Financing the transition: How to make the money move for a net zero economy

There are several independent organisations which have analysed key aspects of the financing challenge and have presented detailed estimates of the investment required to transition to a net-zero economy. This report, by the Energy Transitions Commission (ETC), builds on and complements other analyses in three ways:

• Sets out the ETC’s detailed estimates of investment need by sector and country income group.
• Seeks to define the relative importance of real economy policies and specific financial sector action in mobilising finance, and how this differs between high-income and middle- and low-income economies, and;
• Distinguishes between two conceptually different categories of financial flow: capital investment in the technologies and assets required to create a zero-carbon economy, and concessional/grant payments to pay for decarbonisation actions which will not occur fast enough without payments to economic actors.

This report estimates that capital investment requirements to achieve a zero-carbon economy will reach around $USD 3 trillion a year by 2030, peaking at $USD4.5 trillion in 2040, up from $USD1 trillion per annum year today. This will be associated with a decline in the $USD 0.9 trillion currently invested annually in fossil fuels. The overall investments required will be equivalent to c.1.3% of the likely average annual global GDP over the next 30 years. The amount of investments varies by region: For e.g. in China, the investment would need to double from today’s levels by 2030, whereas in middle- and low-income countries, there would need to be a four-fold increase required by 2030.

Concessional /grant payments will be required to help cover the economic costs of early coal phase-out, offset the incentives to deforest, and fund carbon dioxide removals. This may need to reach at least $USD300 billion per annum by 2030 in middle and low-income countries, which could be deployed through three modes of funding: purchase of carbon credits, increase in philanthropic capital towards climate mitigation, and intergovernmental transfers. To facilitate capital investments and concessional payments, well-designed real-economy policies must create strong incentives for private investment in the energy transition. Examples include setting ambitious targets for renewable generation by 2030, carbon prices and product regulation to drive decarbonisation in heavy industry, aviation and shipping, and specified date bans on internal combustion engines.

The report argues that the high investment needed does not represent a long-term “cost” to the economy or imply a long-term reduction in living standards. This is because:

• They represent a major private investment opportunity, in particular in the power sector where investments are increasingly bankable and more attractive than investments in fossil fuels.
• They offer long-term benefits to society as a whole, including less variable energy costs and energy security.
• Over the long-term, and even during the next 30 years, they will deliver a significant decrease in operating costs, with a potential of realised savings of $2-3 trillion a year by 2050, depending on how fossil fuel prices evolve.

For further insights on how to enable finance for a net zero economy across sectors and countries, read the full report here.