Clean energy technologies have become more affordable around the world. Yet for many countries in the Global South, the cost of transitioning to a low-carbon economy remains disproportionately high. But not because the equipment is more expensive: in fact, solar and wind components are often imported at comparable prices around the world, as global manufacturing scale and trade have helped standardize hardware costs. Instead, the disparities in financing costs reflect the way the global financial system fails to adequately capture, differentiate and price risk.
In many emerging markets and developing economies, the cost of capital for renewable energy projects can be two to three times higher than in advanced economies. This gap is commonly observed through differences in the weighted average cost of capital (WACC), which reflects the risk-adjusted return that a project must offer to both lenders and investors. WACC captures how underlying risk perceptions in a given market are translated into financing costs, determining whether clean energy projects meet investors’ required returns. Comparative analyses of WACC consistently show that higher risk premiums in the Global South raise project-level costs of capital, reducing the number of investments that are financially viable. The result is slower deployment of clean energy and compounding constraints for adaptation investment, alongside greater fiscal pressure on public budgets that are already constrained.
A recent investigation highlights the case of India, where renewable energy developers report interest rates exceeding 12%—two to three times higher than typical rates in Europe or North America. This cost differential is not unique. Across emerging and developing economies, WACC estimates for utility-scale renewables frequently range from 10–15%, compared with 4–6% in advanced markets. These disparities are driven by a combination of structural constraints and risk perceptions that lead investors to price projects in emerging markets and developing economies as inherently riskier. Key factors include less stable and credit-worthy governments, currency volatility, limited access to instruments that enhance project credit-worthiness such as investment guarantees, and underdeveloped local capital markets. Together, these conditions embed higher risk premiums into financing costs, often linked to sovereign credit ratings and macro-financial indicators rather than to project fundamentals. The result is a structural pattern in which the financial architecture amplifies the cost of capital in markets that can least afford it, thereby constraining the energy transition where it is most urgent.
Part of the challenge lies in how risk is defined, which often pays insufficient attention to how different types of risk can be disaggregated and addressed independently. Current financial models tend to conflate sovereign risk with project-level or sectoral risk, applying blanket premiums across entire countries or regions regardless of actual investment conditions. A well-structured renewable energy project backed by long-term offtake agreements—in which a buyer commits ahead of time to purchasing a large portion of the project’s energy output—may still be priced as high risk simply because it is located in a low-rated jurisdiction. This conflation distorts the risk-return calculus and creates a disincentive to invest, even when the fundamentals are strong.
There is growing confusion, and frustration, among both public and private actors about what “risk” actually refers to in this context: macroeconomic volatility? Foreign exchange mismatches? Regulatory uncertainty? Credit-worthiness of the utility? Without clear, transparent methodologies, risk assessments become proxies for familiarity and precedent, reinforcing a cycle where capital flows to countries already deemed investable, rather than those with the greatest need or opportunity.
The current system is not equipped to assess risk in a way that is granular, forward-looking or developmentally aligned. In the absence of consistent standards and improved data, perceptions of risk continue to be shaped more by structural bias than by measurable factors. As a result, capital is misallocated, not because of the intrinsic riskiness of projects in the Global South, but because of how poorly the system captures and differentiates risk in the first place.
At the Columbia Center on Sustainable Investment, which is part of the Columbia Climate School, ongoing research points to several areas where targeted reforms could improve the accessibility and affordability of climate finance in emerging markets.
One important lever for lowering the cost of capital is the design of blended finance instruments, which use public and philanthropic capital to attract additional private investment by improving the risk-return profile of investments. In principle, these instruments are meant to use scarce public or concessional resources to absorb specific risks that private investors are unwilling or unable to bear, thereby mobilizing additional private capital rather than replacing it.
In practice, however, many blended finance structures remain overly conservative. Concessional capital—capital provided at below-market terms or with a higher tolerance for risk—is often allocated to relatively low-risk portions of a project’s capital structure, where it has limited impact on investor behavior. Instruments such as guarantees, which protect lenders or investors against defined losses (for example, in the event of default or revenue shortfalls), or junior tranches, which absorb first losses before senior investors are affected, are frequently underused or applied too narrowly. Similarly, currency buffers or hedging mechanisms, designed to protect projects from exchange-rate volatility, remain scarce or expensive in many developing markets. Redirecting concessional resources toward these types of risk-absorbing functions could better align risk-sharing with where capital constraints are most binding, and more effectively lower the cost of capital in high-risk contexts.
Another area is multilateral development bank (MDB) reform. Recent independent reviews have suggested that MDBs could significantly increase their lending capacity without jeopardizing credit ratings by deploying more of their balance sheets toward risk mitigation. Several institutions are beginning to act on these recommendations, but implementation remains uneven.
Foreign exchange risk is another persistent barrier. Currency mismatches between projects that borrow money in global currencies such as U.S. dollars, yet earn revenues in a local currency, pose risks to investors since the exchange rate between those currencies may fluctuate during the project. Solutions such as the Currency Exchange Fund offer one model, but broader efforts are needed to scale financial tools and facilities that allow investors to hedge against these risks.
There is also growing recognition that risk must be understood in relative, not absolute, terms. Some climate-vulnerable countries face greater near-term instability from underinvestment than from macroeconomic volatility. As such, treating them as uninvestable can become a self-fulfilling prophecy.
While the volume of climate finance remains a central concern, it is increasingly clear that the issue is not lack of capital, but poorly allocated capital due to mispricing embedded in the system. In other words, the cost of capital is not a neutral input; it shapes which projects get built, which technologies scale, and which countries can realistically meet their climate goals.
Several ongoing initiatives are working to address these issues. The Bridgetown Initiative has called for new liquidity mechanisms and debt instruments for vulnerable states. The Inter-American Development Bank’s updated approach to blended finance seeks to increase mobilization and improve structuring. And global discussions on MDB reform continue to gain traction, including through the G20 and the COP finance tracks.
Yet much heavy lifting remains. Achieving a just energy transition will require confronting the systemic factors that continue to price sustainability out of reach for many. As clean energy technologies become cheaper and more widely available, the real barrier is no longer technical; it’s financial. And that is a barrier we have the tools to overcome.
Ana María Camelo Vega is a senior economics and finance researcher at the Columbia Center on Sustainable Investment, which is part of the Columbia Climate School.
Tucker Wilke is a program associate at the Columbia Center on Sustainable Investment.
Views and opinions expressed here are those of the authors, and do not necessarily reflect the official position of the Columbia Climate School, Earth Institute or Columbia University.
