixed, above-market price for electricity supplied to the grid over a specified period, offering investors stable returns and reducing investment risks, especially for renewable energy projects with high upfront costs. They have been globally implemented with demonstrable success, leading to substantial growth in renewable energy capacity, particularly in developed and large emerging economies. Germany, China and India are excellent examples of countries that have used FiTs to drive clean energy investment and technological innovation. However, implementing them in emerging markets that are prone to financial and regulatory constraints remains a challenge.126,127 Furthermore, integrating FiTs with existing policies and infrastructure requires robust institutional frameworks and technical expertise, which may be limited in some developing country contexts.128 Feebates Feebates impose fees on high-emission products and provide rebates for low-emission alternatives, thereby financially incentivizing sustainable choices by consumers. Such choices constitute a signal to producers to invest in low-emission outputs, so feebates stimulate innovation by incentivizing the development and adoption of low-emission products. They can be designed to be revenue- neutral by using collected fees and taxes on emission-intensive products to fund the rebates on low-emission alternatives. The flexibility and adaptability of feebates imply that the mechanisms can be tailored to various sectors, including the following: –Automobile industry: higher registration fees on high-emission vehicles; rebates for low-emission or electric vehicles. –Energy efficiency: higher rates for inefficient appliances; rebates for energy-efficient appliances. –Building codes: fees for non-compliant, energy- inefficient buildings; incentives for highly efficient buildings. –Agriculture: fees on high water-consuming irrigation systems; rebates for the deployment of water-saving technologies. –Waste management: fees on excess waste generation; rebates for recycling and composting initiatives. These examples illustrate the versatility and effectiveness of feebates across various sectors in promoting sustainable practices. By making environmentally friendly choices more economically attractive, consumers are more likely to choose low-emission vehicles, energy-efficient appliances and sustainable building practices. This shift in consumer behaviour not only reduces environmental impact but also encourages manufacturers and service providers to innovate and offer more sustainable options, further reinforcing the cycle of sustainable development.129 Insurance and risk-sharing Lastly, insurance and risk-sharing mechanisms mitigate financial risks associated with climate- related investments, making it easier for private investors to support sustainable projects. The inability to mitigate investment risks is a significant barrier to investments in climate projects and instruments that reduce perceived risks in such projects are therefore crucial in enhancing their viability and attractiveness to private investors.130 The provision of a safety net, which boosts private sector engagement and investor confidence, is particularly important for financing in high- risk markets and contexts, including emerging economies and innovative technologies.131 Examples of insurance and risk-sharing mechanisms include the following: –Political risk insurance –Credit guarantees –First-loss guarantees –Currency hedging –Revenue guarantees Each mechanism is often tailored to mitigate specific investment risks, such as political instability, borrower defaults, currency fluctuations or initial project losses. Multi-sovereign guarantees, which involve multiple countries backing a guarantee fund, are especially useful structures that can help achieve higher leverage ratios and attract more private capital by spreading risk across several sovereign entities.132,133,134 Bridging the Gap: How to Finance the Net-Zero Transition 21