Decarbonization: Key to a Sustainable Future and Challenge of Capital Cost

The decarbonization of the economy in light of climate commitments for 2050 has become a hot topic, but it often faces a sea of uncertainties and widely varying figures. Recently, a report from BBVA Research has highlighted the differing estimates regarding the spending necessary to achieve these goals, revealing a confusion that could hinder efforts towards a sustainable future. The lack of consensus on which costs to include in the decarbonization calculation, as well as the assumptions used, becomes an obstacle to overcome. The first aspect to consider is that the figures being discussed around investment in decarbonization are astronomical. With trillions of euros at stake, the amounts required to carry out this transition are so high that it is evident that private sector participation will be crucial. Without private capital investment, achieving decarbonization goals becomes an almost impossible task. Therefore, the focus should not solely be on the volume of funds, but rather on the nature of the cost of capital needed to make these investments. The cost of capital stands as a determining factor in the decarbonization equation. This cost is not limited to interest rates set by central banks or the yields on sovereign bonds. In reality, the minimum required return for investments in clean technologies must include macroeconomic risks, such as institutional stability and inflation, as well as specific risks related to regulation and infrastructure. These risks, taken together, affect investors' decisions and their willingness to finance projects that, while nuanced by their potential profitability, play with the inherent uncertainty of innovation. To address these financial challenges, financing strategies tailored to each stage of clean technology development must be implemented. In the initial phases, when basic research is at play, public funding must play a crucial role in facilitating the arrival of private capital through guarantee schemes or loss-sharing arrangements. This approach not only leverages resources but also provides a framework of trust during the riskiest stages of innovation. As projects advance toward their deployment phase, private financing needs to gain prominence. Certainty in profitability expectations becomes a driver for attracting investments. Here, clarity and predictability in energy policies are essential. Strategic planning with clear and measurable milestones not only generates confidence among investors but also allows for public scrutiny that can strengthen the legitimacy of government actions. In the context of emerging markets, the issue of the cost of capital takes on an even more critical dimension. With a more unstable macroeconomic environment and less defined climate ambitions, the cost of capital can be significantly higher than in developed economies. This disparity jeopardizes these countries' ability to attract investments in decarbonization, potentially leading to a stagnation of their efforts to meet global climate goals. Therefore, decarbonization policies must focus on reducing the cost of capital use. This approach would not only stimulate the necessary financing but also foster greater competition in the sector, creating a more dynamic and resilient ecosystem. Instead of obsessing over achieving a specific volume of funds, it is more relevant to work towards creating an environment that makes access to capital viable. The transition to a decarbonized economic model cannot be achieved in a vacuum. Collaboration between the public and private sectors, along with a clear and predictable regulatory framework, will be essential to facilitate the necessary investments. If a favorable capital cost environment can be established, it will open the doors to a massive deployment of clean technologies and a more sustainable future. In summary, the key to decarbonization lies in a deep understanding of the cost of capital and the implementation of appropriate strategies that minimize risks and maximize opportunities. Only in this way can we move towards a future where sustainability and profitability go hand in hand, ensuring that the path to carbon neutrality is accessible and viable for all involved stakeholders.