Accelerating and widespread climate change manifests itself in irreversible consequences.1 The overwhelming weight of scientific analysis points to environmental adjustments and cataclysmic feedback loops that will push ecosystems beyond tipping points.2 At that moment, decarbonization efforts would be rendered mute.
The latest nationally determined contributions (NDCs) to decarbonization made at the 2021 United Nations Climate Change Conference of the Parties (COP26) still fall short of the 1.5°C goal set out in the Paris Climate Agreement (for an extensive summary of COP26 outcomes, see Chapter 1, Box 1.1).3 The current trajectory is expected to steer the world towards a 2.4°C warming,4 with only the most optimistic of scenarios holding it to 1.8°C (see Figure 2.1).
Without stronger action, global capacity to mitigate and adapt will be diminished, eventually leading to a “too little, too late” situation and ultimately a “hot house world scenario” with runaway climate change that makes the world all but uninhabitable.5 The world will face high costs if we collectively fail to achieve the net-zero goal by 2050.6 Complete climate inaction will lead to losses projected to be between 4% and 18% of global GDP7 with different impacts across regions.8
The transition to net-zero—the state in which greenhouse gases (GHG) emitted into the atmosphere are balanced by their removal from the atmospherei—could be as transformative for economies and societies as past industrial revolutions. However, the complexities of the technological, economic and societal changes needed for decarbonization, coupled with the slow and insufficient nature of current commitments, will inevitably lead to varying degrees of disorderliness.
As climate change intensifies and some economies recover more quickly than others from COVID-19, a disorderly transition could bifurcate societies and drive countries further apart, and a too-slow transition will only beget damage and disruption across multiple dimensions over the longer term (see Box 2.1). Within countries, the disruptive potential of the transition could be amplified by disconnects between governments, businesses, and households with respect to policy commitments, financial incentives, regulations, and immediate needs. A sustained lack of coordination between countries would likely have profound geopolitical implications, with rising friction between strong decarbonization advocates and those who oppose quick strong action by using tactics such as stalling climate action or greenwashing—the practice of making people believe that a company or authority is more environmentally friendly than it actually is.
Clear evidence of rising physical risks, such as melting land ice, rising sea levels, and prolonged periods of extreme heat and cold,9 as well as their associated consequences for human and economic systems,10 are intensifying momentum for the transition. And while COVID-19 lockdowns saw a global dip in GHG emissions, upward trajectories soon resumed:11 GHG emissions rates rose faster in 2020 than their average over the last decade,12 illustrating how the global economy is still heavily dependent on fossil fuels.
Governments, businesses, investors, and communities are increasingly converging on the need for a quicker transition—each group setting higher expectations of the other. Green parties, and green policies—such as a carbon border adjustment tax13—have gained traction in many countries, regions, and industries, as have multilateral ideas like climate clubs.14 A plethora of climate risk disclosure frameworks and measurement standards are now being combined within a new International Sustainability Standards Board (ISSB) by the IFRS. This will help clarify what needs to be done, and by whom, to highlight and prevent greenwashing and stalling on climate action.
The rise of stakeholder capitalism, shareholder activism, and increased appetite from companies to use environmental, social, and corporate governance (ESG) targets and metrics,15 coupled with ESG-based investments, is re-shaping the financial and economic landscape16 and an increasing number of organizations are committing to decarbonize their operations. As banks, insurers, and institutional investors are steering capital towards net zero, financial systems are rapidly emerging as critical enablers of the transition. A growing share of the US$100 trillion bond market is mobilized for climate change solutions, and it is expected to reach the milestone of US$1 trillion in annual issuances by 2022.17 Moreover, during COP26, the Glasgow Financial Alliance for Net Zero (GFANZ) announced that over US$130 trillion in private capital has been committed to carbon neutrality—enough to achieve net zero by 2050.18 Similarly, parties at COP26 agreed on the framework for Article 6 of the Paris Agreement, enabling the immediate operationalizing of global carbon markets, ending uncertainty about the Clean Development Mechanism (CDM) and further establishing a new central UN supervisory body to trade carbon credits on specific projects.
