It’s 2024, yet the global climate finance state remains underfunded compared to the growing scale of climate needs. At the UN Conference of the Parties (COP) in 2009, Global North countries (the Global North) committed to mobilizing $100 billion USD per year by 2020 to support developing nations (the Global South).[i] Though the Global North eventually met this pledge in 2022 (2 years late), this figure pales in comparison to the newly estimated $2.4 trillion USD needed annually between 2026 and 2030 to sufficiently address climate goals.[ii]
To meet our aggressive climate targets and combat climate change, the Global North must adopt a financing strategy that genuinely aligns with the Global South’s needs, which are rooted in economic growth and prosperity. This approach must be reflected during COP29, where nations are set to discuss issues related to the New Collective Quantified Goal (NCQG),[iii] including forging better knowledge-sharing relationships and making smart investments that bolster economic development and climate resilience.
State of the New World Economy
Let’s first study the state of affairs in the current new world economy, a recent landscape change towards geopolitical, climate, and technology-linked fragmentation, to better understand the landscape behind climate financing.
Countries in the Global South, particularly those with a fresh and newly appointed leadership cadre, are striving to balance rapid development with sustainable practices to foster domestic resilience. Indonesia, for instance, under the newly elected President Prabowo Subianto, has set a bold annual real 8% GDP growth target.[iv] In the meantime, Global South countries are having trouble with debt burdens that complicate climate finance flows. A 2023 report estimates that some members of the Global South spend more on debt servicing than they do on healthcare,[v] limiting their capacity to prioritize climate initiatives amidst other national priorities.
Global North countries like the United States and members of the EU are currently focused on safeguarding their economic positions amidst intense global competition and evolving environmental policies. In the United States, economic rivalry with China remains a top priority as China’s surplus manufacturing capacity shifts production to nations in the Global South, which poses both economic challenges and opportunities for these nations.[vi] The EU remains adamant about the implementation of the Carbon Border Adjustment Mechanism, which could increasingly disrupt the flow of trade starting in 2026 if fully implemented.[vii]
The Reality of Climate Finance Today
Amid this challenging macroeconomic backdrop, the Global North needs to reform its current climate financing schemes.
For instance, a significant portion of financing from the Global North comes in the form of market-rate loans[viii], rather than concessional loans or grants that would actually mobilize climate investments.[ix] Take the case of Indonesia: in the proudly announced $20 billion Just Energy Transition Partnership (JETP), concessional loans or grants make up less than half of the total financing.[x] Aside from the complex administrative process of JETP (both locally in Indonesia and in each of the donor countries), the lack of concessional loans or grants in the financing mix has been a stumbling block in the country’s energy transition.[xi]
However, considering our new world economy model, it is worth taking a step back. Is money alone the magic fix for the climate challenges faced by Global South countries?
Balancing Growth, Prosperity, and Green Goals
The Global South countries are in a tough spot: they need to grow their economies and tackle poverty, among other big issues. Southeast Asia, for instance, is forecasted to more than quadruple its economy by 2040.[xii] However, most of these countries also expected to hit net-zero emissions in 2050 or 2060,[xiii] and the capital needed for this massive climate shift could eat into funds for other critical areas. For many countries in the Global South, climate goals might feel like a heavy financial burden rather than an investment in the future.
For Indonesia to hit their net-zero emissions goal by 2060, they need to carve out more than $1 trillion USD.[xiv] This massive sum covers everything from updating power networks to ramping up renewable energy, plus starting policies like electric vehicle subsidies. That breaks down to needing tens of billions of dollars each year. It is a huge undertaking with a hefty price tag.
Troublingly, the tens of billions per year in investment could jeopardize the Indonesian government’s fiscal condition. If approximately 25% of the annual investment in climate mitigation and adaptation is made by the Indonesian government (with the rest being private spending), our internal calculation suggests that these net-zero investments would increase Indonesia’s deficit by a staggering ~0.7% and its debt-to-GDP ratio by ~5%. It’s no wonder many Global South countries see climate as a tough financial burden.
The Green Growth Pathway
For the Global North aiming to drive global climate change mitigation, financial support alone is insufficient. Beyond capital, it is essential to pair investments with expertise, technology, and customized “know-how” that aligns both with each Global South country’s decarbonization needs and economic development goals. The true catalyst for green transformation in the Global South lies in knowledge transfer—empowering these nations to become green industry powerhouses[xv]. By turning climate challenges into economic opportunities, this approach can enable Global South countries to commit towards a more concrete and effective green transition.
