## Introduction — Staff Climate Note: clnea2024004

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### Climate investment needs and targets
- By the end of 2030, climate mitigation investment needs will increase to about $2 trillion per year in EMDEs—about 40 percent of global investment needs.
- Climate mitigation investments will have to climb to 12 percent of total investments in EMDEs by 2030, up from the present 3 percent.
- IEA (2024) estimates that, to meet the COP28 target, EMDEs excluding China will need to invest an additional $600 billion in clean energy by 2030.
- Under current composition of climate investment (about 50 percent comes from private investors), closing the climate policy gap between the average EMDE and the average AE would help close 50 percent of the private renewable investment gap in EMDEs excluding China; if the private sector’s share jumped to over 80 percent (IMF 2023), the same counterfactual would result in 30 percent of the private renewable investment gap being closed.

### Cost trends and financing constraints
- IRENA (2023a): LCOE for wind, solar, and hydropower is lower than that of fossil fuel power plants and has been decreasing over time.
- EMDEs have LCOEs for renewables similar to, and in some cases lower than, those in Europe.
- Renewable energy investment is front-loaded relative to fossil fuel energy and therefore more sensitive to high financing cost.
- Financing costs for renewable energy are much higher in EMDEs (especially in Africa) compared to Western Europe; higher financial costs in EMDEs are associated with higher country risks and less developed banking sectors.
- Financing costs hamper green FDI inflows, but the impact of climate policies on green FDI is relatively larger than that of financing costs: a one-standard-deviation improvement in climate policies has an impact on green FDI inflows as a share of GDP almost six times as large as a one-standard-deviation reduction in real deposit rates.

### Per-capita clean energy investment
- Advanced economies: around $400 in 2020 to more than $500 in 2022 (per capita clean energy investment).
- EMDEs (excluding China exception): around $50 per capita and stagnant since 2020.
- IEA (2024) suggests EMDEs would need to increase per capita investment in clean energy to around $300 by 2030 to reach net-zero targets.

### Scope, methods, and rationale
- Focus: how new climate policies and other domestic/global factors can facilitate financing and diffusion of low-carbon technologies (LCTs) through FDI.
- Methods:
  - Extends econometric strategies in Hasna and others (2023) and Pienknagura (2024).
  - Distinguishes three green FDI categories: renewable energy, EV-related FDI, and green hydrogen.
  - Uses policy counts from the Climate Policies Database and World Bank Carbon Pricing Dashboard (policy counts do not reflect size/coverage).
- Rationale: FDI is a vessel for technological diffusion and a key source of private financing that can relax domestic financial constraints and help close the climate investment gap in EMDEs when fiscal space is constrained.

### Stylized facts on green FDI trends
- Global green FDI accelerated since 2016 and tripled as a share of global GDP between 2014 and 2022.
- US$ FDI inflows in green sectors:
  - Close to $40 billion in 2014.
  - $80 billion in 2019.
  - Surpassed $200 billion in 2022.
- Recent surge driven by emergence of EV investments (since 2016) and green hydrogen (since 2019); renewable-energy FDI has remained relatively stable since its 2008 high.
- Composition within renewables shifted from hydropower and biomass toward solar and wind without changing overall amounts.
- Source-country diversification increased recently: China, the United Arab Emirates, and India became important investors.
- Geographic patterns:
  - Renewable energy FDI originates mostly in advanced economies and China and targets large emerging markets (e.g., Brazil, Chile, South Africa).
  - Green hydrogen FDI pattern similar but at lower volumes; US and Europe are dominant sources.
  - EV FDI concentrated between the US, Europe, and East Asia (China, Japan, Korea); East Asian countries invest in Southeast Asia and South America; notable recent development: large Chinese EV investment in Hungary.

### Key econometric findings
- Main finding: More action on the climate policy front by EMDEs is associated with larger green FDI inflows, without significant adverse effects on total FDI.
- An increase in the number of climate policies yields higher green FDI inflows as a share of GDP in the average country; relationship is stronger in the average EMDE country.
- Closing the climate policy gap between the average EMDE and the average AE would:
  - Triple the green FDI-to-GDP ratio in the average EMDE.
  - Help close between 30 and 50 percent of the private renewable investment gap in EMDEs (different assumptions on private share yield the 30–50 percent range noted).
- Heterogeneity:
  - Strong positive and statistically significant relationship between climate policies and renewable energy FDI (overall and specifically solar and wind).
  - No statistically significant relationship detected between domestic climate policies and FDI in EVs or green hydrogen (possible reason: recent emergence of EV and green hydrogen flows).
- Policy types:
  - Expenditure measures (such as subsidies) are associated with larger green and renewable energy FDI inflows.
  - Revenue measures (e.g., carbon taxes) also have a positive and significant effect on both overall green FDI inflows and renewable energy inflows.
  - Nonbinding and neutral policies have a nonsignificant impact.
- Robustness:
  - Instrumental variable exercise using intensity of nearby countries’ climate policies produces results consistent with baseline.
  - No evidence that past green FDI flows shape domestic climate policies in the sample.