These commitments by both businesses and governments are being closely monitored by civil society organizations and investors,19 which fear untenable populist promises are being made for short-term political or financial gain.20
The risk of a disorderly transition is aggravated by the interdependencies and distributed nature of economic and financial systems, the historic shielding of climate change externalities from citizens and businesses, decarbonization costs and the many divergent interests at play that will complicate the transition. In the short term, these complexities are likely to prompt many actors to avoid or defer action.
Some national and business actors are still deliberately maneuvering to stall or scale back the green transition. Governments need to balance the needs of populations dependent on carbon-intensive industries with international commitments. Yet some of these commitments are lofty and lacking scientific credibility,21 legislatures are pre-emptively blocking new climate laws,22 and regulations are being contested in courts by both proponents who push for more climate action and those who advocate for less.23 Geopolitical tensions and rising competition over climate-friendly raw materials also further threaten to undermine international cooperation on green transition progress.24 Some actors show little interest in the multilateral platforms on which climate action is taking place;25 others continue to prioritize nationally important industries and could, in the wake of increased global tensions, shift to national security concerns over action on the transitions.
With government finances under pressure, regulatory obligations are not going far or fast enough, and there is an assumption that market forces will come to the rescue. In many countries, there are insufficient incentives for households and businesses to invest in net-zero technologies and few penalties for failing to do so. Slow uptake of new technologies, such as low-carbon energy generation and carbon capture and storage, continued household overconsumption of carbon-intensive products and services,26 and a failure to grasp the seriousness of climate threats all point to a slower transition that preserves “order” in the near term.27 New innovations that require high amounts of energy during production and use, such as crypto-mining or crypto-trading,28 often coming from fossil fuel energy sources, can also offset efforts to reduce ecological footprints.
Post-COVID-19 recovery measures mostly neglect the green transition in favour of short-term stability,29 while loose monetary policies further distort green, market-based solutions or investments;30 they also exacerbate the problem of zombie companies.31 Carbon-intensive technologies continue to receive public subsidies,32 with over 50 developed and emerging economies committing US$345 billion to fossil fuels in 2020—a figure lower than in previous years largely because of depressed consumption and prices during the pandemic.33 At the time of writing, the economic rebound following the impact of COVID-19 has seen (fossil) energy demand outstrip supply,34 resulting in sharply increased energy prices, even as the world turns against fossil fuels.35 Moreover, some business actors continue their efforts to slow the transition. Climate-sceptic lobbying,36 greenwashing, and sowing misinformation and distrust about climate science remain pervasive in many countries.37
Some economic incentives also complicate attempts to coordinate measures that could internalize costs in high-emission industries and countries, minimize market disruptions and more fairly redistribute burdens and rewards. Instead of fostering decarbonization, the lack of global emission prices and reporting requirements continues to shield consumers and producers from the cost of inaction.38 This incentivizes countries and businesses not to curb emissions, but instead to game the system and avoid liability by offshoring carbon-intense activities or trading their emissions to countries with less stringent regulations.39 Developing countries attracted to emissions in-shoring schemes by short-term financial again squander the opportunity to use carbon allowances for their own development and risk undermining their future access to trade flows and the finance needed for mitigation and adaptation.40
Businesses may be unprepared for transition risks such as rapid shifts in policies and regulations, the need to develop low-carbon technologies and changes in consumer behaviour and investor preferences.41 These risks have the potential to destabilize the financial system,42 as in aggregate they can increase default rates and asset volatility. They are further amplified in economies with low investment capability, high reliance on fossil fuels, and less-inclusive political systems.43
The consequences and repercussions of the transition will necessarily reflect the speed at which it takes place; the efforts that go into it; and whether it is slow or aggressive, concerted or entrenched, and focused more on mitigation or adaptation. The goal of 1.5°C is so fundamental that societies need to be prepared to assume negative consequences of policies taken by governments today to avoid the worst consequences tomorrow. This includes job losses, increased costs, and geopolitical insecurity associated with a disorderly transition. Only a socially just transition will make the consequences bearable for large parts of societies with governments needing to create policies and social-protection systems that help reduce the impacts for those affected. A rapid decarbonization would increase economic and societal disruption in the short term, while a slower pace with fewer short-term impacts would entail much larger costs and greater disorderliness in the long term.
