Decarbonization: the challenge of reducing the cost of capital for a sustainable future.

The decarbonization of the economy presents itself as one of the greatest challenges of the 21st century, and its success will largely depend on how the cost of capital is managed. Various institutions have developed estimates regarding the expenditure necessary to achieve carbon neutrality by 2050, with figures that vary significantly. According to a recent study by BBVA Research, these estimates range in the trillions of euros, highlighting that this is a monumental task that cannot be tackled without the active participation of the private sector. One of the biggest obstacles facing investors is the lack of clarity regarding what is included in decarbonization budgets. The question of whether only investment in renewable energy will be considered, or also in industrial processes and the transition to electric mobility, complicates financial planning even further. Additionally, the underlying assumptions—such as the pace of technological improvements and future regulations—play a crucial role in determining costs. A central aspect of this debate is the cost of capital. This is not limited to interest rates set by central banks or the yields on sovereign bonds, although these are important factors. The minimum required return for investments in decarbonization must take into account a broad spectrum of macroeconomic risks, such as institutional stability and inflation, as well as specific risks related to regulation and infrastructure. In other words, the uncertainty surrounding demand and the viability of proposed innovations adds an additional layer of complexity to financing. To address these challenges, financing strategies must be flexible and adapt to the different phases of development of clean technologies. In the early stages, where basic science predominates and risks are high, greater public support will be needed. This could include guarantee schemes and loss-sharing mechanisms that facilitate the influx of private investment. As projects develop and risks decrease, private financing should begin to play a more prominent role. In the final stage, where the goal is large-scale commercialization, it is vital that private financing predominates. At this point, the public sector would have the responsibility to establish a clear regulatory framework that defines the rules of the game. Predictability in energy policies becomes a key element in attracting investors. Solid planning, with short- and medium-term milestones that are subject to public scrutiny, is essential to build market confidence. Particularly in emerging markets, reducing the cost of capital takes on even greater importance. These countries face higher macroeconomic risks and more uncertain climate ambitions, which can result in a cost of capital that doubles or triples that observed in more developed economies. The lack of certainty regarding energy policies in these contexts can lead to capital flight and hinder progress towards decarbonization. The approach to decarbonization policies must therefore be radically different from what has been used so far. Instead of focusing efforts on the volume of funds needed for the transition, it is crucial to focus on reducing the cost of capital. This approach will not only drive competition but will also facilitate the mobilization of the resources necessary to achieve ambitious climate goals. In conclusion, decarbonizing the economy is not a matter of whether there is money available, but of how to access it efficiently and profitably. Collaboration between the public and private sectors, as well as clarity in policies, are essential elements that will determine the success of this transition. Undoubtedly, time is running out, and decisive action is urgent. The key to effective decarbonization may lie in the financial realm, where the cost of capital becomes the hinge that can open the doors to a more sustainable future.