Trend 9: The race to green growth

The Inflation Reduction Act (IRA) in the US provides the most comprehensive package to date to support clean energy projects through a series of tax incentives, grants and low interest loans and created international interest for investments.²² And it forced governments and investors around the world to sit up and take notice.

With some US$783 billion in funding and incentives on offer, the IRA is clearly a powerful tool.²³ Nearly US$350 billion in clean energy investments were announced in the year after the IRA was passed.²⁴ A different report suggests that more than US$70 billion flowed into the US battery sector during the same period.²⁵

Few other markets have the budget elasticity to compete. The EU’s Green Deal has similar objectives²⁶, but the quantum of money on the table is lower and the process for securing it is more complicated.

Yet the reality is that private investors tend to allocate their capital globally, meaning there is still a lot of capital looking for bankable projects in emerging and developed markets outside of the US. There are also arguments to be made that the US’s massive flood of investment into clean energies will effectively help reduce the cost of these technologies for future adopters.

While most governments will not be able to compete with the firepower of the IRA, there is still much they can do to improve investment flows into their own green energy and resilience markets.

For one, governments could be focusing on improving deal preparation, project pipelines and regulatory regimes. They could be helping to cut red tape for renewables developments. They could be reinforcing project and contract certainty through clear policymaking. Rather than competing on incentives, they should be competing on governance. The reality is that investment and incentive programs invariably end, whereas improvements in capacity, capability and governance are much easier to sustain and grow.

There will also likely be some assistance coming. The Loss and Damage Fund formalized at COP28 – along with a number of other big transition capital funds announced recently — will help channel capital towards the markets that need it most. Used as part of a blended finance structure (see Trend 3 for more on this), it could rapidly mobilize global capital into green developing market projects.²⁷

Given the current geopolitical environment, it is likely that some countries gravitate towards protectionism, particularly as disparities grow larger and the impacts of the climate crisis become more damaging. Eventually, however, policymakers and leaders should realize that equitable green growth — evenly dispersed — is the solution to a wide range of problems. But it requires collaboration not competition.