As world leaders gather for COP28 one question looms - who will pay for the green transition?

• Leaders are gathering at the COP28 climate conference in Dubai this month.
• The path to financing the world's transition to green energy remains unclear.

As world leaders, business, and community leaders all gather at the COP28 conference in Dubai this month, the path to reaching net-zero greenhouse gas emissions by 2050 is becoming clearer, mapped out with distinct milestones and tech-enabled solutions. However, how the world will finance this transition is not so apparent.

The estimated $2 trillion currently being invested annually in the green transition is a long way from the $5-$7 trillion needed to trigger and sustain the next great sustainable revolution—a transformation from the current fossil fuel-centric model to a highly renewable, low-emissions system of production.

Financing the green energy transition is a trillion-dollar question. The answers lie in the mobilization of new cost-reducing finance instruments that can significantly remove risk from green projects, identifying and dismantling asymmetrical cost structures between developed and developing countries, and unlocking fair and just mechanisms to transition away from fossil fuels.

This is how we can mobilize private investment and help achieve economic growth and climate neutrality.

The Deloitte Financing the Green Energy Transition report outlines some core financial levers, starting with a fundamental financial principle: the riskier the project, the higher the cost of capital. Harnessing financial instruments is vital to unlocking private capital and the financing of green investment at the lowest cost.

The report estimates that getting this right could ultimately reduce financing costs by around $50 trillion by 2050. So, what are the associated risks, and what steps can we take to mitigate them and, consequently, reduce financing costs?

Reducing the risk of green projects

Identifying the types of risk allows us to understand the scale of the problem but also the potential of the opportunity. Unreliable markets and buyers, political instability, and ambiguous climate policies all contribute to elevated financing costs for green projects.

Developing economies, where about three-quarters of green investments should occur to meet net zero targets, face even greater challenges with stricter public budget constraints for energy transition projects.

One potential solution to reduce the costs and create a level playing field among countries and regions is the adoption of blended and concessional finance—a loan made on more favorable terms than the borrower could obtain in the market.

Blended finance can mitigate risk with different layers of repayment priority, protecting investors against losses if a project meets bottlenecks or faces financial difficulties.

Concessional public financing can have a multiplier effect. For example, US$1 of concessional public finance can mobilize more than US$4 commercial capital, more than half of which can come directly from private capital. Simultaneously, the creation of green product markets and financial markets can quickly reduce revenue risk with pricing confidence. Offtake contracts can enable buyers to find green products and sellers to secure buyers.

Bridging the cost gap

The cost gap between green and fossil fuel projects is significant but it can be bridged with several mechanisms. Upfront costs can be minimized with innovation through R&D as well as investment subsidies. This makes new technology projects more bankable—i.e., their risk-return profile meets investors' criteria to mobilize sufficient capital—while helping to build up a skilled workforce.

At the same time, carbon pricing can help internalize the cost to society and incentivize a reduction. Additionally, public revenue from carbon pricing can be redirected to climate-related initiatives. Doing so would transfer revenues from fossil assets to their green counterparts, helping ease the impact of stranded fossil assets and stranded jobs.

It is overwhelmingly clear that the transformation ahead requires a rapid scale-up of investment with an alignment between governments, financial institutions, and investors to jointly develop and agree on mechanisms to foster bankability.

This is particularly acute and relevant in developing countries where underinvestment directly correlates to the risk perception from private investors and could lead to missed opportunities given that developing countries are key to the success of the global clean energy transition.

If we get this right, we can achieve our collective net zero objectives, at the lowest possible cost, through a just transition. In the end, the probability of this success equals the bankability of projects.

Jennifer Steinmann is Deloitte Global Sustainability & Climate Practice Leader.

Pradeep Philip is Lead Partner, Deloitte Access Economics.