### Enabling factors, structural determinants, and geopolitics
- Within-country over time: governance, human capital, and external sector openness do not systematically explain green FDI dynamics (likely because these are slow-moving variables and the econometric window starts in 2003).
- Cross-country differences: external sector openness, rule of law, human capital, and solar power potential are associated with cross-country differences in green FDI inflows.
- Financing costs: higher financing costs are associated with lower green FDI inflows as a share of GDP.
- Bilateral political alignment increases the likelihood and size of FDI flows; green FDI flows are more sensitive to political alignment than nongreen flows.
- Geoeconomic fragmentation: political distance and post-2022 deeper trade and FDI fragmentation may limit countries’ ability to attract green FDI from a diverse set of partners.

### Country experiences and policy lessons
- Renewable energy (successful examples: Chile, Uruguay, Vietnam; less successful: Mexico, Nigeria):
  - Attracting renewable-energy FDI typically requires a broad range of climate policies, removal of obstacles to renewable energy, complementary public investments, and ensuring a reliable revenue stream to investors (feed-in tariffs, auction programs, wider market access), tailored to country specifics.
  - Policy sequencing observed: expenditure-generating and budget-neutral nonregulatory policies → regulation → revenue-generating policies.
  - Power purchase agreements and feed-in tariffs were key to developing domestic markets and reassuring investors; complementary investments included electricity grid extension and energy storage.
  - Policy consistency matters: Mexico’s cancellation in 2019 of its auction system and renewed support to the fossil fuel sector contributed to a strong decline in renewable-energy FDI; Nigeria’s many policies did not translate into sustained FDI due to policy uncertainty, weak financing mechanisms, and structural gaps.
- Green hydrogen:
  - Countries attracting large green hydrogen FDI (Chile, Egypt, Morocco) combined substantial renewable potential with comprehensive national strategies and international coordination; EU initiatives and strategic alliances played a large role.
  - National strategies (2020–2021) focused on cost reductions along the supply chain, regional industrial integration, industrial clusters, national storage plans, international coordination for financing, development of national hydrogen markets, R&D, and export support.
- Electric vehicles (EVs):
  - EV FDI recipients typically had preexisting automobile-sector comparative advantages and pursued ambitious national sectoral strategies and incentives for investment and domestic adoption.
  - Hungary’s large EV FDI linked to persistent EU climate policy for road transport (1999–2022) and bilateral diplomacy with China; Mexico, Indonesia, Thailand, and Hungary recorded large EV/battery FDI announcements.
- International initiatives:
  - Global coordination by advanced economies (EU, G7, IPG/JETP) has produced “sudden take-off” dynamics in green FDI inflows into EMDEs following big international initiatives and climate conference contexts (e.g., COP27, COP events).
  - JETP example: IPG–Vietnam JETP agreement (December 2022) financing $15.8 billion for renewable energy; fDi Markets recorded a $13-billion US investment in wind energy in Vietnam in 2022.

### Policy implications and distilled takeaways (preserved phrasing and categories)
- Renewable Energy — Domestic climate policies:
  - Robust and predictable policy framework; Policy sequencing from expenditure to revenue measures; Support for the development of technologies; Support for market creation including subsidies for solar rooftops, feed-in-tariffs and power purchase agreements; Investment in complementary infrastructure (electricity grid extension and energy storage); Removal of obstacles for renewable energy use; Limits/bans on fossil fuel use in electricity generation; Targets for the share of renewables in the electricity mix; Carbon taxes or ETS for fossil fuels in electricity generation.
  - Other domestic factors: Trade and financial openness; low country risk; Renewable energy potential; International partnerships (JETP).
  - International context: Emphasis on international partnerships (JETP) and demand-side coordination.
- Green Hydrogen — Domestic climate policies:
  - Comprehensive national strategy; Export support through alliances with countries with growing demand; Reinforcing international coordination to secure financing.
  - Other domestic factors: Investment in storage capacity; R&D for hydrogen production and storage technologies; Investment in cost reductions along the supply chain.
  - International context: Regulatory framework for a national hydrogen market and regional industrial integration; Streamlined permitting; Availability of renewable energy; Advanced-economy initiatives to buy green hydrogen.
- Electric Vehicles — Domestic climate policies:
  - Comprehensive national strategy covering several policy areas simultaneously.
  - Other domestic factors: Incentives for EV production and domestic adoption; Minimum shares for EVs to provide clear market signals.
  - International context: Existing vehicle production potential; Market size or access; Partnerships with large EV producers; Benefits from supranational policies (EU).

*Source: IMF Staff Climate Notes — clnea2024004*

### Introduction

### Introduction

### Climate investment needs and targets
- By the end of 2030, climate mitigation investment needs will increase to about $2 trillion per year in EMDEs—about 40 percent of global investment needs.
- This implies climate mitigation investments will have to climb to 12 percent of total investments in EMDEs by 2030—a significant increase from the present 3 percent.
- IEA (2024) estimates that, to meet the COP28 target, EMDEs excluding China will need to invest an additional $600 billion in clean energy by 2030.

