IMF – Policies to Foster Green FDI

Meeting the goals of COP28 by 2030 will require a significant increase in clean energy investments, especially in emerging market and developing economies (EMDEs). With domestic financial limitations, foreign direct investment (FDI) could play a crucial role in closing the renewable energy investment gap and funding green projects in EMDEs. Strengthening climate policies has been shown to increase FDI into renewable energy in these countries, particularly in those with solar power potential. However, the impact on FDI in electric vehicles (EVs) and green hydrogen is less certain due to their recent emergence. Closing the climate policy gap with advanced economies could secure a substantial portion of the private financing necessary for renewable energy investments in EMDEs, helping to offset high financing costs. Additionally, improving macro-structural frameworks such as trade and capital account openness and institutional quality could also attract more green FDI, along with implementing sector-specific policies like power-purchase agreements, renewable targets, and subsidies. Furthermore, successful attraction of FDI into EVs and green hydrogen requires national sector strategies and international partnerships to boost production and competitiveness in these sectors. Overall, comprehensive national policies and international initiatives are essential to foster green FDI in EMDEs and achieve sustainable energy investment goals.