Fortune

Climate change: What we will need to spend, and what we will need to change, to reach net zero

Solving a fundamentally global, borderless problem requires an unprecedented level of global collaboration, write Hamid Samandari and Mekala Krishnan in Fortune.

Countries and companies have been accelerating their commitments to achieve net zero by 2050. But reaching that target is much easier said than done. What would it take to get there? The short answer: a substantial change in spending and a significant shift in mindsets.

Our latest research estimates cumulative spending of $275 trillion globally over the next 30 years on physical assets in energy and land-use to reach net zero. This represents an annual average of $9.2 trillion, about $3.5 trillion more than we’re spending today. By comparison, that annual increase would be equivalent to half of 2020’s global corporate profits, one-quarter of total tax revenue, and 15% of gross fixed capital formation.

Both these aggregate and average numbers hide further complexities. One is the massive reallocation of capital required. About two-thirds of spending today goes towards high-emissions assets like fossil-based power and internal combustion engine vehicles; roughly the same proportion has to go towards low-emission ones on average through 2050. Another is the front-loaded nature of the investments, with the biggest increase required between 2026 and 2030. And a yet more important one is how unevenly the burdens of the transition would be felt.

Indeed, sectors with high-emissions products or operations, such as fossil fuels and automotive, would be disproportionately exposed, as would those with high-emissions supply chains, such as construction. The same holds true for countries dependent on fossil fuel production and for many emerging economies, which would have to spend 1.5 times or more on the transition as a share of their GDP than advanced economies. And the burden would be felt more pointedly by more vulnerable populations across the world.

These numbers (based on a scenario-based simulation and hence not a prediction or prescription) are helpful in focusing minds on the nature and magnitude of the challenge, and in highlighting the question of how and by whom the transition would be financed. But they need to be understood in context.

First, the annual spend increase may be less than $3.5 trillion. Our projection shows that if the current policies put in place across countries, as well as their expected population and income growth, were accounted for, the increase could be about $1 trillion annually. At the same time, many policies have yet to be funded, and additional expenditures for redundancy in energy systems, adaptation, and safety nets are needed. Still the total price tag could be smaller.

Second, this spending should be weighed against the costs of inaction; it would counter rising physical climate risks, provide a real chance to limit warming to 1.5°C or 2.7ºF above pre-industrial levels by 2100, and reduce the odds of the most catastrophic impacts of climate change, which can be expected when non-linear physical effects accumulate.

Third, much of the spending has a return, and indeed our research finds opportunities for growth as decarbonization spurs new efficiencies and creates new products for new markets—which would create jobs and strengthen growth and inclusion.

Fourth, while the spending need is large, the world can afford it: Other research we published highlights how the global balance sheet has tripled in size in the past 20 years, with total global net worth rising to about $500 trillion. Utilizing a part of that wealth toward productive uses to fund the net-zero transition could and should be a priority. The financial outlay in response to the current pandemic is also an indication of what can be done when a necessity is recognized.

Numbers, even when put in context, do not tell the whole story, however. Indeed, many other elements need to be put in place for the transition, such as technological innovation, supply chains, and natural resources, as well as effective governance and institutions. And action must be taken to avoid the risks of a disorderly transition, where the ramping-down of high-emissions activities is not matched by the ramping-up of low-emissions ones.

Addressing these questions will require at least three main mindset shifts. The first is a broadened notion of self-interest—both the self and the interest. These challenges can only be met with a notion of self that extends beyond regional and national boundaries and the current generation, and a notion of interest that fully appreciates how much of our prosperity is tied to natural capital and the climate stability we have enjoyed over the past ten millennia.

Secondly, for the investment itself, it is critical to expand time horizons for returns in order to preserve physical livability and economic opportunity—essentially a different “discount rate.” A close partnership between public and private sectors would be central to enabling such a shift.

Finally, solving a fundamentally global, borderless problem requires an unprecedented level of global collaboration and unity of purpose. The universal nature of the transition means that all stakeholders need to play a role. But for some stakeholders the costs will be much more difficult to bear than for others. A genuine effort is needed to address such challenges in a spirit of fairness and pragmatism.

Against that backdrop, the transition should not be merely viewed as a cost: The required economic shifts open up the prospect of a fundamentally transformed global economy with lower energy costs and numerous other benefits that can be scarcely quantified now.

But will we get there? No one can say for sure. One way to think about the question is to see it as a contest between the constraints imposed by our current economic, social, and political systems and the laws of Nature. The question may be less about who will win but after how many rounds and with what score.

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