### Cost trends for renewable energy and regional comparisons
- IRENA (2023a) highlights that the levelized cost of energy (LCOE) for wind, solar, and hydropower plants is lower than that of fossil fuel power plants, and it has been decreasing over time.
- EMDEs have LCOEs for renewables similar to, and in some cases lower than, those in Europe.
- Renewable energy has a much more front-loaded investment profile than fossil fuel energy, making it more sensitive to high financing cost.

### Per-capita clean energy investment and financing costs
- Clean energy investment per capita:
  - Advanced economies: around $400 in 2020 to more than $500 in 2022.
  - EMDEs (excluding China exception): around $50 and stagnant since 2020.
- IEA (2024) suggests EMDEs would need to increase per capita investment in clean energy to around $300 by 2030 to reach net-zero targets.
- Survey data show financing costs for renewable energy are much higher in EMDEs (especially in Africa) compared to Western Europe.
- Higher financial costs in EMDEs are associated with higher country risks and less developed banking sectors.

### Financing instruments and structural barriers
- Innovative financing (blended finance, enhanced use of MDBs’ and donors’ guarantees) can help attract private investment through public–private risk-sharing.
- In low-income countries, larger international public support is essential to overcome steep challenges in attracting private climate finance.
- Sustained improvements in attracting renewable energy investment require addressing structural factors, including deeper commitments on the climate policy front (for example, legally enshrined national net zero commitments).

### Emerging technologies: EVs and green hydrogen
- Since 2015, production of electric and hybrid vehicles has accelerated due to policies and incentives.
- Demand for green hydrogen is expected to rise substantially even if uptake of blue and green hydrogen loses momentum.
- EMDEs with critical upstream inputs have pursued industrial policies to develop capabilities in downstream EV value chains.

### Scope and approach of the Staff Climate Note
- Focus: how new climate policies and other domestic/global factors can facilitate financing and diffusion of low-carbon technologies (LCTs) through FDI.
- Methods:
  - Extends econometric strategies in Hasna and others (2023) and Pienknagura (2024).
  - Econometrically explores how the relationship between climate policies and green FDI varies across three categories: renewable energy, FDI related to EVs, and green hydrogen.
  - Explores how other policy and structural factors affect green FDI.
  - Highlights examples of EMDEs that successfully attracted different types of green FDI and draws policy lessons.
- Rationale: FDI is a vessel for technological diffusion and a key source of private financing that can relax domestic financial constraints and help close the climate investment gap in EMDEs when fiscal space is constrained.

### Key econometric findings
- Climate policies are associated with higher green FDI inflows in renewable energy, especially in countries with solar energy potential and low fossil fuel dependence.
- No statistical association found between climate policies and higher FDI in EVs and green hydrogen.
- An increase in the number of climate policies is associated with higher green FDI inflows as a share of GDP in the average country, without significant adverse impacts on nongreen FDI inflows.
- Closing the climate policy gap between the average EMDE and the average AE would:
  - Triple the green FDI to GDP ratio in the average EMDE.
  - Help close 40 percent of the private renewable investment gap in EMDEs excluding China.
- Financing costs hamper green FDI inflows, but the impact of climate policies on green FDI is relatively larger than that of financing costs, suggesting decisive climate policy action can partly offset high financing costs.
- Structural factors (openness to trade and capital, governance, education) do not explain within-country FDI dynamics over the study period but do explain cross-country differences in green FDI inflows among EMDEs.
- Cross-country differences in openness (capital account and trade openness index), rule of law, human capital index, and solar power potential are associated with cross-country differences in green FDI inflows.

### Geoeconomic fragmentation and political distance
- Green FDI in renewable energy and EVs is less likely between politically distant countries.
- Geoeconomic fragmentation could limit countries’ ability to leverage climate and structural policies to attract green FDI from a diverse set of partners.
- Recent deeper trade and FDI fragmentation along geopolitical lines since 2022 may accentuate this pattern.

### Evidence from country experiences and policy lessons
- Attracting FDI in renewable energy typically requires:
  - A broad range of climate policies, removal of obstacles to renewable energy, complementary public investments.
  - Ensuring a reliable revenue stream to investors (feed-in tariffs, auction programs, wider market access), tailored to country specifics.
  - Continuous improvement and adaptation of electricity sector legislation to technological progress.
- Countries attracting FDI in EVs and green hydrogen have relied on:
  - Ambitious national sectoral strategies (industrial policies) and favorable initial conditions.
  - For EVs: incentives for investment and policies to encourage domestic adoption; prior comparative advantage in the automobile sector is important.
  - For green hydrogen: high potential to generate renewable energy is a common factor.
- Global initiatives and major policy moves in advanced economies have interacted with domestic policies to produce “sudden take-off” dynamics in green FDI inflows into EMDEs (examples include Just Energy Transition Partnership investments and EU strategic alliances for green hydrogen).

