Increased investment across sectors and regions is critical to achieving the goals of the Paris Agreement. Significantly raising climate finance flows in the near term will help to avoid the costs of future harm and also realize long-term growth opportunities.1
By contrast, any delay in climate action will cause finance needs to rise. As of 2022, the available “carbon budget”2 (the total volume of emissions possible to keep average global temperature rises within 1.5°C) was 380 gigatons.3 Annual emissions hit 58 billion tons (more than 15% of the total) in the same year.
Each year of inaction exhausts our carbon budget more quickly. This takes us further from our climate mitigation goals and increases physical and financial risks, creating the need for more dramatic investment in the future, potentially including the deployment of more expensive carbon removal technologies and other technologies that are still maturing. The more we overshoot our carbon limits, the worse the physical, financial, and social harm will be. Potential consequences include greater likelihood of breaching climate “tipping points,”4 greater sea-level rises, more extreme weather events, and more severe heatwaves.5 These worsening climate impacts will increase poverty, lower crop yields, and raise the risk of injury and death, especially for vulnerable communities. In 2022, for example, India was hit by unprecedented heatwaves while flooding devastated vast swathes of Pakistan.6
While the cost of decarbonizing the global economy over the next 30 years is substantial, the potential economic benefits in terms of asset appreciation and productivity growth are even bigger. One study estimates that concerted climate action and investment could add net USD43tn to the global economy – equivalent to a rise of up to 3.8% in global GDP by 2070.
This would equate to additional economic output of almost USD1tn per year.7,8 Meanwhile, the negative economic consequences of climate change are being felt now. Annually, over USD300bn of infrastructure damage can be attributed to climate change,9 not to mention the health costs associated with fossil fuel-induced pollution.10
In addition, carbon-intensive investments through the middle of this decade are increasingly likely to become stranded as the carbon budget is exhausted,11or will require large-scale investment in carbon capture, utilization and storage (CCUS) in the future, adding to the social cost of energy infrastructure. Some studies suggest that the effects of climate policy could result in upstream oil and gas assets with the potential to generate USD1tn in future profits becoming stranded.12 We anticipate that regulations aimed at curbing carbon-intensive investments will continue to exhibit a time lag, with governments not providing clear pricing signals (either positive for low-carbon or punitive for high-carbon). Subsequently, swift re-alignments with legislative changes may trigger major disruption.
It is better that we make sensible choices now rather than invest in assets that quickly become unusable. For example, a large investment in nuclear power post-2030 could strand high-carbon power plants and renewables. The reluctance of governments to lead their electorates and address the difficult decisions that lie ahead – and, it must be said, the inability of some voters to accept that tackling climate change will come at a cost – means insufficient thought is being put into system design.
The current socioeconomic and geopolitical context has made the case for investing in low-carbon infrastructure more compelling, although not yet sufficiently compelling to overcome cost parity issues or the legal and regulatory barriers that are preventing a faster transition. At a fundamental level, energy must be secure, sustainable, and economical. Renewable energy ticks many of these boxes and it is more freely available globally than fossil fuels, offering most countries greater potential to enhance energy access and energy security, though some (including Germany and Japan) will still need to import renewable power.
Power from new renewable infrastructure – specifically wind and solar – is also cheaper than power from new fossil fuel plants in most parts of the world. Studies show that as installed capacity rises, the price of renewable electricity falls, thanks to economies of scale and technological advances (similar price reductions are not a feature of high-carbon generation). Building renewable infrastructure requires materials such as concrete and copper, which carry an environmental cost. But overall renewables are much cleaner and cheaper than oil and gas, with the cost differential an opportunity for developing economies to accelerate growth while increasing energy access.
Realizing these benefits will require trillions of dollars of investment (further detail in Part 2). In addition, countries may need to address legal and regulatory barriers that are currently preventing a faster transition.
For individual businesses, the transition to a Net Zero future presents opportunities to secure market share in growing industries, and to take advantage of policy tailwinds and the evolving regulatory environment.
Despite these benefits, investment in renewable energy is unevenly distributed across the world, and 90% of the growth in clean energy investment in recent years has occurred in advanced economies and China.13Developing nations can learn from this activity and leapfrog some of the issues that other countries have faced, but they require more financial and technical support to do so.
Transition opportunities are not being realized fast enough: the rate of climate finance growth is weak, and remains far below that needed to deliver on Net Zero goals. Our research shows that investment in climate-positive solutions and adaptation and resilience has grown at an average rate of 7% annually over the past decade. While this may appear encouraging, it is from a low base and does not reach the necessary growth rate.
We estimate that climate finance rose to USD850bn in 2021, a 28% increase on 2020 (Figure 1). Initial external estimates suggest that climate finance for the energy transition broke the USD1tn barrier for the first time in 2022, which would represent a 29% uptick year-on-year.14
The rate of Net Zero investment is accelerating, but not quickly enough. Our research shows that global climate finance flows may need to increase by 625% by 2030 to meet the goals of the Paris Agreement (estimated needs range from USD4.8tn per year to USD7.8tn).15By comparison, global defense spending reached a new high of USD2.2tn16 in 2022, while consumers worldwide are predicted to spend almost USD2tn on tobacco and alcohol in 2023.17
In addition to expanding the amount of finance, spending also has to be channeled to solutions that will most effectively reduce emissions. This can include an initial focus on renewables, energy efficiency, batteries, and electrification, followed by new technologies related to nuclear power, CCUS, and low-carbon industrial processes at scale over the subsequent decade. Work must be done to scale this development before the 2020s are out.
