Finance for the International Transfer of Climate Change Mitigation Technologies

Discussion Paper
Finance for the International Transfer of Climate Change Mitigation Technologies

Key messages:
1. Technological absorptive capacity (consisting of the factors of general governance and business climate, basic technological literacy, access to finance, and technologically proactive policies) is the key determinant of successful technology transfer. Access to finance is one necessary but insufficient condition for technology transfer, as technology receptivity is also grounded in the stakeholder and country context, the technology type and scale, and transfer mechanisms. Technology transfer by itself does not lead to or guarantee the leapfrogging of local innovation capabilities to a more indigenous stage, although it is the start of the evolution of the technology latecomer’s domestic innovation modes.
2. High cost of debt is the most pressing problem that restricts technology diffusion in developing countries. Firms in developing countries pay a significantly higher lending interest rate, rely on internal funds for investments to a much greater extent, and suffer from a heavier burden imposed by collateral requirements than their counterparts in developed countries. The cost of debt is even higher for climate mitigation projects, because such projects have low collateral value, fail to secure attractive debt terms, and must compete with mature, brown technologies in the same sector for loans.
3. Equity investors in developing countries are willing to take a low initial internal rate on return (IRR) for strategic considerations. By sacrificing initial IRR, equity investors aim to gain the market share and play a dominant role in the long-term once the technology matures. Equity investors also expect IRR to increase by 10-15% in the future. These strategic considerations lead to the concern that equity costs will increase in the future once the market is mature enough to provide more rational risk pricing.
4. Technology procurement is costly and challenging. Procurement costs can account for more than 95% of the total costs of a technology transfer project. International technology suppliers are easily deterred by narrow technical specifications, cumbersome bidding processes and small contract values, making the procurement process inefficient. In addition, few private beneficiaries of technology would retransfer technology to other domestic counterparts, fearing competition and hence limiting the overall impact of diffusion.
5. IGES’s experience on the ground shows that, rather than private firms owning proprietary technology (at least technology for demonstration purposes), it is a public institution that can provide more incentives to the private sector and accordingly generate a larger impact of diffusion. Private firms are willing to install the imported technology because they pay a lower import tax of equipment in such cases. A public institution is also willing to disseminate the technology, as it is not afraid of competition.
6. Inadequate lending for business investment and particularly for mitigation projects reflects developing countries’ wider credit market failures, including onerous collateral requirements. This has left one fundamental question to be answered: What types of policy interventions and instruments can move money from old to new technologies? In essence, an investment shift to low-carbon electricity, new industrial processes and radical production processes is particularly important for developing countries to avoid carbon lock-in effects in the long run.