### Stylized facts on trends in green FDI
- Global green FDI accelerated since 2016 and tripled as a share of global GDP between 2014 and 2022.
- US$ FDI inflows in green sectors:
  - Close to $40 billion in 2014.
  - $80 billion in 2019.
  - Surpassed $200 billion in 2022.
- Recent surge in green FDI driven by emergence of investments in EVs (since 2016) and green hydrogen (since 2019), while FDI into renewable energy has remained relatively stable since its 2008 high.
- Composition within renewables shifted from hydropower and biomass toward solar and wind without changing overall amounts.
- Source-country diversification increased recently, with China, the United Arab Emirates, and India becoming important investors.
- Geographic patterns:
  - Renewable energy FDI originates mostly in advanced economies and China and targets large emerging markets (e.g., Brazil, Chile, South Africa).
  - Green hydrogen FDI pattern is similar but at lower volumes; US and Europe are dominant sources.
  - Electric vehicle FDI is concentrated between the US, Europe, and East Asia (China, Japan, Korea), with East Asian countries investing in Southeast Asia and South America; notable recent development: large Chinese EV investment in Hungary.

*Staff Climate Note: clnea2024004 - Introduction*

### 3. Green Hydrogen 4. Other

### 3. Green Hydrogen 4. Other

### Overview and data
- Sample: over 100 EMDEs during 2003–22.
- Green FDI data constructed from the Financial Times fDi Markets Database (records new cross-border investment plans from multiple media and business sources).
- Analysis distinguishes renewable energy flows, green FDI associated with electric vehicles (EVs) and green hydrogen, and the three leading types of green FDI.
- Policy counts used come from the Climate Policies Database and World Bank Carbon Pricing Dashboard; caveat that policy counts do not reflect the size and coverage of policies.

### Econometric evidence on climate policies and green FDI
- Main finding: More action on the climate policy front by EMDEs is associated with larger green FDI inflows, without significant adverse effects on total FDI.
- An increase in the number of climate policies yields higher green FDI inflows as a share of GDP in the average country; relationship is stronger in the average EMDE country.
- Quantitative counterfactuals and gaps:
  - Closing the climate policy gap between the average EMDE and the average AE would triple the green FDI-to-GDP ratio in the average EMDE.
  - That same counterfactual would help close between 30 and 50 percent of the private renewable investment gap in EMDEs.
  - EMDEs excluding China need to boost their investment in renewables by US$600 billion by 2030 (IEA, 2024).
  - Under current composition of climate investment (about 50 percent comes from private investors), the counterfactual exercise would close 50 percent of the private renewable investment gap in EMDEs excluding China. IMF (2023) argues that the private sector’s share should jump to over 80 percent, in which case the counterfactual would result in 30 percent of the private renewable investment gap being closed.
- Robustness to endogeneity and reverse causality:
  - Instrumental variable exercise using intensity of nearby countries’ climate policies produces results consistent with baseline.
  - No evidence that past green FDI flows shape domestic climate policies in the sample.

### Heterogeneity across green FDI subcategories
- Strong positive and statistically significant relationship between climate policies and renewable energy FDI (overall and specifically solar and wind).
- No statistically significant relationship detected between domestic climate policies and FDI in EVs or green hydrogen.
  - Possible reason: recent emergence of EV and green hydrogen flows makes it challenging to detect historical statistical relationships.

### Policy instruments and their effects
- Expenditure measures (such as subsidies) are associated with larger green and renewable energy FDI inflows.
- Revenue measures (e.g., carbon taxes) also have a positive and significant effect on both overall green FDI inflows and renewable energy inflows into EMDEs.
- Nonbinding and neutral policies have a nonsignificant impact.
- Implication: more binding and specific policies matter for attracting higher green FDI inflows.

### Enabling factors and structural determinants
- Within-country (over time) statistical evidence: governance, human capital, and external sector openness do not systematically explain green FDI dynamics.
  - Possible reason: these are slow-moving variables and the econometric window starts in 2003, missing major reform periods in the 1990s.
- Cross-country differences (fixed effects regressions) indicate external sector openness, rule of law, and human capital are important variables explaining differences in average green FDI as a share of GDP across EMDEs.
- Financing costs:
  - Higher financing costs are associated with lower green FDI inflows as a share of GDP.
  - A one-standard-deviation improvement in climate policies has an impact on green FDI inflows as a share of GDP almost six times as large as a one-standard-deviation reduction in real deposit rates.

### Geopolitics and bilateral determinants
- Bilateral political alignment increases the likelihood and size of FDI flows; green FDI flows are more sensitive to political alignment than nongreen flows.
- Geopolitical fragmentation could hamper diffusion of low-carbon technologies (LCTs) to EMDEs and limit the ability to attract green FDI from a diverse set of partners.

