Energy transition challenges for developing economies

Climate policies and investments in the Organization for Economic Cooperation and Development (OECD) alone are not sufficient to solve climate change issues worldwide. Any effective solution will need to engage emerging markets and developing economies (EMDEs).

Emissions in the US and EU have peaked and are declining, but not fast enough. Chinese emissions have nearly peaked after growing at an extraordinary rate for about 20 years, and they are forecast to plateau before declining. In the S&P Global Commodity Insights Inflections scenario, greenhouse gas (GHG) emissions in China in 2030 are forecast to be 7% below their 2025 peak later this decade.

However, India, Africa and other emerging markets are projected to experience continued emissions growth for the foreseeable future. This situation fosters a narrative that the EMDEs are to blame for the world's failure to meet climate goals. However, many perceive this narrative as unjust, considering their relatively small contributions to historical emissions.

For instance, the present energy consumption levels in sub-Saharan Africa mirror those of France and Germany in the 1860s, according to Vaclav Smil in the article "Beyond Magical Thinking: Time to Get Real on Climate Change."

In India, per capita emissions stand at approximately 2.9 mtCO2e, much lower than figures of more than 18 mtCO2e in the US and more than 7.3 mtCO2e in the EU, according to the UN's Emissions Gap Report 2024.

Considering the significant role the EMDEs must play in addressing climate change, it is crucial to examine the region's challenges and stimulate dialogue around developing effective solutions for the energy transition that align with the priorities of the people and governments in the EMDEs.

Some of the challenges for emerging and developing markets include energy affordability, dependence on fossil fuels, financing costs, as well as infrastructure and skills issues.

Affordability of energy

Based on 2024 statistics from the International Monetary Fund, per capita income in India is approximately $2,900; in sub-Saharan Africa, it is less than $1,800. This compares with per capita income of more than $63,000 in North America and more than $51,000 in Western Europe.

The significant disparity in per capita income underscores the critical importance of affordable energy. Solutions feasible in the Western world – electric vehicles, carbon capture, utilization and storage (CCUS), and hydrogen production or importation – may be financially inaccessible in the EMDEs.

While governments in developed countries offer incentives, subsidies or mandates to alleviate costs associated with these transition pathways, those in the EMDEs often lack the financial flexibility to implement large-scale subsidies. Their priority is providing the cheapest available energy, hydrocarbons in many countries, and subsidizing this energy to ensure mass affordability.

Dependence on domestic fossil fuels

Domestically available coal, oil and gas serve as critical pillars for ensuring the security of supply and are primary sources of revenue for numerous countries. They are vital in funding country budgets and supporting social programs.

Moreover, the sector typically stands as one of the largest direct and indirect employers in the EMDEs. Governments cannot afford to swiftly transition away from fossil fuels, which they depend on for national operations, without viable alternative revenue sources.

A rapid phaseout of fossil fuels could result in widespread unemployment, political unrest and destabilization – all counterproductive to addressing climate change.

Financing and cost of capital

Financing and the cost of capital pose substantial challenges for energy investment in the EMDEs. Limited access to capital markets, high borrowing costs and real or perceived investment risks deter domestic and foreign investors.

This problem is even more pronounced in today's high interest rate environment. The lack of creditworthy offtakers and uncertain regulatory environments undermine investor confidence. Currency volatility and political instability amplify investment risks, discouraging long-term commitments. Infrastructure projects require substantial up-front capital, which many developing countries struggle to mobilize independently.

Consequently, attracting capital and securing favorable financing terms are paramount for advancing energy infrastructure and transitioning to sustainable energy sources.

Carbon markets and carbon tariffs

Carbon markets worldwide are expected to gain momentum in 2025 as both corporate and sovereign entities strive to meet decarbonization targets. A significant portion of global emissions is now under carbon pricing, although prices vary widely.

Europe is globalizing its high carbon prices by including maritime emissions in the EU Emissions Trading System and implementing Carbon Border Adjustment Mechanism (CBAM).

Developing nations like Brazil, India and Mexico are establishing carbon markets, using carbon credits as climate finance tools. China, the largest compliance market, plans to expand into new sectors. In voluntary markets, 2025 will test initiatives like the Integrity Council for the Voluntary Carbon Market in restoring trust in carbon credits. Carbon credits remain crucial for many decarbonization strategies.

Infrastructure development continues as key players facilitate market reductions. During COP29, Saudi Arabia launched its first carbon trading exchange to expand its voluntary market. A new and fast looming challenge for EMDEs is carbon tariffs.

The EU has launched the first phase of its CBAM by initially imposing import tariffs on products such as steel, cement, aluminum and fertilizer based on the carbon emissions embedded in their production at the source country. EMDEs are strongly opposed to CBAM because they see it is a barrier to their economic development and exports and are taking their opposition to the World Trade Organization.

In many EMDEs, CBAM is seen as the wealthy countries using a carbon tariff to impose their climate goals and regulations on EMDEs and preventing access to global markets. Infrastructure bottlenecks Energy is fundamentally an infrastructure business that involves building massive supply nodes (power plants, solar farms, CCUS and hydrogen hubs, nuclear plants) and interconnections (transmission lines, pipelines) over large distances.

Such endeavors necessitate land procurement, siting and permitting processes before projects can proceed. In many developing countries, land ownership is fragmented, and procurement and permitting procedures involve multiple layers of engagement with local, state and federal stakeholders.

As a result, setting up large-scale solar farms, gas pipelines and electric grids can encounter prolonged delays, especially when projects must navigate multiple jurisdictions and cross county and state lines.

Access to technology and skilled workforce

Lack of access to technology and a skilled workforce also presents significant hurdles. Many countries do not have the technological infrastructure and expertise needed to deploy and maintain new energy systems such as carbon capture and storage, direct air capture and hydrogen projects.

Additionally, a shortage of skilled workers trained in emerging energy technologies complicates efforts to implement efficient and sustainable energy solutions. Bridging the technology gap through global collaboration and investing in workforce development is essential to overcome these challenges and facilitate a successful transition.

This article was first published in the February 2025 edition of the Commodity Insights magazine(opens in a new tab).