A new ETC report quantifies financial needs and identifies the policies needed to drive investment at the scale needed
LONDON, April 4, 2023 /PRNewswire/ -- Investments in clean energy need to quadruple over the next two decades according to the Energy Transition Commission (ETC). In its latest report, 'Financing the Transition: How to make the money flow for a net-zero economy', the ETC highlights the crucial importance of strong government policies in relation to the real economy and the financial system so that funding flows on the scale needed. It also identifies financial contributions that should be made "on concessional" or "grant basis" to support early carbon phase-out, end deforestation and finance CO removal.
On average, it will take a capital investment of about $3.5 trillion a year between now and 2050 to build a net-zero global economy, up from $1 trillion a year today. Of this sum, 70% is needed for low-carbon power generation, transmission and distribution, which would support decarbonization in virtually all sectors of the economy.
Strong incentives for private investment in the energy transition need to be created through well-designed real economy policies. Some examples would be the setting of ambitious targets for renewable energy generation by 2030, the application of carbon prices and product regulation to promote decarbonization in heavy industry, aviation and fishing, and specific dates for the ban on the sale of internal combustion engines (for example, 2035 at the latest).
Other key actions would be various forms of financial regulation, fiscal support earmarked for the development and initial deployment of new technologies, and net-zero emissions commitments by financial institutions.
As a separate concept from investment financing (which will generate positive economic returns), concessional or grant financing will be required to help cover the economic costs of the early stages of coal phase-out, to offset incentives for coal phasing out. deforestation and to finance CO removal.
“Adequate flows of finance are essential to achieve a net zero emissions future and limit the effects of climate change. Both private investment and philanthropic and government contributions are needed to secure the large-scale funding and international financial flows to ensure we move from goals to action and achieve a low-carbon global economy.” Adair Turner, President of the Commission for the Energy Transition.
An accelerated investment but balanced by savings
Part of the necessary investment will be offset by reduced investment in fossil fuels, reducing the requirements from $3.5 trillion a year to $3 trillion net. This is equivalent to 1.3% of the expected average annual world GDP over the next 30 years. Likewise, these investments will create an energy system with lower operating costs than the current one, which could mean savings of between 2 and 3 trillion dollars a year by 2050 and that would continue beyond that, depending on the evolution of fuel prices. fossils. In countries with a medium or low level of economic development, much of the investment should go to support economic growth even in the absence of the challenge of climate change.
Therefore, the true incremental cost of the required investment is well below the gross investment required. However, the scale of capital mobilization and redistribution that is required will not take place without strong real economy policies in all economies and actions to address financial sector challenges in countries with a medium or low economic development.
The energy transition requires a large infusion of capital, whose investment peak in the creation of the energy system of the future would be reached around the year 2040, before declining thereafter at a lower rate, focused on asset replacement.
Global investment: incentives to invest despite the challenges
There is enough capital in the world to finance the energy transition. Although investing in the transition presents certain challenges in the short term (for example, high interest rates), renewables are cheaper than new fossil fuels in more than 95% of the world's electricity markets, which which adds to the current drive to invest in energy security and efficiency savings.
The increase in investment that would be required varies according to the level of economic development of each country. In the most developed countries and China, annual investments to create a net zero emission economy will need to reach about double the current level by 2030. In countries with a medium or low level of economic development, a fourfold increase is required by 2030.
In all countries, the vast majority of financing will come from financial institutions and private markets if there are well-designed real economy policies. However, even in high-end economies, public financial institutions should play a role in financing some specific types of investment, such as the deployment of pioneering technology, shared infrastructure (for example, hydrogen transportation and distribution networks, and carbon capture, storage and utilization) and the rehabilitation of residential buildings.
In some less economically developed countries, private contributions alone cannot ensure adequate investment due to the challenges of high macroeconomic risks, real or perceived, inadequate national savings, and other factors that increase costs and reduce investment. offer of private financing. Thus, a significant increase in international financial flows to some less developed economies is needed. As the Songwe and Stern report argued, this requires a further increase in the scale of financing provided by multilateral development banks (MDBs), accompanied by changes in the strategy and approach of MDBs that can help mobilize a large increase in private investment.
Supportive actions by financial institutions and financial regulation can speed up the redistribution of capital. Financial institutions should develop net-zero transition plans that can influence the mobilization and redeployment of capital towards low-carbon assets and technologies. Financial regulation must ensure transparent disclosure and management of climate-related risks and strategies.
The vital role of financial contributions under favorable conditions or as a subsidy
As long as good policies are in place, the investment of capital will generate positive returns for investors. However, achieving certain emission reductions will come at an economic cost, notably accelerating the phase-out of coal in places where it is still competitive with renewables, halting deforestation, which generates a positive return for landowners, and companies, and increase the removal of CO.
Contributions on concessional terms or as a grant to offset these costs in countries with a medium or low level of economic development (excluding China) may therefore be essential and could amount to about $0.3 trillion per year for 2030 for the world to reach the 1.5°C target. This money, in theory, could come from companies through voluntary carbon markets, from philanthropy and from more economically developed countries.
By 2030, these contributions could amount to:
To read the full report, visit: https://www.energy-transitions.org/publications/financing-the-transition/ (The link will be available from 00:01 GMT on Tuesday, March 21, 2023).
note to editor
This report constitutes a collective vision of the Commission for the Energy Transition. ETC members support the general idea of the arguments presented in it, but this does not imply that they agree with all the results or recommendations. The institutions with which the commission members are associated have not been asked to formally endorse the report.
For more information on the ETC, visit: https://www.energy-transitions.org
For the link to the report and infographic, please visit: https://www.energy-transitions.org/publications/financing-the-transition/ (The link will be available from 00:01 GMT on Tuesday 21 March of 2023).
To consult the complete list of members of the commission, visit this link.
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