### Country characteristics that amplify or attenuate policy effects
- Fossil-fuel endowments and renewable potential matter:
  - The relationship between climate policies and green FDI is positive and statistically significant in both oil producers (exporters) and nonproducers (importers), but the relationship is weaker in oil producers/exporters.
  - Higher solar energy potential (World Bank ESMAP definition) is associated with a stronger relationship between climate policies and solar and wind FDI.
- EV FDI driven more by global policies in major markets:
  - EV FDI responds to climate policy movements by large countries (sum of climate policies pursued by G7 countries and China targeting the transport sector).
  - Countries that had comparative advantage in car and car parts production prior to the EV boom have responded more strongly to the rise in global transport climate policies.

### Country-level nuance and policy strategy
- Aggregate regressions mask nuanced interplay between:
  - Country-specific factors that accentuate climate policy’s ability to attract green investment.
  - Differences in policy mix (incentives versus taxes), sectoral targeting, and complementary policies.
  - Different types of green FDI responding to different factors and timing of emergence.

*Source: IMF Staff Climate Notes.*

### 1. Structural Factors and Green FDI 2. Political Distance and Green FDI

### 1. Structural Factors and Green FDI 2. Political Distance and Green FDI

### Empirical evidence and structural determinants
- Regression evidence (Panel 1): coefficients of a regression of fixed effects from Figure 5 on structural factors; for renewable energy and solar and wind, regressions also control for solar energy potential. All right-hand-side variables normalized between 0 and 1. Solid bars significant at the 90 percent level.
- Gravity regressions (Panel 2): coefficients control for political distance among other country-level and bilateral variables; bars represent the coefficient for geopolitical distance.
- Key structural factors highlighted (exact labels preserved): Solar energy, Credit, External sector, Labor regulation, Business regulation, Rule of law, Human capital.
- Findings summarized visually: Green FDI / Renewable energy / Wind and Solar coefficients ranged across negative and positive values between -1 and 1.5 in the presented charts.
- Political distance: Panel 2 coefficients for geopolitical distance shown separately for Non-green and Green FDI and for Renewable energy; axis scales from -1 to 0.7 and -0.5 to 1.5 as presented.

### Country lessons—overview of cases and FDI magnitudes
- Countries studied for renewable energy FDI: Chile, Uruguay, Vietnam; less successful cases: Mexico, Nigeria.
- Renewable energy case highlights:
  - Chile: started introducing climate policies in the mid-2000s; investments exceeded $1 billion for the first time in 2008 and have been high since then.
  - Uruguay: early adopter of climate policies; considerable FDI since 2010 and sharp increase in renewable energy production from 2013 onward.
  - Vietnam: green FDI inflows exceeding $1 billion annually since 2015, especially for solar and wind.
  - Mexico: attracted more than $800 million in FDI for renewable energy annually between 2008 and 2020; cancellations/reversals in policy led to strong decline thereafter.
  - Nigeria: passed numerous policies but received very little sustained renewable energy FDI; exceptions include FDI announcements worth $5 billion in 2014 and $1.2 billion in 2016; share of solar energy in electricity mix remains below 0.15 percent.
- Green hydrogen:
  - Countries with substantial FDI announcements: Chile, Egypt, Morocco.
  - Role of EU and UK investors: several billions in investment from EU and UK investors to Chile, Egypt, Morocco.
- Electric vehicles (EVs) and batteries:
  - Hungary: receiving considerable green FDI announcements ($10 billion in 2022), almost all for EVs and vehicle batteries.
  - Mexico: announcements for $10.4 billion over 2021–22.
  - Thailand: received close to $1 billion in the 2000–22 period.
  - Indonesia: received $18 billion of FDI announcements for EVs and batteries since 2019.

### Renewable energy: policy sequencing and domestic market creation
- Core takeaway: beyond resource potential, attracting renewable-energy FDI requires developing and continuously modernizing the electricity sector’s policy framework.
- Policy portfolio and sequencing:
  - Countries that attracted large renewable-energy FDI implemented a large portfolio of domestic policies over the past 10–15 years.
  - Between 2015 and 2022: Vietnam passed 12 climate policy laws in the sector “electricity and heat” and Chile 11.
  - Policy types used by leading countries: revenue-generating, expenditure-generating, regulations, and nonbinding; all policy types were used by the four leading countries in the electricity sector.
  - Typical sequence: expenditure-generating and budget-neutral nonregulatory policies → regulation → revenue-generating policies.
  - Example timing: Vietnam started in 2001 with a broad “decree”; energy-efficiency laws in 2006 (regulation); law establishing a mandate to design an ETS in 2020, expected to start by 2025.
- Carbon pricing noted but limited:
  - Chile carbon price about $5.
  - Mexico carbon price about $3.3.
  - Uruguay carbon price covers 5 percent of emissions (introduced in 2022 but not captured in the database).
  - Conclusion: carbon prices cited are either very low or cover only a small part of emissions and unlikely to have influenced green FDI much yet.
- Domestic market creation instruments:
  - Power purchase agreements and feed-in tariffs were key to developing a domestic market and reassuring investors; typically included a subsidy element to overcome initial cost disadvantages.
  - Complementary investments: electricity grid extension and energy storage; connecting ideal locations for solar and wind to industrial centers and the capital.