For the Global South, clean energy transition is a critical pathway that goes beyond mitigating climate. With a $3 trillion USD annual investment opportunity, the clean energy transition is the century’s greatest economic opportunity since the industrial revolution[xvi][xvii]. Countries that move quickly into sustainable energy can gain a competitive edge, tapping into new growth sectors that drive job creation, innovation, and long-term resilience. The combination of technology and finance collaboration allows Global South countries to maximize resources without harming the country’s fiscal, state-owned enterprise, and local budget health.
For example, Indonesia is sitting on a goldmine of critical minerals like nickel, uniquely positioning it to lead in the development of green technologies such as electric vehicles (EV) and solar panels[xviii]. The game plan, focused on the economy and green growth, is clear: invest across the entire production chain—from mining these valuable minerals to manufacturing batteries and fostering green innovation. Indonesia’s Morowali Industrial Park in Central Sulawesi, where nickel processing has transformed the region into a powerhouse for the EV battery supply chain, is both a good start and benchmark. This initiative may contribute to Central Sulawesi’s regional GDP growth as much as ~1.5x, showcasing the immense economic potential of the multiplier effect of green industry hubs[xix].
In the future, Indonesia could also develop a local solar panel manufacturing industry to reduce the country’s heavy reliance on fossil fuel subsidy.[xx] Blessed with abundant solar irradiation, Indonesia has substantial solar energy potential but faces solar panel import dependencies due to a lack of local manufacturing capabilities.[xxi] Transferring expertise on solar panel production—including advanced manufacturing technologies—could empower Indonesian companies to produce solar panels domestically, reduce costs, create high-quality jobs, and build self-reliance in the energy sector.
In addition, there’s big potential in focusing on new fuels, including leveraging the abundant palm oil industries to increase the production of bioenergy.[xxii] Investments in biorefineries could help Indonesia transition from fossil fuels faster and offer international markets a supply of an alternative clean bio-energy source.
Once the “know-how” has been developed, Global South countries can also tap into other high-growth industries that leverages similar capabilities. According to Harvard Growth Lab’s Atlas of Economic Complexity,[xxiii] Indonesia could also capture opportunities in the semiconductor industry, which is a vital building block for a decarbonized and digital economy. Like Malaysia,[xxiv] Indonesia can start by developing the assembly and testing part of the semiconductor value chain, drawing on its competitive labor force and strong manufacturing base.
Conclusion
Global South countries have the potential to grow as decarbonized nations, achieving their desire to become developed economies while mitigating climate change in the process. The Global North needs to focus not just on climate funding, but also on forging deep, knowledge-based partnerships that enable the Global South to capture real, sustainable growth opportunities in line with their economic agendas.
The key lies in a collaborative, rather than prescriptive, approach that prioritizes pragmatic, development-linked solutions, where climate actions in the Global South align closely with each country’s broader development agenda, rather than rhetoric and politically linked conditional assistance.
[i] “Climate Finance and the USD 100 Billion Goal,” OECD, accessed April 11, 2024, https://www.oecd.org/climate-change/finance-usd-100-billion-goal/.
[ii] “Climate Finance Provided and Mobilised by Developed Countries in 2013-2021,” OECD, November 16, 2023, https://www.oecd.org/en/publications/climate-finance-provided-and-mobilised-by-developed-countries-in-2013-2021_e20d2bc7-en.html.
[iii] “New Collective Quantified Goal on Climate Finance,” UNFCCC, accessed October 28, 2024, https://unfccc.int/NCQG#Stock-takes-and-guidance-by-the-CMA-.
[iv] “Prabowo’s 8% Growth Gamble: Reform or Bureaucratic Bloat? – The Diplomat,” accessed November 5, 2024, https://thediplomat.com/2024/10/prabowos-8-growth-gamble-reform-or-bureaucratic-bloat/.
[v] “To Tackle Climate Change, the Cycle of Crisis, Debt, and Underinvestment in the Global South Must End,” Center for American Progress (blog), June 5, 2023, https://www.americanprogress.org/article/to-tackle-climate-change-the-cycle-of-crisis-debt-and-underinvestment-in-the-global-south-must-end/.
