The impact of financing conditions on global deep decarbonization

Abstract Integrated assessment models (IAMs) shape mitigation pathways and policies but usually neglect differences in financing conditions across countries, sectors, and time. Recent studies highlight how this omission distorts outcomes concerning electricity generation but ignore other sectors. Here, we estimate and implement dynamic, country-specific cost of capital (CoC) for nine energy and industry sectors in the IMAGE IAM. Accounting for developing countries’ investment risks increases global mitigation costs through 2100 for staying well below +2°C by over 10% and shifts cost-effective mitigation efforts to lower-risk regions. Sector-level analysis shows that using granular CoC estimates reduces grid investments in developing countries, shifts centralized heat production toward natural gas, and raises green hydrogen costs due to higher electricity prices and sector-specific risks, slowing electrolysis uptake. In industries such as steel and cement, sector and country risks hinder capital-intensive carbon capture and electricity-based technologies. Our results reveal biases from omitting country-specific financing conditions and highlight the need for climate finance beyond electricity generation to facilitate global deep decarbonization.