The Energy Transitions Commission (ETC) – the global think tank that aims to accelerate the energy transition and mitigate climate change, has issued its latest report, focusing on the annual global investments needed to reach net zero.
The report titled: “Financing the Transition: How to make the money flow for a net-zero economy“, highlights the critical importance of government support, concessional/ grant payments, and philanthropic money to ensure the financial flow towards decarbonizing the economy to the scale needed to achieve a net zero world.
According to the findings, the world would need $3.5 trillion a year of capital investment on average between now and 2050 to build a net-zero global economy. The number is up from $1 trillion per annum today and compares to around $1 billion in annual investments in fossil fuels developments.
Out of the $3.5 billion, 70% is required for low-carbon power generation, transmission, and distribution which are cornerstones in the decarbonization of almost all economic sectors.
Savings Achieved From Net Zero Economy
The report highlights that a peak in investments in decarbonization will also be balanced out by savings achieved from the lower operating cost energy system associated with a low-carbon economy, and savings from high fossil fuel prices. Part of the investment needed will also be offset by reduced investment in fossil fuels, which would cut the $3.5 trillion per annum requirement to a net $3 trillion.
The lower operating cost energy system could realize savings of $2-3 trillion a year by 2050 and continue thereafter. In middle- and low-income countries, investments are required either way to support economic growth even in the absence of a climate change challenge.
Back in 2022, another study found out that just 10 investors have the most influence over the world’s fossil fuel reserves.
Financial institutions like BlackRock, Vanguard, Fidelity Management & Research, Dimensional, State Street, Life Insurance Corporation of India, Capital Group, and state entities in India, Saudi Arabia and Norway have the ability to influence 49.5% of the emissions potential from 200 top oil and gas companies. Those ten actors can accelerate the transition away from fossil fuels by redirecting their positions in those assets.
According to the Energy Transitions Commission’s report, the peak in investments needed is expected in 2040 as the energy system of the future would be built and after that, it would be down to a lower asset replacement. The report highlights the critical challenge of the global net zero transition – the scale of capital mobilization and reallocation will not occur without strong real economy policies in all economies.
There is a light at the end of the tunnel, however – renewables are now cheaper than new fossil fuels in over 95% of global electricity markets which means governments have an incentive to invest in clean energy which is equal to an investment in financial savings, energy security, and efficiency.
Concessional/ Grant Payments
Concessional/ grant payments are also necessary for the economy to offset the revenues that businesses and landowners receive from deforestation and coal development. In middle- and low-income countries (excluding China) these concessional/ grant payments could amount to around $0.3 trillion a year by 2030 if the world is to achieve the 1.5°C objectives.
This money could, in theory, come from corporates via voluntary carbon markets, philanthropy, and high-income countries.
The following amounts of concessional/ grant payments are allocated as follows:
- around $25-50 billion per year for early phase-out of existing coal assets, with the need for these payments to decline to zero by 2040.
- around $130 billion per year to end deforestation by 2030 – but potentially far more if red meat consumption continues to increase. The available money could also be better spent in other ways like directly supporting governments that are willing and able to impose deforestation bans.
- around $100 billion are needed per year to fund carbon removal solutions. Initially, the money would go for nature-based solutions like reforestation but in the 2030/40s an increasing role is seen for engineered solutions like direct air capture and storage (DACCS).
The Energy Transitions Commission’s report is pointing out that the world has enough of the capital needed to create the net zero economy. It also concludes that provided good policies are in place, those investments will deliver positive returns to investors. One of the real challenges that remain for the world is to put enough political pressure to ensure policymakers prioritize climate change, decarbonization and long-term financial benefits instead of short-term financial interests.