Financing the Transition

The ETC has set out a vision for the energy transition, including the renewable energy capacity, hydrogen production, and technologies in the hard-to-abate sectors that the world needs to reach net zero by mid-century. Delivering this vision will require a large one-off scale up in investment over the next two decades to build a clean power system, retrofit buildings, and build low-carbon industrial and transport assets like electric vehicles.

Several other institutions have conducted analysis of the scale finance needed – including IEA, IRENA and the UN High-Level Expert Groups. The ETC adds value to existing work by providing clarity on the profile of investment over time, sector and country income group, and the relative importance of real economy policies and other financial sector action.

$3.5 trillion
average annual capital investment required until 2050 to build a net-zero economy
scale up in capital investment needed by 2030 globally, from today's levels

The investment scale-up differs by country income group

In high-income economies and China, annual investments to build a net-zero economy will need to reach roughly double today’s levels by 2030. Investment in middle- and low-income countries represents the biggest challenge, requiring a 4-fold increase from today’s levels to around $900bn a year by 2030. Financing the transition in middle- and low-income countries will also require a significant scale up in international financial flows, led by Multilateral Development Banks (MDBs), together with changes in MDB strategy and approach, which can help mobilise greatly increased private investment.

Two distinct but equally necessary forms of financial flow

Two forms of financial flow are required for the energy transition: Capital investment, and concessional/grant payments.

The energy transition offers significant opportunities for investors The vast majority of finance can come from private financial institutions and markets if well-designed real economy policies are in place which create incentives to invest. Examples include setting ambitious targets for renewable generation by 2030, carbon prices, and specified date bans on the sales of internal combustion engines (e.g., by 2035 at the latest). Around $3.5 trillion a year of capital investment will be needed on average between now and 2050 to build a net-zero global economy, up from $1 trillion per annum today.

Part of the investment needed will be offset by reduced investment in fossil fuels, cutting the $3.5 trillion per annum requirement to a net $3 trillion. This is equivalent to 1.3% of the likely average annual global GDP over the next 30 years. The true incremental cost of the required investment is therefore far below the gross investment need. But the scale of capital mobilisation and reallocation required will not occur without strong real economy policies in all economies.

Provided good policies are in place, capital investment will deliver positive returns to investors. But achieving some emissions reductions will impose an economic cost – in particular, phasing out coal early where it still remains competitive with renewables, halting deforestation which delivers a positive return to landowners and businesses, and scaling up carbon dioxide removals.

Concessional/grant payments to offset these costs in middle- and low-income countries (excluding China) may therefore be essential and could amount to around $0.3 trillion a year by 2030 if the world is to achieve its 1.5°C objectives. This money could, in theory, come from corporates via voluntary carbon markets, philanthropy, and high-income countries.