1750 Massachusetts Avenue, NW | Washington, DC 20036-1903 USA | +1.202.328.9000 | www.piie.comPOLICY BRIEFSteven Fries, nonresident senior fellow at the Peterson Institute for International Economics, is a senior associate fellow at the Institute for New Economic Thinking at the Oxford Martin School, University of Oxford. He was previously chief economist at Shell and the UK Department of Energy and Climate Change and deputy chief economist at the European Bank for Reconstruction and Development.23-2 Multilateral development banks are key to unlocking low-carbon investments in developing economiesSteven FriesApril 2023Note: The author thanks Sam Fankhauser, Egor Gornostay, Jacob Kirkegaard, Adnan Mazarei, Marcus Noland, Asher Rose, and Steve Weisman for helpful comments on previous drafts. He acknowledges financial support from a multiyear grant from the Danish Embassy in Washington for PIIE research related to developing economies and climate change.INTRODUCTIONDespite sharp cost decreases and investment increases for some low-carbon technologies in advanced economies and China, other emerging markets and developing economies (EMDEs) have yet to fully tap these investment opportunities.1 The opportunities arise from the increasing cost competitiveness—if not cost dominance—of technologies like solar photovoltaics (PV) and wind turbines to generate electric power as well as battery electric cars and motorcycles. But so far, most investments in these technologies are in advanced economies and China. Because EMDEs are set to see significant increases in their economic activity and energy use in the coming decades, their prompt pivot to low-carbon technologies is central to both their sustainable development and a stable climate (IEA 2022a, pp. 107–10, 241–46).Some argue that adequate carbon pricing and greater financial transparency would unlock low-carbon investments in EMDEs, but evidence points to the greater significance of other impediments. For example, barriers arise from piecemeal energy reforms, inadequate energy market designs, institutions, and infrastructure, high switching costs to new energy technologies, and domestic 1 In this Policy Brief, low-carbon technologies are those consistent with a net zero emissions (NZE) energy system in the long run even if their current use entails some emissions. For example, battery electric vehicles (EVs) produce some emissions because the electric power to charge them is not fully decarbonized. But battery EVs charged with low-carbon power would be consistent with an NZE system. 2 PB 23-2 | APRIL 2023financing constraints. Price distortions from neglected carbon emissions and fossil fuel subsidies and financial disclosures matter too, but they are not barriers to low-carbon investments that are increasingly competitive at current prices and have a track record of attracting private finance. The multilateral development banks (MDBs) are in a unique position to decisively help lower barriers to low-carbon investments in EMDEs and unlock these sustainable development opportunities.2 Their differentiating governance, financial and technical capabilities, and financing instruments would enable MDBs to support the necessary business environment and energy reforms and to cofinance low-carbon and energy efficiency investments alongside other investors to reduce and manage risks. Effectively applied, these complementary MDB operations would reduce required returns on low-carbon investments, improve their cost-effectiveness, accelerate sustainable development, and advance progress toward net zero emissions (NZE) and a stable climate. But the MDB approach to climate change mitigation so far is opportunistic rather than transformative.This Policy Brief assesses how the MDBs should use their unique capabilities to support energy reforms that expand low-carbon investment opportunities and participate in complementary private and public low-carbon investments to mitigate investment risks. They include, for example, support for a two-track approach to electricity reforms—a fast track focused on contractual frameworks for power investments and a fundamental electricity system reform track. Policies to promote energy efficiency in buildings and manufacturing and the efficient growth of cities and transport systems are also pivotal. In addition to supporting such structural reforms, the MDBs should participate directly in large private and public investment projects in electricity generation and grids and in public transport. To manage foreign exchange rate risks in investments, MDBs should raise local currency funds and both invest them directly in large-scale projects and on-lend them through domestic banks for smaller low-carbon and energy efficiency investments. This Brief focuses on the diffusion to EMDEs of low-carbon technologies that are increasingly competitive, like renewable electric power and electrification of road transport, buildings, and manufacturing.3 H