GRPS respondents drew attention to the societal consequences of environmental degradation at a global scale. They identify “climate action failure” and “extreme weather” as strong aggravators of “involuntary migration”, “livelihood crises” and “social cohesion erosion”. In contrast, respondents to the Executive Opinion Survey (EOS) see the impacts from “climate action failure” as top risks in the short-term on a country level: “human environmental damage” and “extreme weather” are considered top 10 risks in 90 economies and 60 countries, respectively. All countries ranking these risks highly are particularly prone to wildfires, droughts, floods, deforestation and pollution.
Concerted, aggressive action now will, because of the scale of the endeavour, bring discontinuities and thus disruptions, as efforts within and between industries, businesses and governments fail to align. It would alleviate long-term environmental consequences but could have severe short-term economic and societal impacts. Missteps will likely threaten national energy security, for example, and result in volatile energy prices. Over the longer term, countries will face questions regarding the viability of vehicle fuel and gas supply arrangements when much of the population has shifted away from combustion engines, gas boilers and heating.
As carbon-intense industries employ millions of workers, their rapid termination could trigger economic volatility and increase societal and geopolitical tensions. Up to 8.5 million jobs in the energy sector (almost 30%) could be lost in fossil fuels and nuclear energy by 2050, although with re-skilling up to 40 million new jobs could be created, mostly in renewables.44 Earlier or current investments in carbon-intensive technologies could result in stranded assets. These—even if they are the result of willfully made investments in carbon-intensive technologies for short-term gain instead of long-term investments in clean technologies45—could impact the financial sector,46 as well as the transition, when they are trapped in industries such as those that extract resources required for low-carbon technologies.47 Despite these short-term disruptions, the social and economic consequences of unmitigated global warming and entire nations being flooded or disappearing would be even more cataclysmic: countries’ complete economies and assets would be left stranded.
Non-holistic government approaches also pose risks. Adopting low-carbon and more sustainable technologies too hastily, in a way that neglects systemic interdependencies—such as transitioning one system before another linked or dependent one is ready—could lead to production shortages and disrupt secondary economic cycles if redundant systems are not in place to prevent energy supplies from collapsing. Poor regulation of new green markets could create unwanted monopolies in geopolitically contested industries such as rare earth elements extraction.
Some approaches to the green transition reflect blind spots that risk damaging outcomes for workers and the environment.48 These include focusing solely on carbon dioxide (CO2) emissions and ignoring methane,49 or the increased use of resources for low-carbon technologies. They also risk setting regulatory requirements to phase out technologies before substitutes exist or, in other words, a focus on supply constraint of fossil fuels rather than an equal emphasis on demand-destruction in the most carbon-intensive industries.
In contrast, a slower but more orderly transition might be more manageable in the short term but would result in the need for deeper and faster changes by 2050. This would lead to more pronounced long-term disorder, amplified at the same time by more damaging economic activity such as the closing off of opportunities, damaging impacts through environmental degradation impacting societal well-being, and infrastructural fragilities.
The long-term financial impacts would disproportionately affect large and/or developing countries.50 Some of these countries face political and financial barriers to swiftly reducing their reliance on fossil fuel energy production such as cutting coal use;51 others rely on natural gas to reach a higher level of industrialisation before decarbonizing,52 even though these policies further aggravate the destruction of ecosystems. Consequently, the loss of (arable) land would increase migration pressure and the number of climate refugees (see Chapter 4). This slow pathway may lead countries to prioritize adaptation over mitigation efforts. Yet, once carbon prices increase and demand destruction ends up making fossil energy investment a losing bet, leapfrogging to renewables sooner than later could prove to be a more effective long-term investment for such developing countries.
It is most likely that national transition programmes will move at different paces as a result of differences in political will (decarbonization ambitions and political interest), economic structure (service vs manufacturing), and capabilities (technological know-how and financial wherewithal). Countries that move faster will be able to consolidate their own national capabilities and cleantech industries; those that move more slowly will lack competitiveness in this area but be able to leverage the best that has been developed elsewhere. Initiatives that pay closer attention to scope 3 emissionsii will shine a spotlight on global value chains and will increasingly disadvantage exports from laggard countries. Furthermore, the heterogeneity of climate action worldwide will be a risk for trade flows in the future, especially for the less-developed economies. By facing narrower access to trade finance, they risk exclusion from the opportunities for orderly climate mitigation and adaption.53
Reputational damage and liability issues for governments and businesses seen as complicit in, if not responsible for, climate change could lead to breakdowns in trust between nations, higher global tensions and the possibility of sanctions being introduced against laggard nations, or fines/trade tariffs against relapsing businesses.
