To put this figure in context, this equates to around 6% of global annual GDP or 2.5% of global investable assets.
Published to coincide with the latest UN climate change conference, COP29, the second annual report by CPI and A&O Shearman reveals that the volume of net zero funding has shown encouraging growth year-on-year and is now rising faster than at any point in history.
But comparing the figures in this year’s report to those from our inaugural study in 2023 shows the steep climb the world has to make if it is to meet urgent climate targets.
The funding gap between current investment and what is actually needed to achieve net zero goals – an estimated USD6.7tn to USD10tn required annually until 2050 – remains stubbornly high.
The annual funding gap between now and 2050 in the average scenario has also increased by USD1tn compared to our previous study. This rise is largely due to improved estimates of climate finance needs, which reveal that the cost of delivering net zero is higher than previously thought.
The CPI/A&O Shearman study, ‘How big is the Net Zero financing gap?’, analyzes the differential between spending committed to climate-positive solutions and the capital needed to decarbonize the global economy across sectors and regions.
As well as improved data in this year’s report, an enhanced methodology for calculating climate finance needs means our research is more accurate and therefore more valuable for investors and policymakers alike.
But as the clarity of our analysis has improved, so has our appreciation of the scale of the challenge.
David Lee, global co-head of A&O Shearman’s energy, natural resources and infrastructure group (ENRI), said: “We are seeing investors and lenders prioritizing well-structured low carbon projects. Public authorities must now redouble their efforts to ensure they clear obstacles and provide support where needed to facilitate investment being deployed where it will have the biggest impact on the climate.
“We need to work together to accelerate this process.”
Meanwhile, Matthew Townsend, global co-head of our environmental and climate law group, said: “This research presents a clear case to politicians and policymakers: the challenge of delivering netzero is bigger than we imagined, and the time available to tackle it is reducing. As COP29 convenes in Azerbaijan, leaders must recognize the responsibility they hold.”
ENRI partner Scott Neilson added: “While there are legitimate concerns that we are not moving fast enough, there is a lot of work towards net zero that we are involved in behind the scenes. I am confident that visible efforts will accelerate based on what we are seeing.
“This includes a build-up of facilitative regulatory changes related to carbon pricing, carbon capture and subsidies, as well as climate financing that will make waves as it moves out of the pipeline and matures into public announcements, including at COP29.
“Global climate finance flows hit USD1.46tn in 2022 and notably mitigation finance flows rose to USD1.3tn – a compound annual growth of 20% since 2018. It was great to see developed countries mobilise more than USD100 million in climate financing for developing countries in 2022, and I am personally working on a lot more in the same direction.
“I would expect to see the numbers climbing at a faster rate if the political will, which we all have agency in, is there.”
Our 2024 research reveals:
- Global climate finance flows hit USD1.46tn in 2022. Our previous study noted estimates suggesting that climate investment might top USD1tn in 2022, so to exceed it by such a significant margin, despite the ongoing impact of COVID-19, rising inflation, high interest rates and international conflicts, is a positive development.
- In particular, mitigation finance flows – which account for 90% of total climate finance – increased to USD1.3tn in 2022, demonstrating a compound annual growth rate of 20% since 2018. The remaining 10% of total global climate finance flows in 2022 were dedicated to adaptation or cross-cutting objectives.
- Despite these encouraging signs, climate finance flows are still way below the levels needed to achieve the goals of the Paris Agreement. Our research shows that USD7.2tn of climate finance is required annually in an average scenario until 2030 to deliver net zero. To put this figure into context, global defence spending hit USD2.4tn in 2023, while combined sales of tobacco and alcohol products worldwide are expected to increase to USD2.1tn by 2029.
- At current rates this represents an annual financing gap of almost USD6tn in an average scenario until 2030, up from the USD5tn we identified last year. However, because our study includes estimates from multiple scenarios based on different assumptions, there is a high degree of variability in our figures. Our needs estimates therefore run from USD6.1tn per year by 2030 at the bottom of the range to USD8.6tn by 2030 at the top, and our annual financing gap over the same period therefore sits between USD5tn and USD7.3tn.
- A further increase in climate investments will be needed beyond 2030. Climate finance flows must increase to USD8.4tn annually between 2031 and 2050 in an average scenario, equivalent to a USD7.1tn average financing gap compared to current flows. Here, our low/high estimates vary from USD6.8tn a year to USD10.2tn a year, revealing an annual financing gap of between USD5.5tn and USD8.9tn.
- In addition, these numbers do not include the investment required in adaptation measures, which in emerging markets and developing economies (EMDEs) amount to USD210bn per year until 2030, and USD240bn per year from 2031-2050 in an average scenario.Climate finance investment must therefore be significantly and immediately scaled. We now estimate the cumulative investment required in an average scenario to deliver net zero by 2050 to be USD226tn, up from our USD200tn projection last year. But the investment needed to decarbonize the global economy is five times less than the economic losses that will flow from failing to do so.
Ken Rivlin, global co-head of our environmental and climate law group, said: “Every year we fail to hit USD7.2tn of climate investment the target grows, as does the economic impact of higher global temperatures. But the good news is that things have improved since our first study.
“Next year, when our numbers reflect 2023 activity, we will be able to see the impact of the U.S. Inflation Reduction Act – one of the most ambitious environmental frameworks ever implemented – on global investment flows.
“But businesses and investors are finding it harder to make confident decisions due to the volatility of politics across the West. In particular, Donald Trump’s election victory could create some headwinds.”
Cynthia Urda Kassis, global co-head of ENRI, added: “Exactly how the new administration in Washington – and the new European Commission in Brussels – will approach decarbonization will become clearer in the months to come.
“But our study provides a guide for policymakers across the world to assess where to direct their incentive dollars. We know that well-designed regulatory frameworks and fiscal incentives are key to unlocking more private investment in net zero.”
