Green financing and energy transition: Path to a sustainable future

As the world races against time to combat climate change, Thailand stands at a pivotal crossroads in its journey towards a sustainable future.

With a commitment to achieving carbon neutrality by 2050, each country is not only addressing its environmental responsibilities but also exploring opportunities in clean energy and green finance.

Financing the green energy transition outlines critical strategies that can be tailored to each country’s unique context, offering a roadmap to unlocking billions in green investments, fostering innovation, and driving the country towards a resilient, low-carbon economy.

This article is based on Deloitte’s Financing the Green Energy Transition report and preliminary analysis for Thailand’s context.

Green Financing Landscape in Thailand

Thailand is one of the countries that is most impacted by climate change e.g., natural disasters, rising in sea levels, air pollution, and international pressures to transition to a low-carbon economy.

Despite this, Thailand's economy still heavily relies on energy produced from fossil fuels. To achieve carbon neutrality by 2050 and net-zero emissions by 2065, key challenges include the need for significant investments to cope with impacts from climate change, insufficient market incentives, and varying readiness levels across sectors.

The financial sector plays a crucial role in this transition by allocating capital to businesses, especially SMEs, and investing in environmentally friendly technologies.

In 2022, The Bank of Thailand (BOT) set the direction for the financial sector to support this transition through several key initiatives, emphasizing the orderly transition and most importantly, the collaborative effort of all sectors.

Green financing can help companies in various industries transition to greener activities and reduce greenhouse gas emissions by de-risking project investment, creating stable markets, and bridging the cost gap between green and fossil fuel technologies.

De-risking Green Projects in Thailand

One of the primary steps in de-risking green projects is the establishment of consistent and predictable financial regulatory frameworks and energy policies. Clarity in future regulatory timelines and processes is essential to attracting foreign investments and support.

The government can also play very important roles in introducing financial mechanisms such as providing government-backed guarantees products and insurance schemes that mitigate the financial risks associated with investing in green projects.

Additionally, creating dedicated green finance instruments offering low-interest loans and grants can encourage private-sector investment by lowering the cost of capital. Collaborating with international financial institutions and leveraging their risk mitigation instruments can further enhance the attractiveness of green projects.

By reducing the perceived risks, these measures can facilitate a constant flow of capital into sustainable projects, accelerating Thailand’s transition to a low-carbon economy.

Market Creation and Financial Instruments

Each country has different agendas and contexts, and Thailand can create resilient markets and financial instruments tailored to support green initiatives by accelerating green bonds, sustainability-linked loan deployment, and carbon trading mechanisms.

Emphasizing the use of a Sustainable Financing Framework, aligned with international standards, can attract both domestic and international investors looking to finance sustainable projects. Additionally, implementing carbon pricing mechanisms, such as a carbon credit trading system, will incentivize businesses to reduce their carbon footprint and make projects more commercially viable.

The government can also encourage financial institutions to develop innovative financial products that reward sustainable practices, thus fostering a market environment conducive to green investments.

Bridging the Cost Gap

Investment support mechanisms and subsidies play a crucial role in reducing upfront costs for green projects. Such support can be particularly effective in Thailand’s renewable energy and EV sectors due to the relatively low barriers to adoption and promising prospects.

Implementing differential pricing policies that reflect the true environmental costs of fossil fuels, such as carbon taxes, can further enhance market competitiveness. Additionally, creating public-private partnerships to co-finance green projects can help share the financial burden and accelerate the adoption of cleaner technologies.

Therefore, Low-cost finance to enable an affordable energy transition would accelerate the adoption of green technologies.

Strengthening Financial Markets

Strengthening Thailand’s financial markets involves enhancing transparency and accountability in environmental risk management. Policymakers and regulators could encourage up-to-date disclosure standards, requiring companies to start collecting necessary data and reporting on their environmental risks and the sustainability of their portfolios.

As outlined in Thailand's drafted Climate Change Act, the country is in the process of establishing a nationwide GHG inventory to ensure that relevant, high-quality environmental data is accessible to all market participants.

Additionally, integrating environmental risk assessments into the regulatory framework can ensure that financial markets accurately price in the risks associated with climate change, thereby promoting stability and resilience.

The world is racing to close the 1.5’c gap and a course for net-zero targets for affordable energy transition is closing fast. Policymakers, investors and lenders, development finance institutions, and international organizations should ensure collaboration to help reshape the current project finance environment into a functional green finance ecosystem.

Green financing and energy transition: Path to a sustainable future