Transition policies risk losing public support if they neglect the impacts—on land use, resources or nature—of large-scale water and wind energy installations,54 or emanate from failure to create just pricing schemes for communities willing to invest in green energy, such as a shift of fossil fuel to renewable energy subsidies or equal feed-in tariffs for individuals and large-scale providers.55 Poor grid stability through the intermittency of renewable energy sources, shortages in storage capacity, and the phasing out of existing baseload energy technologies that have a low carbon intensity yet are politically highly controversial, such as nuclear energy,56 could also dwindle public support for cleaner energy sources.
While negative emission technologies are an essential component of all IPCC 1.5°C scenarios, geoengineering solutions could be silver-bullet solutions, but they may not adequately explore systemic interdependencies and implications.57 Moreover, the deployment of such untested technologies carries unknown risks. Some geoengineering approaches—such as weather modification or solar radiation management (SRM)—could spiral out of control or create friction if they are used for geopolitical advantage in the absence of any governance framework,58 as the effectiveness could vary regionally.59 They could exacerbate geopolitical tensions between countries where the local climate is improving and those that are suffering from the unintended consequences.60
On the other side, biotechnical solutions such as carbon dioxide removal (CDR) from the atmosphere need to be scaled up to come close to keeping the 1.5°C scenario within reach under all IPCC scenarios.61 The robustness of any net-zero strategy that relies on CDR depends both on the effectiveness of the underlying projects that drive the CO2 removal and, especially, on the permanence of the stored carbon.62 Other solutions, such as carbon capture, utilization, and storage (CCUS), are already heavily subsidized,63 but they risk being used for greenwashing as carbon-heavy industries eventually fail to structural change their value chains to reduce their emissions.64 Similarly, Bio-energy Carbon Capture and Storage (BECCS) solutions could create unintended geopolitical consequences or prove to be counterproductive.65
The type of transition will have far-reaching socio-economic implications for individuals. Where policies, incentives and innovations fail to stimulate effective market solutions, households will see increases in their cost of living due to rising decarbonization requirements for homes, rising fossil fuel prices and physical climate impacts, among other issues. They may also face increased service disruption from utilities where system dependencies and discontinuities have not been adequately anticipated by participants. Especially at risk are unskilled workers, those unable to transition their skill sets, and those currently employed in carbon-intensive industries that undergo radical transformation.66 Many of these workers are already facing challenges related to automation and the hyper-globalization of the pre-COVID-19 era, when key heavy industries such as coal and steel were offshored to emerging markets.67 Middle-class households could also be left behind if aggressive transition measures impact their finances and their purchasing power diminishes substantially.
Loss of income would inhibit people’s access to new technologies and upward mobility, entrenching inequalities for generations. Unequal transition speeds could widen inequalities between economies and create pressure on workers to migrate to countries where their skills are still in demand (see Chapter 4). Failed or slow climate action could worsen gender inequalities as, in many low-income economies, women are responsible for gathering and producing food, securing water and collecting bioenergy sources such as firewood and crop waste. Together, these consequences could trigger disillusionment with climate action and lead to the radicalization of marginalized socio-economic groups across the political spectrum.