[vi] “Chinese Companies Are Moving Supply Chains out of China to Manage Risks, with India, Malaysia and Indonesia Benefiting | South China Morning Post,” accessed November 5, 2024, https://www.scmp.com/news/asia/south-asia/article/3218025/chinese-companies-are-moving-supply-chains-out-china-manage-risks-india-malaysia-and-indonesia.
[vii] “Carbon Border Adjustment Mechanism – European Commission,” accessed October 28, 2024, https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en.
[viii] “COP26: Delivering on $100 billion climate finance”, House of Commons Library, November 3, 2021, https://commonslibrary.parliament.uk/cop26-delivering-on-100-billion-climate-finance/
[ix] “What You Need to Know About Concessional Finance for Climate Action,” World Bank, accessed October 28, 2024, https://www.worldbank.org/en/news/feature/2021/09/16/what-you-need-to-know-about-concessional-finance-for-climate-action
[x] “CIPP,” JETP Indonesia, accessed December 15, 2023, https://jetp-id.org/cipp.
[xi] Eco-Business, “Financing Indonesia’s Energy Transition Can Happen beyond Sluggish JETP Deals – Here’s How,” Eco-Business, October 1, 2024, https://www.eco-business.com/news/financing-indonesias-energy-transition-can-happen-beyond-sluggish-jetp-deals-heres-how/.
[xii] Rajiv Biswas, “The ascent of APAC in the global economy,” S&P Global, accessed October 28, 2024, https://www.spglobal.com/market-intelligence/en/news-insights/research/ascent-of-apac-in-the-global-economy
[xiii] “Executive Summary – Southeast Asia Energy Outlook 2024 – Analysis – IEA,” accessed November 5, 2024, https://www.iea.org/reports/southeast-asia-energy-outlook-2024/executive-summary.
[xiv] “Jokowi: US$1 Trillion of Investment Needed to Reach NZE Target by 2060 – News En.Tempo.Co,” accessed March 1, 2024, https://en.tempo.co/read/1804768/jokowi-us1-trillion-of-investment-needed-to-reach-nze-target-by-2060.
[xv] Grace J. Kim Spring 2024, “Powering the Energy Transition,” accessed November 5, 2024, https://www.hks.harvard.edu/faculty-research/policy-topics/environment-energy/powering-energy-transition.
[xvi] “The Energy Transition Could Shift the Global Power Centre. This Expert Explains Why,” World Economic Forum, June 4, 2024, https://www.weforum.org/stories/2024/06/energy-transition-minerals-global-power/.
[xvii] “Janet Yellen Says Lowering Carbon Emissions Is ‘greatest Economic Opportunity’ | Fortune,” accessed November 8, 2024, https://fortune.com/2024/07/27/janet-yellen-lowering-carbon-emissions-climate-change-greatest-economic-opportunity/.
[xviii] “Indonesia Critical Minerals,” International Trade Administration, September 27, 2023, https://www.trade.gov/market-intelligence/indonesia-critical-minerals.
[xix] “Rise of IMIP: The Metamorphosis of Morowali’s Forests into an Industrial Hub,” Jakarta Globe, accessed November 5, 2024, https://jakartaglobe.id/business/rise-of-imip-the-metamorphosis-of-morowalis-forests-into-an-industrial-hub.
[xx] Galen Erickson, “Indonesia’s Fossil Fuel Subsidies Threaten Its Energy Transition,” The Diplomat, accessed October 28, 2024, https://thediplomat.com/2024/02/indonesias-fossil-fuel-subsidies-threaten-its-energy-transition/.
[xxi] Denny Gunawan et al., “Seizing the Opportunity for Solar Panel Manufacturing – Academia,” The Jakarta Post, accessed October 28, 2024, https://www.thejakartapost.com/opinion/2024/04/24/seizing-the-opportunity-for-solar-panel-manufacturing.html.
[xxii] “Bioenergy: The Future Energy for Indonesia,” APROBI (blog), May 7, 2021, https://www.aprobi.or.id/id/bioenergy-the-future-energy-for-indonesia-2/.
[xxiii] “The Atlas of Economic Complexity,” Harvard Growth Lab, accessed November 15, 2023, https://atlas.cid.harvard.edu/.
[xxiv] “Malaysia Is Emerging as a New Semiconductor Powerhouse,” World Economic Forum, accessed October 28, 2024, https://www.weforum.org/videos/malaysia-semiconductors/.