Financing the transition to a net zero economy

net zero

Investments in net zero clean energy must quadruple within the next two decades according to the global Energy Transitions Commission.

In its latest report “Financing the Transition: How to make the money flow for a net-zero economy” the Energy Transitions Commission (ETC) highlights the critical importance of strong government policies relating both to the real economy and to the financial system if finance is to flow on the scale required. It also identifies “concessional/grant” payments needed to support early coal phase-out, end deforestation and finance carbon removals.

Around $3.5 trillion a year of capital investment will be needed on average between now and 2050 to build a net-zero global economy, up from $1 trillion per annum today. Of this, 70 per cent is required for low-carbon power generation, transmission and distribution, which underpins decarbonisation in almost all sectors of the economy.

Well-designed real-economy policies must create strong incentives for private investment in the energy transition. Examples include setting ambitious targets for renewable generation by 2030, carbon prices and product regulation to drive decarbonisation in heavy industry, aviation and shipping, and specified date bans on the sales of internal combustion engines (e.g., by 2035 at the latest)

Other key actions include various forms of financial regulation, targeted fiscal support for the development and initial deployment of new technologies, and net-zero commitments from financial institutions.

Conceptually separate from investment finance (which will deliver positive economic returns), “concessionary/grant” finance will be required to help cover the economic costs of early coal phase-out, to offset the incentives to deforest, and to fund carbon dioxide removals.

“Adequate flows of finance are the key to delivering a net-zero future and limiting the impact of climate change. Private investment, government and philanthropic money are needed to deliver the large-scale funding and international financial flows to ensure we move from targets to action and deliver a low-carbon global economy”, Adair Turner, chair of the Energy Transitions Commission.

Part of the investment needed will be offset by reduced investment in fossil fuels, cutting the $3.5 trillion per annum requirement to a net $3 trillion. This is equivalent to 1.3 per cent of the likely average annual global GDP over the next 30 years. These investments will also create a lower operating cost energy system than today which could realise savings of $2-3 trillion a year by 2050 and continue thereafter, depending on how fossil fuel prices evolve. In middle- and low-income countries, much of the investment would be required to support economic growth even in the absence of a climate change challenge.

The true incremental cost of the required investment is therefore far below the gross investment need. But the scale of capital mobilisation and reallocation required will not occur without strong real economy policies in all economies and actions to address financial sector challenges in middle- and low-income countries.

The energy transition is capital intensive, pointing to a peak in investments around 2040 as we build the energy system of the future, before falling to a lower asset replacement rate thereafter.

To read the full report, visit: https://www.energy-transitions.org/publications/financing-the-transition/

The ETC’s report is accompanied by five sector sheets summarising the investment needs, challenges and actions required for decarbonising power, buildings, transport, industry and hydrogen sectors by 2050. These are available to download here: https://www.energy-transitions.org/publications/financing-the-transition/#downloads

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