Climate Action

Costing the earth: What will it take to make the green transition work?

A successful green transition requires more investment than is currently provided.

A successful green transition requires more investment than is currently provided. Image: Reuters/Ludovic Marin/Pool

Christian Keller
Managing Director, Head of Economics Research, Barclays
Maggie O'Neal
Global Head of ESG Research, Barclays
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  • Achieving net zero by 2050 requires a complete overhaul of the world's energy, transport and industry, as well as agriculture and forestry.
  • The green transition will also require a lot more investment than the world is currently providing, but reaching the levels needed is not impossible.
  • Here are three aspects key to understanding the investment needed and how the world can help fund and facilitate a successful green transition.

For the green transition to achieve net zero by 2050 requires a complete overhaul of the world’s energy, transport and industrial systems, as well as the transformation of agricultural and forestry practices.

It will also require a lot of investment – much more than the world is currently providing – but it is not impossible.

To help facilitate and accelerate raising the funds needed for the green transition, research analysts from Barclays Corporate and Investment Bank outline three aspects key to understanding the investment needed.

Greater capex needed for green transition

Remaining on a pathway to cap global temperatures at 1.5°C will require huge capital expenditure (capex).

Not only must fossil fuel-based infrastructure be replaced with solar, wind and other renewable energy sources, but investment is also required for the development of solutions in hard-to-abate sectors, such as steel, cement and aviation.

Estimates for just how much the green transition will cost vary greatly, ranging from a total of $100 trillion to $300 trillion between now and 2050. To put this into context, current annual global gross domestic product is about $100 trillion.

How much will it cost to reach net zero by 2050? Estimates differ
How much will it cost to reach net zero by 2050? Estimates differ Image: Barclays

Here are two estimates of the investment required:

Conservative estimate: $2trn/year today (about 2.5% of global GDP) to nearly $5trn (4.5% of global GDP) by 2030, before returning to 2.5% by 2050 – that’s the International Energy Agency’s (IEA) calculation of the yearly global investment in just energy infrastructure to stick to the 1.5°C target.

Radical estimate: $9.2trn (7.5% of global GDP) annually between now and 2050 is consultancy McKinsey’s conclusion about the average yearly energy investment needs.

Regardless of the estimate used, the message remains the same: global capital expenditure will need to rise substantially from current levels to limit global warming and mitigate climate risks.

Capex will need to increase substantially relative to current levels
Capex will need to increase substantially relative to current levels. Image: Barclays

Shifting towards greener investments

Meeting these investment goals by 2050 would be difficult but not impossible, even using McKinsey’s annual capex estimate of $9.2trn – the most extreme, by some distance.

The world economy is already investing roughly $1.4 trillion per year in clean energy and its supporting infrastructure, according to the IEA. Based on current policies, annual investments into low-carbon infrastructure are expected to increase by $2.5 trillion.

This leaves the annual investment gap at roughly $5.3 trillion, which is still a lot. But it could be tackled by redirecting the estimated $3.7 trillion currently flowing into brown infrastructure, such as high-polluting oil and gas extraction, refining and combustion, and cement and steel production, to green power plants.

The net remaining investment gap to be filled would be $1.6 trillion. While still substantial, it is equivalent to only 2% of annual global GDP.

How economies can start filling the green investment gap
How economies can start filling the green investment gap Image: Barclays

Facilitating the transition in developing countries

Most green transition investments are required in developing and emerging market countries, where emissions have risen the fastest in recent decades and will continue to do so.

Emissions in these regions will rise by roughly 20% by the mid-2040s before marginally declining to 2050, according to the IEA. Rapid economic growth, growing populations, urbanization and industrialization will all contribute, despite improvements in energy efficiency and increased use of renewable energy.

Therefore, with fossil fuels making up over 75% of global emissions and developing economies accounting for nearly all additional energy demand in the future, substantial investments will be needed to avoid a situation where global emissions increases are not offset by decarbonization efforts in developed economies.

Failure to curb the projected rise in emissions in developing countries could undermine global decarbonisation efforts.
Failure to curb the projected rise in emissions in developing countries could undermine global decarbonization efforts. Image: Barclays

Most developed countries fall short of their fair share of climate financing commitment.

Aspects key to successful green transition

Here are three aspects that need to be understood to comprehend the investment needs required to make the green transition work:

Not filling the gap: Only four countries have contributed their “fair share” of the annual $100bn target that was due by 2020, as was agreed in Paris in 2015. Not only has this target been missed, but the targets themselves fall far short of what is needed to hit net zero by 2050.

Just transition: Developing economies will also need to be convinced of the green transition’s fairness. Current per capita emissions in developed markets are significantly higher than in the rest of the world. As developing countries aspire to catch up on standards of living, emissions are likely to rise unless growth can be decoupled from carbon-intensive activities.

Providing solutions: Developed countries will have to provide capital to developing countries if they want them to ‘leapfrog’ straight to low-carbon solutions. The recent Just Energy Transition Partnership (JETP) announcements with South Africa (2021) and Indonesia (2022) will see groups of developed countries provide financing to assist countries with their energy transition.

Achieving net zero by 2050 is a challenge, but with further investment the global overhaul of industries and energy systems required it is not impossible.

A version of the article was originally published by Barclays here.

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