### When policy consistency matters—contrasting country experiences
- Mexico: cancellation in 2019 of the auction system (previously decisive) and renewed support to the fossil fuel sector contributed to a strong decline in renewable-energy FDI and a plateauing in the share of solar and wind energy since 2020.
- Nigeria: despite 12 climate policies between 2007 and 2019 and a further five since then (including a 2016 law on feed-in tariffs and auction procedures), green FDI remained scarce; cited causes include “policy uncertainty and weak financing mechanisms,” “structural gaps, policy discordance, unconducive investment climate, questionable commitment of stakeholders to transit to renewable energy and inability to attract robust private investments.”

### Green hydrogen and EVs: industrial policy and pre-existing conditions
- Pre-conditions for success:
  - Green hydrogen: availability of renewable energy potential (Chile, Morocco); coordination with investing countries.
  - EVs: existing vehicle production potential and infrastructure (Indonesia, Hungary, Mexico, Thailand); investment-grade status in many successful countries.
- Policy approach differences:
  - Renewable energy: gradual policy evolution with many policy types over time.
  - Green hydrogen and EVs: more recent technologies required decisive, coordinated industrial-policy action (national strategies) because there was no time for gradual policy unfolding.
- Green hydrogen national strategies (Chile, Egypt, Morocco, 2020–2021):
  - Elements: cost reductions along supply chain; plans for regional industrial integration; creation of industrial clusters; national storage plans; international coordination for financing; development of a national hydrogen market; R&D capacity; export support.
  - Result: immediate inflow of several billions in private investment, often associated with EU initiatives.
- EV national strategies and variants:
  - Indonesia, Thailand, Mexico passed national EV strategies between 2019 and 2021 including incentives for production and domestic adoption.
  - Hungary: no national EV production legislation but subsidies and tax breaks for EV production, and intensive bilateral diplomacy with China; EU regulatory context (21 laws on decarbonizing road transport between 2000 and 2022, including ban on sale of combustion engine vehicles by 2035) created favorable investment conditions.

### International context and the role of coordinated initiatives
- Shift since 2018: green FDI increasingly linked to climate policy coordination efforts by large groups of countries aiming to match demand and supply and achieve scale effects.
- Relevant actors and initiatives:
  - EU (notably for green hydrogen) and G7/large country groups.
  - International Partners Group (IPG) working on Just Energy Transition Partnerships (JETP).
  - Green Climate Fund: not central despite mandate to involve private investors; difficulties reconciling principles of Global Partnership for Effective Development Co-operation with private interests.
- EU-specific actions for green hydrogen:
  - July 2020: “EU Hydrogen Strategy” consisting of 20 key actions; Actions 18–19 devoted to cooperation with potential trade partners in Africa and Eastern Europe.
  - 2022 follow-up: specific initiative to cooperate with Chile to “boost investment opportunities in the field of green hydrogen.”
  - Observed timing: 2020 initiative targeting (North) African countries followed by green hydrogen FDI in 2022 in Morocco and Egypt; 2022 Chile initiative followed by FDI to Chile in 2023.
  - Conclusion: a big part of green hydrogen FDI to EMDEs happened under these EU initiatives, highlighting the key role of investing governments’ efforts to spur policy frameworks in recipient countries.

### Table 1 distilled policy takeaways (preserved categories and phrasing)
- Renewable Energy
  - Domestic climate policies: Robust and predictable policy framework; Policy sequencing, from expenditure to revenue measures; Support for the development of technologies; Support for market creation, including subsidies for solar rooftops, feed-in-tariffs and power purchase agreements; Investment in complementary infrastructure, for example electricity grid extension and energy storage; Removal of obstacles for renewable energy use (e.g., allowing solar energy sale to the grid); Limits/bans on fossil fuel use in electricity generation; Targets for the share of renewables in the electricity mix; Carbon taxes or ETS for fossil fuels in electricity generation.
  - Other domestic factors: Trade and financial openness; low country risk; Renewable energy potential; International partnerships (JETP).
  - International context: Emphasis on international partnerships (JETP) and demand-side coordination.
- Green Hydrogen
  - Domestic climate policies: Comprehensive national strategy; Export support through alliances with countries with growing demand; Reinforcing international coordination to secure financing.
  - Other domestic factors: Investment in storage capacity; R&D for hydrogen production, storage technologies; Investment in cost reductions along the supply chain.
  - International context: Regulatory framework for a national hydrogen market and regional industrial integration; Streamlined permitting processes; Availability of renewable energy; Advanced-economy initiatives to buy green hydrogen.
- Electric Vehicles
  - Domestic climate policies: Comprehensive national strategy that allows covering several policy areas simultaneously.
  - Other domestic factors: Incentives for EV production and for EV domestic adoption; Minimum shares for EVs to provide clear signals to market participants.
  - International context: Existing vehicle production potential; Market size or access; Partnerships with large EV producers; Benefits from supranational policies (EU).

