The world is awakening to the climate emergency: 129 countries have now committed to carbon neutrality by 2050 (a few others, including China, are aiming for 2060). The International Energy Agency (IEA) estimates that around 70 per cent of both global emissions and GDP are covered by net-zero pledges.
The work required to transition global energy systems is immense, and it will demand similarly enormous investment.
Estimates as to how much is needed vary. The IEA suggests annual investment in energy must increase from the current rate of around $2trn per year to $5trn by 2030, and then back down to $4.5trn by 2050. Another forecast from the Energy Transitions Commission, a group of multinationals committed to decarbonisation, estimates net zero will cost an estimated $1.5-1.8trn every year until 2050. The International Renewable Energy Agency (IRENA), meanwhile, offers a lump sum: $33trn over the period from now to 2050.
Describing this investment as a “cost” is perhaps unfair. The global economy already has very high ongoing costs: fossil fuels are expensive to extract, energy efficiency standards are low, and the consumer market is filled with low-quality products with short lifespans. An economy with far less waste, powered by renewable energy that has no fuel costs, would “cost” a great deal less – and this is before we include the still greater price of inaction.
Nevertheless, the short-term investment needed to get to net zero in three decades has to come from somewhere, and market forces alone have thus far not provided enough capital. IEA data shows that annual global investment in electricity systems actually fell over the five years to 2020.
For national infrastructure projects, money tends to come from a combination of taxes and bills charged to consumers. Between 2016 and 2021, UK transport projects were funded with £91bn in taxes and £7bn in user charges. Energy projects over the same period were funded with £68bn from user charges, and £4bn from taxes, according to the Institute for Government.
One option to increase revenue streams for infrastructure is with a carbon tax. This would make those who emit contribute towards the money needed for the energy transition, while at the same time encourage them to decarbonise so they pay less tax. There are already 64 carbon pricing schemes in operation around the world, according to the World Bank. These include emissions trading schemes (ETS) in the UK and EU, in which authorities auction an ever-decreasing set of carbon allowances to energy and industrial companies.
The EU’s 2030 decarbonisation strategy is set to extend the ETS to other sectors, including transport and buildings. But there are concerns that, even if the system targets companies over individuals, it could be the poorest in society who lose out, as they spend a greater portion of their income on the heating and power, for example, that such companies provide. And under the EU’s rules, the money raised from the ETS does not have to be spent on green measures. A 2018 analysis from WWF showed that member states directed money worth less than half of the total value of carbon allowances towards decarbonising.
The other way governments can raise money is through borrowing. The Institute for Public Policy Research (IPPR) produced a strategy for how the UK could get to net zero, which included policies such as free local public transport and a national retraining service. The think tank says its recommendations would cost £42bn per year, and this should be paid for with borrowing.
“We have a window of opportunity right now when it is very feasible to borrow, because interest rates are so low at the moment,” said IPPR’s Joshua Emden.
It is important to “not spook the market” by over-borrowing and risking future inflation, added Matthew Agarwala, from the Bennett Institute for Public Policy. But this can be avoided if governments “judiciously support targeted investment in decarbonisation, in skills, in jobs, in new infrastructure”.
Given that the majority of economic activity happens in the private sector, though, it is private capital that is largely going to have to fund the energy transition.
“The bulk of the capital will come from the private sector”, said Tom Burke, chair of the climate think tank E3G. “But the price businesses pay is going to be determined by how smart the government is in giving clear policy signals so companies know how they should act.”
Burke adds that he too believes the government should take advantage of historically low interest rates in order to borrow money, and then lend it back at desirable rates for companies to invest in decarbonising. The UK used to have a Green Investment Bank that did just this, until it was sold by the government in 2017; a new iteration was later announced in Rishi Sunak’s 2021 Budget.
But it remains hard for UK businesses to gauge how they should invest for net zero, says Emden, because policy signals from the government are too vague. The EU has a vast Next Generation EU stimulus plan worth more than €500bn at the European level, which features specific green provisions that provide “certainty and incentives to the private sector” said Ursula Von der Leyen last month. Joe Biden is attempting to push his own multi-trillion dollar green infrastructure plan through Congress.
Meanwhile, Boris Johnson was accused of failing to set out a plan that matches his rhetoric on climate in a report from the Public Accounts Committee of MPs earlier this year.
“We need a comprehensive green industrial strategy that outlines the government’s plan and lets business know what needs to be done,” said Emden. “The UK does not have plans to invest in the same way as other countries at the moment.”
For countries in the Global South, funding challenges are even more acute. Not only do these countries receive less money from private businesses who might be able to pay for the energy transition, but they are often still developing countries that are trying to pull their populations out of poverty.
“Wealthy governments have got to move money into these countries,” said Burke. “This can be through development banks like the World Bank, special drawing rights and cancelling debt.”
For all countries, however, the short-term cost of investing to tackle climate change will be minuscule compared to paying for the worst effects of global warming.
A recent report from reinsurers Swiss Re simulates the economic outcomes of risks associated with climate change. The results show that if the global temperature rises between 2°C and 2.6°C by 2050 (which is deemed the most likely increase based on current policies), global GDP will plummet by between 11 and 13.9 per cent compared with a world without global warming.
Emden adds that we should not be viewing net zero “as a cost”, but instead “as an investment” for a healthier economy in the future. He added: “If we design it smartly, and in a way that treats people fairly, costs will not even have to go up that much for most people, and could be lower for lower-income households due to cheaper running costs.”
[see also: How China became the world’s biggest CO2 emitter]