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    RESEARCH  |  3 POINT PERSPECTIVE  |  SOLVING SUSTAINABLE

    Costing the earth: What will it take to make the green transition work?

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    Contributors: Christian Keller & Maggie O'Neal

    22 Aug 2023

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    The green transition to achieve net zero targets by 2050 requires a complete overhaul of the world’s energy, transport and industrial systems, as well as the transformation of agricultural and forestry practices. It will require a lot of investment–much more than the world is currently providing–but it is not impossible. Our analysts list three key aspects in understanding the investment needs.

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    Contributors: Christian Keller & Maggie O'Neal

    22 Aug 2023

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    1. Ramping up capex

    Remaining on a pathway to cap global temperatures at 1.5°C will require huge capital expenditure. Not only must fossil fuel-based infrastructure be replaced with solar, wind and other renewable energy sources, but investment is also required for the development of solutions in hard-to-abate sectors (eg: steel, cement, aviation).

    Estimates for just how much the green transition will cost vary greatly, ranging from a total of $100trn to $300trn between now and 2050. To put it in context, current annual global GDP is about $100trn.

    Table listing estimated costs of the green transition from 6 different sources

    Conservative estimate: $2trn/yr today (c.2.5% of global GDP) to nearly $5trn (4.5% of global GDP) by 2030, before returning to 2.5% by 2050: the International Energy Agency’s calculation of the yearly global investment in just energy infrastructure to stick to the 1.5°C target.

    Radical estimate: $9.2trn (7.5% of global GDP) annually between now and 2050: consultancy McKinsey’s conclusion about the average yearly energy investment needs.

    Regardless of the estimate used, the message remains the same: global capital expenditure will need to rise substantially from current levels to limit global warming and mitigate climate risks.

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    Capex will need to increase substantially relative to current levels
    Capex will need to increase substantially relative to current levels

    Note: Using IEA Net Zero 2050 Scenario (NZE)
    Source: Barclays Research, IEA (2021)

    2. Shifting towards greener investments

    Meeting these investment goals by 2050 would be difficult but not impossible, even if we were to use McKinsey’s annual capex estimate of $9.2trn – the most extreme, by some distance.

    The world economy is already investing roughly $1.4trn per year in clean energy and its supporting infrastructure, according to the IEA. Based on current policies, annual investments into low-carbon infrastructure are expected to increase by $2.5trn.

    This leaves the annual investment gap at roughly $5.3trn, which is still a lot. But it could be tackled by redirecting the estimated $3.7trn currently flowing into brown infrastructure, such as high-polluting oil and gas extraction, refining and combustion, and cement and steel production, to green power plants.

    The net remaining investment gap to be filled would be $1.6trn. While still substantial, it is equivalent to only 2% of annual global GDP.

    Donut chart showing where $9.2 trillion investment required for the green transition (McKinsey's estimate) could be found

    3. Facilitating the transition in developing countries

    Most green transition investments are required in developing and emerging market countries, where emissions have risen the fastest in recent decades and will continue to do so.

    Emissions in these regions will rise by roughly 20% by the mid-2040s before marginally declining to 2050, according to the International Energy Agency (IEA). Rapid economic growth, growing populations, urbanisation and industrialisation will all contribute, despite improvements in energy efficiency and increased use of renewable energy.

    Therefore, with energy making up nearly 75% of global emissions and developing economies accounting for nearly all additional energy demand in the future, substantial investments will be needed to avoid a situation where global emissions increases are not offset by decarbonisation efforts in developed economies.

    Chart showing emissions from developed versus emerging economies over the period 2010-2050 (estimated)

    Most developed countries fall short of their fair share of climate financing commitment.

    Not filling the gap: Only four countries have contributed their “fair share” of the annual $100bn target that was due by 2020, as was agreed in Paris in 2015. Not only has this target been missed, but the targets themselves fall far short of what is needed to hit net zero by 2050.

    Just transition: Developing economies will also need to be convinced of the green transition’s fairness. Current per capita emissions in developed markets are significantly higher than in the rest of the world. As developing countries aspire to catch up on standards of living, emissions are likely to rise unless growth can be decoupled from carbon-intensive activities.

    Providing solutions: Developed countries will have to provide capital to developing countries if they want them to ‘leapfrog’ straight to low-carbon solutions. The recent Just Energy Transition Partnership (JETP) announcements with South Africa (2021) and Indonesia (2022) will see groups of developed countries provide financing to assist countries with their energy transition.

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    About the experts

    Christian Keller

    Head of Economics Research

    Christian Keller is Head of Economics Research at Barclays, leading a global team covering both Developed and Emerging Markets. Mr. Keller is based in London and joined Barclays in 2007 from the International Monetary Fund (IMF) where he had worked since 1999. Based at the IMF headquarters in Washington D.C., Mr. Keller worked on IMF programs with Emerging Market economies in Europe, Latin America and Asia, and served as the IMF’s Resident Representative in Turkey from 2005-7. Mr. Keller graduated with a PhD in Economics from University of Köln, Germany, and holds a joined-MA in Economics and Finance from University of Köln and HEC, Paris.

    Maggie O'Neal

    Global Head of ESG Research

    Maggie O'Neal is Global Head of ESG Research at Barclays. Based in London, she has been named in the top three of Institutional Investor European Fixed Income Research team for her coverage of Basic Materials and Industrials since 2016, including #1 in High Yield Basic Materials in 2021. Prior to joining the firm in 2015, she was at Deutsche Bank for ten years, where she held a similar role covering High Yield Basic Industries and Industrials following a short time in Emerging Markets Credit Risk.

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