Policies to Foster Green FDI: Best Practices for Emerging Market and Developing Economies

Staff Climate Notes, October 8, 2024

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Meeting COP28 goals requires a substantial increase in clean energy investment by 2030, including in emerging market and developing economies (EMDEs).
Foreign direct investment (FDI) could play a key role in EMDEs’ ability to close their renewable energy investment gap and finance green projects amid domestic financial constraints.
The Note analyzes how climate policies and macro-structural frameworks affect green FDI flows into renewable energy, electric vehicles (EVs), and green hydrogen in EMDEs, and draws policy lessons from country case studies.

Strengthening climate policies boosts FDI into renewable energy in EMDEs, especially in those with solar power potential.
Effects of climate policies on FDI into EVs and green hydrogen are less clear, possibly due to their recent emergence.
Closing the average climate policy gap with respect to AEs could secure 40 percent of the private finance needed for renewable energy investment in EMDEs, helping overcome the impact of high financing costs.
Strengthening the macro-structural framework—improving trade and capital account openness and institutional quality—would also raise green FDI inflows and complement climate policies.
Global initiatives such as the Just Energy Transition Partnerships and the EU strategy for green hydrogen are benefitting FDI to EMDEs.

Renewable energy:
- Attracting FDI was associated with a large and diverse set of policies in the electricity sector.
- Policies that secure a revenue stream for investors in initial phases were important, including power-purchase agreements/feed-in tariffs, renewables targets, and complementary investments.
Electric Vehicles (EVs):
- Successful FDI attraction relied on national sectoral strategies that included production and adoption subsidies, prior comparative advantage in the sector, and bilateral alliances with key players in the EV market.
Green Hydrogen:
- Comprehensive national hydrogen strategies that leverage international efforts to boost production, together with good conditions for production of renewable energy, were key drivers of green hydrogen FDI.

Strengthen domestic climate policies to directly boost renewable-energy FDI, prioritizing measures that create predictable revenue streams for early investors (for example, power-purchase agreements/feed-in tariffs and renewables targets).
Close the climate policy gap relative to advanced economies (AEs) to mobilize private finance—aims that could secure 40 percent of needed private finance for EMDE renewable energy investment.
Improve macro-structural fundamentals—trade openness, capital account openness, and institutional quality—to complement climate policy in attracting green FDI.
Develop comprehensive national sectoral strategies for emerging green sectors (EVs, green hydrogen) that combine subsidies, industrial policy, and international partnerships to leverage comparative advantages and global initiatives.

Annex 1. Data Sources and Sample Coverage
- Annex 1. Data Sources and Sample Coverage (Markdown version)
- Annex 1. Data Sources and Sample Coverage (PDF)
Introduction — Staff Climate Note: clnea2024004
- Introduction — Staff Climate Note: clnea2024004 (Markdown version)
- Introduction — Staff Climate Note: clnea2024004 (PDF)