*IMF | Staff Climate Note — clnea2024004*

### Box 1. Climate Policies in Top Recipients of FDI in Renewable Energy

### Box 1. Climate Policies in Top Recipients of FDI in Renewable Energy

### Country case studies: renewable energy policy and FDI outcomes
- Chile
  - Systematic introduction of climate policies in the electricity sector since 2004, including FITs in 2004 and 2012 and a carbon tax in 2014.
  - Integration of markets in solar/wind resource locations in the north with industrial centers and the capital in the south improved efficiency and increased solar generation.
  - Coal power phase-out announcement in 2021 provided additional security for investors.
  - Mature electricity market, openness to trade and FDI, legal framework for investment, and high solar potential helped attract FDI.
  - Diversified investor origins for renewable-energy FDI: Spain (24 percent), the UK (18 percent), and Ireland (12 percent).
- Uruguay
  - Early adopter of renewable energy laws in 2009, including support for solar and wind; carbon tax in 2022.
  - Power purchase agreements were key for rapid wind development; additional measures included R&D and training law for solar, wind power auction decree, and priority dispatch for wind.
  - Policies accompanied by high green FDI and a sharp increase in renewable production since 2013.
- Mexico
  - Early pollution control policies in the 1990s and steady policy introduction since 2001; major policies include the 2014 carbon tax and the 2015 energy transition law.
  - Law for power auctions introduced in 2016 and cancelled in 2019; progress stalled and government financial support for domestic fossil fuel production increased.
  - Green FDI inflows dropped since 2020 and solar and wind production stagnated.
- Vietnam
  - Tax relief for renewable energy in 2013 and FITs in 2017 (FITs considered key for the solar boom).
  - An ETS pilot expected to start by 2025.
  - LCOE for solar PV is below the FITs for capital costs of up to 10 percent.
  - Since 2015 inflows have been consistently high; in 2022 Vietnam received investments of $13.6 billion for wind energy.
  - Just Energy Transition Partnership (JETP) between the International Partners Group and Vietnam accompanied commitments to reduce coal use and build renewable capacity.

### International coordination, hydrogen, and JETP
- Green hydrogen FDI often tied to multilateral government coordination and climate conference contexts (notably COP27).
  - Substantial part of green hydrogen FDI to EMDEs occurred in the immediate context of COP27 in Egypt.
  - Djibouti received an investment of $2.3 billion in 2022.
  - One major green hydrogen FDI to an EMDE without EU or climate conference context: Malaysia’s Petronas investment in India.
- Just Energy Transition Partnership (JETP) and Vietnam
  - December 2022 IPG–Vietnam JETP agreement: financing $15.8 billion for renewable energy (type of investment not specified).
  - fDi Markets recorded a $13-billion investment in wind energy in Vietnam from the United States in 2022.
  - Limited transmission grid capacity and policy uncertainty were key barriers; JETP may have increased investor confidence for infrastructure investments.
  - Further JETP agreements: South Africa in 2021, Indonesia in 2022, and Senegal in 2023 (no major renewable-energy FDI observed yet in those countries as of the source).

### Supranational policy and EV investment
- Hungary
  - Attracted significant FDI in EV production largely due to persistent EU climate policy for road transport (1999–2022) and bilateral diplomatic engagement with China.
  - EU-wide laws (including a ban on combustion-engine vehicles by 2035) created a market for low-emission vehicles and investment security.
  - Hungary’s neighbors with large car industries received much smaller EV FDI inflows, highlighting complementarity between EU fundamentals and targeted diplomacy.

### Conclusion: overarching findings on policy, country characteristics, and green FDI
- Linkages vary by technology; renewable energy shows the clearest connection between domestic climate policies and higher FDI inflows.
- Econometric evidence: a larger number of climate policies is associated with higher FDI inflows in renewable energies.
- Typical policy sequencing in EMDEs: government expenses (subsidies) → regulation → government revenues (carbon taxes).
- Critical for attracting renewable-energy FDI: policies that ensure a reliable revenue stream (feed-in tariffs, auctions, regional market integration).
- Number of policies alone is insufficient—structural weaknesses can prevent FDI despite many policies.
- Diverting policy focus can stall renewable-energy FDI inflows.
- Strengthening renewable-energy capacity and credible commitments can help attract green hydrogen FDI.
- EV FDI to EMDEs increased substantially since 2015 driven by demand in AEs and AE policy action; largest recipients typically had preexisting automobile-sector comparative advantages and active investment-seeking strategies.
- International initiatives by AEs (for example, IPG and EU strategic alliances) often produce a “sudden take-off” dynamic in green FDI into EMDEs following big international initiatives.
- Structural factors (human capital, slow-moving reforms) do not systematically explain dynamics but do explain cross-country differences in levels: external sector openness, rule of law, human capital, and solar potential matter.

