From our CEO: More than just a financing mechanism, JETPs have great potential to rebuild trust among stakeholders and create real impact
Six months after COP27, it remains clear the summit didn’t deliver what was needed to tackle the climate crisis, particularly in developing economies. The African continent is likely to be among the worst affected by climate change, so it was no coincidence that COP27 emphasised the need to better prepare for, and perhaps even mitigate against, the worst impacts of climate change in the world’s most vulnerable countries.
Infrastructure is responsible for 79% of GHG emissions worldwide, and its development and use is a critical component to addressing the climate crisis. Infrastructure delivery requires strong political will and commitment from all stakeholders – public and private – throughout the lifecycle of a project, which can easily be decades. It also requires a high level of trust among stakeholders. Currently, lack of trust is a widespread issue undermining efforts to scale up climate finance. It should be urgently addressed by leveraging the right partnerships, supported by the right frameworks and processes.
In an ideal scenario, a few things would happen in emerging markets and developing economies (EMDEs) and where MDB support is needed:
- The public sector, with support from experts in private or multilateral institutions, would apply technical, legal, and finance expertise to structure a project well.
- Multilateral and bilateral agencies would provide risk sharing or mitigation instruments at critical junctures to ensure the project’s success.
- Investors would work together to cover financing in tranches aligned to their requirements and the needs of the project.
In developed economies, the reality is closer to this ideal scenario and projects can be developed reasonably well. But in EMDEs, the alignment and mutual trust needed for this scenario to play out are much harder to create. This is one reason we see very few projects coming to market.
This is where a new form of ‘country platform’ comes in, as a sandbox to rebuild trust and test blended finance approaches. The JETPs (Just Energy Transition Partnerships) are a multi-donor, system-wide approach to energy sector reform. At their core, JETPs are climate finance agreements that help developing economies enact policy reforms that remove barriers to investment and to scaling up clean energy technologies that are necessary to transition economies. JETPs may be led by the ‘recipient’ country, or may be donor-led or co-designed. Optimally, the leadership is structured to create political buy-in and commitment, which are critical to sustaining progress and to ultimate success.
JETPs were announced at COP26 and COP27, and at the G20 Summit in Bali last year, for South Africa, Egypt, Indonesia, and Vietnam. Work is underway on agreements for India and the Philippines. Major donors include the US, UK, EU, France, Germany, Canada, Denmark, Italy, Norway, Japan, and the private sector, including through the Glasgow Financial Alliance for Net Zero (GFANZ).
Although each JETP announcement included substantial commitments of donor funds – between USD8.5bn and USD20bn – commitments remain too low, and globally the leverage rates of public to private investment remain too low to make any substantial progress against the costs of the climate transition.
There are other challenges too. Often, including in JETP countries, financing is needed most in areas or projects that have what are considered very low rates of return commercially. These projects require a high commitment of concessional finance, including grants and guarantees. This doesn’t necessarily align with what is being committed under the JETPs, or the expected return from private investors, creating real risk. All parties need to collaborate to understand where the issues are and why they arise, co-create solutions, and – importantly – compromise.
A further complication is the risk that JETPs could finance technologies or projects that do more harm than good through negative externalities. An example of this is the Indonesian Government mandating biomass be burned alongside coal in power stations as part of their phaseout plans, which would result in additional deforestation to provide sufficient biomass to meet the requirements. Not only does the scale of biomass required to meet such a mandate have negative environmental implications, it could see some JETP donor countries compromise their Paris target achievements and the commitments to end fossil fuel financing that G7 countries and others made at COP26. Speaking more broadly, JETPs are at risk of supporting only projects that are viewed as economically viable through a traditional lens, and therefore only delivering part of a country’s master plan necessary to reach climate targets. JETP governments will need to step in alongside financing to support the whole plan.
But although there are challenges that need to be managed, they shouldn’t mean JETPs are abandoned.
No two JETPs are the same, but the underlying principle of a co-developed partnership between donors and a recipient country, often led by the recipient country, is common to all. The global infrastructure community needs to take the lessons from these early JETPs and continue to evolve the approach at the project and policy levels. Underpinning this is the work by institutions like the GI Hub to provide better data and knowledge to support decisionmakers.
I’m hopeful that JETPs, and the approaches and trust that will develop from them, could be the next evolution of multilateralism. I see great potential for them to be a breakthrough in mobilising private climate finance, especially for infrastructure. Although it is early days and nothing is guaranteed, approaching with trust, truly sharing responsibility, fostering innovative funding and financing options, and allowing the recipient country to take the lead puts the parties in a better position than is possible with the alternatives we know, which haven’t been serving us for more than a decade.