Much of the discourse on climate finance has focused on whether low- and middle-income countries (LMICs) can access sufficient capital to decarbonise their economies, particularly in the energy sector. But this overlooks a critical issue: can LMICs afford the finance they receive? The negotiations at COP29 in Baku brought this issue to the forefront, with LMICs advocating for ‘affordable, accessible, and adequate’ climate finance.  

This distinction between access and affordability is more than semantic. It goes to the heart of whether investment pathways to net zero are financially viable and can be delivered at the scale and speed required to meet global climate goals. The reality is that many LMICs face structural barriers that render even well-designed energy transition plans fiscally unfeasible. 

Chief among these barriers is the high cost of capital. Renewable energy projects are capital-intensive, and the cost of capital – which includes interest rates, risk premiums, and required returns on equity – varies significantly across countries. In LMICs, weak credit ratings, macroeconomic volatility, and underdeveloped financial sectors translate into higher financing costs than in high-income countries. This inflates investment needs and increases debt service obligations over time. 

At the same time, many LMICs have limited capacity to generate the cash flows required for repayment. In the power sector, this is often the result of low electricity tariffs, poor utility performance, constrained public finances, and minimal access to concessional or grant-based funding. When financing costs exceed a sector’s ability to repay, the result is a fiscal affordability gap, a structural shortfall that deters both public and private investment. 

Recent work at the Climate Compatible Growth programme has begun to quantify this challenge, using a financial model called MinFin to assess the viability of energy transitions. The findings show that, in several LMICs studied to date, net zero investment plans are not just ambitious – they are unaffordable under current financing and funding conditions. 

South Africa offers a case in point. Despite its being one of the most carbon-intensive economies in the G20 and facing a power crisis, the country’s net-zero power transition looks out of reach without major changes to its financing model. Our modelling using MinFin shows that, under business-as-usual conditions, the financing requirements of a net-zero pathway will exceed the power sector’s available funding from 2035 onwards, peaking at 2.6% of projected GDP. This affordability gap is not merely theoretical. It signals a future in which capital may not be mobilised at all owing to insufficient repayment capacity. 

Figure 1. Projected financing needs and available funding for South Africa’s net-zero power sector transition by 2050 (as % of GDP) 

Source: Compiled by authors 

When financing offered to South Africa under the Just Energy Transition Partnership (JETP) is factored into this model, it does little to close the fiscal affordability gap. This is a consequence of the debt-dominated nature of JETP financing, which on aggregate is not significantly more concessional than the energy financing South Africa has historically accessed.  

This has clear implications for the G20’s climate finance agenda. If we are to ensure that transitions are not just planned but also delivered, we must shift from focusing solely on capital mobilisation to addressing financial viability.  

So, what can the G20 do? 

1. Strengthen transparency and concessionality  

Climate finance providers must improve transparency around the composition of finance. Specifically, the share provided as grants versus loans, and the concessionality of those loans, should be clearly reported. Current practices often overstate financial effort by reporting the face value of loans, even when issued on commercial terms. This undermines accountability and clarity on what debt burden is associated with a climate financing package. Transparency must be paired with a shift toward more concessional finance, particularly in contexts such as that of the JETP, where limited grant components and high-interest loans threaten financial viability. 

2. Explore alternative financing models  

To complement concessional finance when debt is not viable, the G20 should explore the scaling up of private sector-led models such as results-based climate contributions — (voluntary payments for verified emission reductions that do not generate offsets). These mechanisms can function as non-debt-creating grants and are particularly suited to LMICs.  

3. Integrate affordability into transition planning 

The G20 must ensure that the financing pledged to meet the new global climate finance goal of $300 billion annually does not repeat the shortcomings of past commitments. Investment plans must be grounded in financial realism, with tools such as MinFin used to assess whether projected financing is affordable. Embedding affordability into planning processes will prevent new debt burdens from derailing transitions, especially in JETP countries and other LMICs with constrained fiscal space. 

The G20 has an opportunity to lead a paradigm shift in climate finance. The next phase of climate leadership will not be measured by pledges alone, but by whether capital can flow to where it is needed most — on terms that countries can afford.