*IMF | Staff Climate Note — Box 1. Climate Policies in Top Recipients of FDI in Renewable Energy*

### References

### References

### Scope and thematic coverage
- The references compile academic papers, IMF staff notes and working papers, international agency reports, and policy articles focusing on:
  - Foreign Direct Investment (FDI) dynamics, spillovers, and geopolitical drivers (e.g., Aiyar et al. 2023; Arnold and Javorcik 2009; Desbordes and Wei 2017; Gu and Hale 2023; Javorcik 2004; Knutsson and Ibarlucea Flores 2022; Pienknagura 2024).
  - Green investment, renewable energy deployment, and technology diffusion (e.g., Eyraud, Clements, and Wane 2013; Do et al. 2020, 2021; Đukan and Kitzing 2023; Isah et al. 2023; Kempa, Moslener, and Schenker 2021).
  - Hydrogen as a decarbonization option and country case studies, especially Chile (e.g., Bartlett 2022; Ferrada et al. 2023; Government of Chile 2020; Jorquera-Copier et al. 2024; Plank et al. 2023; France 24 2024).
  - Financing clean energy transitions and the cost of capital for renewables (e.g., IEA 2021; IEA 2022; IEA 2024; IRENA 2023a; IRENA 2023b; Kempa et al. 2021).
  - Climate policy design, sequencing, public perceptions, and innovation (e.g., Pahle et al. 2018; Linsenmeier, Mohommad, and Schwerhoff 2022; Nascimento et al. 2022; Dabla-Norris et al. 2023; Hasna et al. 2023).
  - Empirical methods and measurement relevant to FDI, emissions, and voting behavior (e.g., Bailey, Strezhnev, and Voeten 2017; Santos-Silva and Tenreyro 2006; Borga et al. 2023).

### Representative publication types and series
- IMF internal publications and staff notes:
  - Staff Discussion Notes and Staff Climate Notes (e.g., Aiyar et al. 2023 Staff Discussion Notes 2023 (001); Budina et al. 2023 Staff Discussion Notes 2023 (007); Hasna et al. 2023 IMF Staff Discussion Note 2023/08; Dabla-Norris et al. 2023 IMF Staff Discussion Note 2023/02).
  - IMF Working Papers and reports (e.g., Bogman, Pescatori, and Prifti 2023 IMF Working Papers 2023/140; Gopinath et al. 2024 IMF Working Paper 24/76; Pienknagura 2024 IMF Working Paper 2024 (046); IMF 2023a Global Financial Stability Report, Chapter 3; IMF. 2023b Mexico 2023 Article IV Consultation - 2023/356).
- International organizations and think tanks:
  - IEA reports (IEA 2021; IEA 2022; IEA 2024) and IRENA publications (IRENA 2023a; IRENA 2023b).
  - World Bank / ESMAP (ESMAP 2020).
  - CEPR Discussion Paper (Aiyar, Malacrino, and Presbitero 2023).
- Peer-reviewed journals across energy economics and climate policy:
  - Journal of International Economics, Energy Policy, Nature Energy, Nature Climate Change, Climate Policy, Econometrica, Journal of Development Economics, Review of Economics and Statistics, and others (multiple citations with exact volumes, issues, pages, and DOIs preserved in the original list).

### Geographic and sectoral emphasis
- Country and region-specific studies and case material:
  - Chile (Bartlett 2022; Ferrada et al. 2023; Government of Chile 2020; Gonzales, Ito, and Reguant 2023; Jorquera-Copier et al. 2024).
  - Vietnam and ASEAN (Do et al. 2020; Do et al. 2021).
  - Indonesia (Arnold and Javorcik 2009; Baker McKenzie 2019).
  - Sub-Saharan Africa and emerging markets (Cai et al. 2024; Isah et al. 2023; Budina et al. 2023).
  - EU-Morocco energy cooperation (Plank et al. 2023).
- Technologies and markets:
  - Solar photovoltaics, wind energy, renewable power generation costs, and hydrogen systems (Do et al.; Corrêa et al. 2022; IRENA 2023a; IRENA 2023b; Ferrada et al. 2023).

### Methodological and empirical tools referenced
- Firm-level and plant-productivity analyses (Arnold and Javorcik 2009; Bogman, Pescatori, and Prifti 2023).
- Measurement of CO2 emissions attributable to FDI (Borga et al. 2023).
- Gravity model econometrics and log transformations (Santos-Silva and Tenreyro 2006).
- Survey-based evidence on public perceptions (Dabla-Norris et al. 2023).
- Dynamic preference estimation from voting data (Bailey, Strezhnev, and Voeten 2017).

*References list from: NOTES — Policies to Foster Green FDI: Best Practices for Emerging Market and Developing Economies — IMF STAFF CLIMATE NOTES 2024/004*

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_Source: https://www.imf.org/-/media/files/publications/staff-climate-notes/2024/english/clnea2024004.pdf_