Governments will face backlash whether climate action is slow or aggressive. Steeper transition costs such as high and quick increase in the price of carbon and fossil fuels could weaken public support for fast action; conversely, slow action could trigger further radicalization from those who feel authorities at all levels do not act fast enough, with a potential increase in inter-generational friction and more fiscal drain due to increased recovery funding. Investing in a net-zero economy could create unsustainable levels of debt for economies lacking the means of such large-scale investment, or the loss of rent/tax revenue for economies heavily dependent on carbon-intensive resource production, which would cripple public finances already vulnerable from the economic impacts of COVID-19 fallouts (see Chapter 1). Especially at risk are more climate-vulnerable countries; such green investment could be seen as a diversion from pandemic-related recovery programmes and the enhancement of core public infrastructure and services. Unequal access to low-or zero-carbon innovations could undermine support for governments in some countries.68
A socially unjust transition would exacerbate geopolitical and economic friction and inequalities between countries and regions. Laggard economies—especially those reliant on carbon-intensive sectors and that fail to keep up with technological innovation—risk losing competitive advantage and leverage in trade agreements, civil unrest, regime change, and massive economic and societal disruption. Unequal access to materials and funding to enable the transition could increase tensions, as could unintended consequences—such as the destruction of ecosystems in developing countries to extract resources for next-level electrification of mobility in developed economies.69
Failed or delayed financial promises by advanced economies—such as a decline in promised foreign direct investment (FDI),70 or shortcomings to the globally agreed annual $100billion for emerging and developing countries to finance their transition to lower emissions and adaption measures to the physical consequences of climate change71—could leave developing countries stranded with costly, aggressive transition plans, unable to provide for vulnerable populations.
A zero-sum political game, with a first-come, first-served mentality, compounded by a lack of solidarity and combined with the absence of clear climate governance or enforceable accountability measures would increase tensions between economies transitioning quickly and those preferring or needing a slower transition.
Policies triggering the premature termination of large-scale industries would disrupt markets, affect financing mechanisms and limit investment opportunities.72
Inconsistent policy signals, choices crippling competitiveness, and conflicting rhetoric, regulations and incentives would generate discontent among businesses. The transition could lead to stranded assets in carbon-intensive industries,73 while devaluations could potentially affect the financial system,74 leading to loss of liquidity and increasing liability, credit, and market risks.75 Businesses perceived as lagging, or as complicit in slowing down climate action,76 could lose consumer and investor confidence and face additional state intervention and liability risk through judicial action.77 Overall, businesses could also lose out on opportunities to invest in net-zero technologies and the skilled professionals of the future,78 impacting their long-term viability.
A disorderly transition could see more frequent and severe supply chain disruptions due to labour and product shortages, especially as sectors and companies switch operating models or simply go out of business. These disruptions present challenges to there silence of business models across all industries.
How the speed and degree of transition impacts natural ecosystems will, in turn, help or hinder its effectiveness. Some actions taken to mitigate climate change will incur costs for nature. In the rush to increase biomass use for BECCS, to use more agricultural land to create biofuels for industries such as aviation, and to extract minerals needed for the decarbonization of the world’s economy,79 additional negative impacts on ecosystems and indigenous societies in emerging economies are difficult to avoid. Solutions used for carbon offsetting, such as restoring or reforesting land—so-called offset forests—could be destroyed if that land is damaged by more severe weather such as wildfires or floods, eventually unleashing the stored carbon. Poorly sited wind farms or hydroelectric dams can affect ecosystems and wildlife at a large scale, and they also present societal risks (such as forced relocation of local residents) and political risks (such as by controlling downstream water access to neighbouring countries). The continued degradation of nature will add to stress on local residents, public health, businesses, and ultimately the stability of society, while regional population growth will further impact the use of land and resources such as water and food.
Beyond the sheer scale, complexity and interdependency of the needed changes, the climate transition will be disorderly because decades of inaction and hesitant implementation of transition measures on local and global levels have steered the planet onto a path that will be difficult to change.
In a recovering yet diverging global economy, countries will need to transition at varying paces to prevent short-term disruptions from offsetting long-term gains, but the consequences of disparate transitions will be felt worldwide. The least disruptive climate transition measures will be those that holistically integrate the needs of individuals, societies, businesses, and planet. Domestic and international collaboration should focus on educating the public about the value and need of climate action, including a change in consumer behaviour and demand-destruction for carbon-intensive goods. Businesses of all sizes need to be incentivised to proactively factor in transition risks and move to circular economy models, while governments should be encouraged to take bold and immediate steps towards implementing robust legal frameworks that ensure a just transition.
Any transition of this scale will be disruptive. All stakeholders need to focus on actions that will drive an innovative, determined, and inclusive transition in order to minimize the impacts of disorder, facilitate adaptation and maximize opportunities.
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