The countries that will receive billions of dollars to stop using polluting fuels

Rich nations’ requests for developing countries to accelerate the energy transition as part of the fight against climate change have faced the same obstacle for years: lack of money.

Substituting polluting energy sources for clean energy requires millions of dollars, which those countries need to allocate to the immediate needs of the population.

This situation limits the amount of resources that can be used to combat global warming. After all, no matter how serious the issue is, its more serious consequences tend to get worse in the medium and long term. The problem is that scientists fear that, when that happens, the damage caused to the planet may already be irreversible.

But a recently launched initiative seems to be opening the door so that at least some developing countries can receive the money needed to eliminate the use of highly polluting fuels, such as coal, and replace them with sustainable energy sources. These are the Atej agreements (Association for the Just Energy Transition).

These agreements have already been signed by the so-called Group of International Partners – made up of the European Union and several rich countries, such as the United States, United Kingdom, France, Germany, Italy, Canada, Japan, Norway and Denmark – and by three developing countries : South Africa, Indonesia and Vietnam.

It is expected that these three countries will receive, in all, around US$ 44 billion (about R$ 226 billion) over a period of three to five years, as a stimulus to anticipate the energy transition.

But what do these agreements consist of and what is the origin of the money?

Financing the energy transition

The first country to sign an ATEJ agreement was South Africa, on November 2, 2021, during the International Conference on Climate Change COP26, held in Glasgow, United Kingdom. A year later, the agreement with Indonesia was signed, during the G20 summit in Bali.

Vietnam signed the agreement last December 14, during the meeting between the European Union and the Association of Southeast Asian Nations (Asean).

According to the signed agreements, South Africa will receive US$ 8.5 billion (about R$ 43.6 billion); Indonesia, about US$ 20 billion (about R$ 102.6 billion); and Vietnam, about US$ 15 billion (about R$ 77 billion).

The agreements were based on the recognition of the need to accelerate the pace to achieve the objectives established by the UN regarding climate change, in order to avoid its worst consequences. To do so, it is necessary to halve the emission of greenhouse gases by 2030 and reach the goal of zero emissions by 2050, as highlighted in the political declarations that accompany the agreements.

In practical terms, these three agreements are intended to help accelerate the decarbonization of these countries’ economies and, in particular, limit and reduce the use of coal as an energy source for electricity generation.

In all cases, the funds made available to the countries come from public and private sources and are offered through various mechanisms, such as soft loans, market loans, grants, private investments and others.

All agreements provide for the participation of the private sector. In the case of Indonesia and Vietnam, half of the funds are expected to come from this sector.

Both agreements mention the participation of the Glasgow Financial Alliance for Zero Emissions (GFANZ), a coalition of financial institutions formed during COP26 to contribute to the decarbonization of the economy.

GFANZ members include major banks such as Bank of America, HSBC, Deutsche Bank, Citi, Mizuho Financial Group, Shinhan Financial Group, SMBC Group, Prudential PLC, Macquarie Group and Standard Chartered, among others. And the agreement with Vietnam indicates that GFANZ will coordinate private sector contributions.

The participation of multilateral organizations such as the World Bank is also foreseen. But, paradoxically, although the amounts foreseen to support the energy transition in these countries may seem high, it is likely that, in reality, they are not enough.

According to the Investment Plan for the Energy Transition presented last November by South Africa, the country will need around US$ 98.7 billion (about R$ 506 billion) to decarbonize its economy between 2023 and 2027.

Another limitation of the initiative is that it apparently only contemplates providing a very small portion of the funds in the form of grants. At least in the case of South Africa, only 4% of the total financial package is made up of grants, while the remaining resources come from sovereign or multilateral loans, according to the Financial Times.

This led the government of South African President Cyril Ramaphosa to warn, in November 2022, that the structure of the package depended heavily on loans that would become part of the country’s external debt. In any case, it is worth mentioning that the disbursement foreseen in the Atej has specific purposes and would serve more as a first financial impulse.

According to a report by the think tank (research and debate center) Atlantic Council, based in the US capital, Washington, “While the ATEJ represents a significant financial contribution to South Africa’s climate goals, its real benefit lies in the transformative reforms of the energy sector that the government must enact to expand its financing”.

Taking coal out of the energy equation

These agreements are clearly oriented towards reducing coal consumption by the countries involved, especially for electricity generation.

“These partnerships are a key tool to unlock the emissions reductions the world needs in the 2020s,” said UN Secretary-General Antonio Guterres. For him, “we need all forces to carry out an energy transition that is global, sustainable, fair, inclusive and equitable”.

South Africa is the 14th country that emits the most greenhouse gases, mainly due to its dependence on the use of coal to generate 77% of its electricity, according to the British magazine The Economist.

The Atej is expected to prevent the emission of 1 to 1.5 gigatons of greenhouse gases by South Africa over the next 20 years.

Indonesia is the ninth country that emits the most greenhouse gases. It is also very dependent on coal, which generates 66% of its electricity, according to data from the statistical yearbook of the energy multinational BP, mentioned by the Reuters news agency.

In the Indonesian case, the ATEJ contemplates that the emissions of its energy sector in 2030 do not exceed 290 million tons of CO2, which represents a reduction of the previous targets, which set a maximum of 357 million tons. From there, emissions should continue to fall, until reaching the goal of zero emissions in 2050.

In addition, the objective was set that, by 2030, 34% of Indonesia’s electricity will come from renewable sources. It is a significant increase, as the current level is only 6%.

Vietnam, in turn, does not appear on the list of the 10 countries that emit the most greenhouse gases, but its consumption of coal has increased significantly in recent years, having become the source of more than 50% of the electricity consumed in the country.

The Atej agreement signed by Vietnam establishes a 30% reduction in the level foreseen for the increase in emissions from its energy sector – from 240 million to 170 million tons of CO2 – which should occur in 2030, five years earlier than previously scheduled.

The country is also expected to reduce its coal consumption capacity to 30.2 gigawatts, compared to the projected level so far, of 37 gigawatts. At the same time, Vietnam is also expected to increase its use of renewable energies so that, by 2030, they represent 47% of its electricity production, instead of the 36% predicted previously.

Specialists consider that Vietnam has an important potential for wind energy production, thanks to its coastline of more than 3,000 kilometers. If the country meets these goals, it is estimated that, by 2035, around 500 million tons of emissions will have been avoided.

Reducing coal consumption is a central issue in combating global warming. It is the main source of CO2 emissions in the world, according to figures from the International Energy Agency.

It is not surprising, therefore, that the first three Atej agreements were concluded with high coal consumption countries. And, as announced, there are ongoing negotiations to enter into a similar agreement with India, which is the third country that emits the most greenhouse gases (behind only China and the United States) and gets 74% of its electricity from the coal.

This text was originally published here.