How much money do we need to redirect and unlock to finance the net-zero transition?

The ‘Financing the Transition’ report, published today (21 March) , reiterates the assertion of climate scientists this week that there is more than enough capital globally to finance an energy transition of the scale and pace needed to bring global emissions to net-zero by 2050. But it sets out that the ways in which trillions of dollars flow will need to be changed, a change enabled by both of policy interventions and private market decisions.

A headline finding is that global annual capital investment in low-carbon sectors will need to more than triple by 2050, growing from $1trn to at least $3.5trn. This is around 1.3% of global GDP.

The majority of the $3.5trn, around 70%, will need to go towards the power system, covering activities such as scaling up clean energy generation, building in energy storage, improving transmission and distribution networks, electrifying heat and transport and improving energy efficiency.

The report sets out a scenario in which private finance accounts for the bulk of low-carbon financing in all markets, with public finance accounting for an ever-decreasing proportion of overall investment.

Some of the additional low-carbon finance, the ETC recommends, should be found from scaling back investment in fossil fuels. Investment in this sector totalled $3.5trn last year and the Commission forecasts this falling to a maximum of $3trn by 2050. It draws on 2050 net-zero energy scenarios from the International Energy Agency and IRENA to reach this conclusion.

The ETC acknowledges that, in the near term, the cost of the energy transition will be high. This is both because “zero-carbon electricity systems are characterised by high upfront capital costs but a lower operating cost than fossil-fuel-based systems”, and because of the costs of phasing out fossil fuels where they still remain cost-competitive with renewables.

On this latter point, the report concludes that concessional or grant payments to prevent fossil fuel use in middle and low-income countries “may be essential” to achieving a net-zero energy system. It states that at least $25bn per year, by 2030, will need to be allocated to subsidising an early phase-out of existing coal assets by 2040. The Asian Development Bank is already operating a scheme through which it and other banks can finance the buy-out and early closure of coal power plants in Indonesia.

The ETC is also recommending far higher subsidies of $130bn per year by 2030 to stop making deforestation profitable. In theory, concessional or grant payments do not necessarily need to come from governments in the global south – they could be made by philanthropic bodies, businesses or from wealthier nations.

Beyond upfront costs, the ETC sees energy system operating costs coming down massively over the medium term and long term. It estimates that operating the global energy system would be at least $400bn cheaper each year annually by 2050 in a net-zero scenario than in a business-as-usual, fossil-fuel-based system. This is before costs relating to poor climate adaptation are factored in.

Policy recommendations

As noted above, the report from the ETC has been published shortly after the Intergovernmental Panel on Climate Change (IPCC) published its synthesis report. This summarised all key developments in global climate science since 2017 in a format intended to be ‘digestable’ to policymakers ahead of this year’s UN climate summit in Dubai. Environment Ministers are currently at their first pre-summit meeting for this event, in Copenhagen.

The conclusion, in a nutshell, is that the window in which to act to deliver the Paris Agreement and avert the worst of the climate crisis is closing rapidly, and that failure to utilise all levers to unlock finance to cut emissions and increase adaptation will end the chance of a ‘liveable future’ for regions that are home to 3.3 billion people.

UN Secretary-General Antonio Guterres advocated a “quantum leap in climate action… on all fronts”, “everything, everywhere, all at once”.

The ETC’s report, like the IPCC’s, makes several clear recommendations for policymakers.

These include setting clear and ambitious targets to increase renewable energy generation this decade; specifying clear dates for ending unabated fossil-fuelled power generation; ending the sale of new cars and vans with internal combustion engines by 2035; regulating embedded carbon to drive decarbonisation in heavy industry and implementing clearer carbon pricing regimes.

Also covered in the report is the need for targeted fiscal support for the development of new technologies in high-income markets, and the need to reduce the cost of capital in middle and low-income markets, to make the delivery of existing technologies more rapid.

On this latter point, the ETC estimates that $900bn of annual investment will be needed in middle and low-income countries by the late 2020s, up from around $130bn at present. This is in line with previous findings from the International Energy Agency.

A key part of unlocking and scaling finance here, the ETC’s report explains, is changing the strategy and approach of Multilateral Development Banks. Work is underway to facilitate this change through the Bridgetown Agenda initiative championed at the last UN climate COP by Barbados’s Prime Minister Mia Mottley.

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