Highlighting the ‘critical importance of strong government policies relating both to the real economy and to the financial system if finance is to flow on the scale required’, the ETC report also identifies ‘concessional/grant payments will be needed to support early coal phase-out, end deforestation and finance carbon removals’.

Around $3.5tn/y of capital investment will be needed on average between now and 2050 to build a net zero global economy, up from $1tn/y today, states the ETC. Of this, 70% is required for low-carbon power generation, transmission and distribution, which underpins decarbonisation in almost all sectors of the economy.

‘Well-designed real-economy policies must create strong incentives for private investment in the energy transition,’ the ETC says. 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 the sales of internal combustion engines (eg by 2035 at the latest).

Other key actions include various forms of financial regulation, targeted fiscal support for the development and initial deployment of new technologies, and net zero commitments from financial institutions.

Part of the investment needed will be offset by reduced investment in fossil fuels, cutting the $3.5tn/y requirement to a net $3tn/y, suggests the study, equivalent to 1.3% of the likely average annual global GDP over the next 30 years. ‘These investments will also create a lower operating cost energy system than today, which could realise savings of $2–3tn/y by 2050 and continue thereafter, depending on how fossil fuel prices evolve,’ it adds. In middle- and low-income countries, much of the investment would be required to support economic growth even in the absence of a climate change challenge, it notes.

‘The true incremental cost of the required investment is therefore far below the gross investment need,’ says the ETC. ‘But the scale of capital mobilisation and reallocation required will not occur without strong real economy policies in all economies and actions to address financial sector challenges in middle- and low-income countries.’

The energy transition is capital intensive, and the report points to a peak in investments around 2040 as we build the energy system of the future, before falling to a lower asset replacement rate thereafter.

Global investment – incentives to invest despite the challenges
There is enough capital globally to finance the energy transition. Although there are some short-term challenges to investment in the transition (eg high interest rates), renewables are cheaper than new fossil fuels in over 95% of global electricity markets and there is now an impetus to invest in energy security and efficiency savings, states the report.

The scale-up of investment required 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. In middle- and low-income countries, a four-fold increase is required by 2030, says the ETC.

In all countries, the vast majority of finance is expected to come from private financial institutions and markets ‘if well-designed real economy policies are in place’. Yet even in high-income economies, the reports suggests that public financial institutions should play a role in financing specific types of investment, such as first-of-a-kind technology deployments, shared infrastructure (such as hydrogen and CCUS transport and distribution networks), and residential buildings retrofits.

In some middle- and low-income countries, private financial flows alone cannot ensure adequate investment given the challenges created by high actual or perceived macroeconomic risks, inadequate domestic savings and other factors which increase the cost and reduce the supply of private finance. A significant increase in international financial flows to some lower-income economies is therefore required, states the report. This will require a major increase in the scale of finance provided by multilateral development banks (MDBs), together with changes in MDB strategy and approach which can help mobilise greatly increased private investment.

‘Supporting action by financial institutions and financial regulation can accelerate capital reallocation,’ adds the ETC. It says financial institutions should ‘develop net zero transition plans, which can play a role in capital mobilisation and reallocation into low-carbon assets and technologies’. Furthermore, ‘financial regulation should ensure the transparent disclosure and management of climate-related risks and strategies’.

‘Provided good policies are in place, capital investment will deliver positive returns to investors,’ says the report. 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 CO₂ removals,’ it adds.

Concessional/grant payments to offset these costs in middle- and low-income countries (excluding China) ‘may therefore be essential’ and could amount to around $0.3tn/y 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, suggests the report.