Delivering double wins: How can Africa's finance deliver economic growth and renewable energy transition?

Abstract

As economies grow, they tend to prioritize industrializing with fossil fuels over protecting the environment, impeding efforts to combat climate change. Therefore, there is an urgent need to address the critical policy concern of financing a clean energy transition to ensure sustainable economic growth for current and future generations. We examine the effect of financial development on clean energy transition in 20 low-income and middle-income countries in sub-Saharan Africa. The study employs fixed-effects and instrumental variable two-stage Least squares (IV-2SLS) models to examine the effect of financial development on the transition to renewable energy. Overall, the results show a positive effect of financial development on renewable energy transition. However, the financial development effect is only significant for financial institutions instead of financial markets – a signal of weak financial markets in the region. More importantly, the results show that this financial development effect on renewable energy transition is significant only in low-income countries, contrary to middle-income economies. We recommend that governments in the region further develop and promote innovative financial market products such as green bonds and digital finance that support private sector investments in renewable energy. Regarding trade, it is critical to subsidize environmentally friendly green energy imports while taxing non-renewable products that promote the use of fossil fuels.