Net zero by 2050 requires $200 trillion. Financing the goal is an issue

29 November 2023 Consultancy-me.com 5 min. read
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Reaching net zero greenhouse gas emissions globally by 2050 will only be possible if major steps are taken to close the financing gap required to fund the green transition. A new report by Deloitte warns global leaders who are set to convene at COP28 next week that urgent action is needed.

The backdrop is clear: anthropogenic greenhouse gas (GHG) emissions like carbon dioxide (CO2), methane and nitrous oxide (N2O) have caused much of the observed global warming over the past 150 years. To keep the world a liveable place, and mitigate potential catastrophes that can emerge from global warming (massive displacement of people, scarcities, etc), most countries have agreed to limiting global warming to 1.5 degrees Celsius by 2050.

According to the Intergovernmental Panel on Climate Change (IPCC), limiting global warming to 1.5 degrees Celsius could “reduce the probability of extreme drought, precipitation deficits, and risks associated with water availability”.

Global map of net-zero targets

Net zero by 2050 requires $200 trillion. Financing the goal is an issue

Achieving this goal is an audacious task. Both the International Energy Agency and International Renewable Energy Agency estimate that about US$4 trillion of global investments will be needed per year until 2050. In comparison, in 2019 the world spent $1.8 trillion per year, and current policy trajectory would see that number jump to ‘only’ $3.3 trillion per year.

Deloitte’s latest report, titled ‘Financing the Green Transition’, paints a more pessimistic picture of current progress. The firm’s economists estimate that between $5 trillion to $7 trillion per year will be needed to drive the transformation to reaching net-zero GHG emissions by 2050. That translates to almost $200 trillion cumulatively by 2050.

“If investments do not scale up rapidly, the world will fail to meet its climate objectives,” said Jennifer Steinmann, Global Sustainability & Climate practice leader at Deloitte.

Overview of key solutions to turn green projects more bankable
Overview of key solutions to turn green projects more bankable

Why investments in ‘greening’ the world are not picking up quick enough has to do with a lot of factors. Most can be traced back to the energy and industrial sectors, which account for more than 80% of global GHG emissions. Both sectors are asset-heavy, meaning that the cost of capital is high.

“The high cost of capital means that projects are riskier to finance, and as a result, investor appetite is lower,” said Steinmann. “In fact, financing costs stemming from the cost of capital, can account for as much as half of the investment expenditure.”

In practice, this means that green projects currently suffer from underinvestment and high required return rates because private investors see green technologies as riskier than alternative investments.

Main barriers to investment in clean technologies

Overview of key solutions to turn green projects more bankable

This situation is exacerbated by the fact that three-quarters of green investments should occur in developing economies. “There, investors often face greater risks and stricter public budget constraints for energy transition projects. Therefore, green projects, especially when they are in the Global South, are often not bankable.”

In other words, the risk-return profile of such projects does not meet the investors’ criteria to mobilise sufficient capital. The unfortunate outcome: a lack of funding for projects that are crucial to the world’s decarbonisation journey.

Financing the green agenda needs collaboration

In its report, Deloitte’s authors emphasize the need for governments, financial institutions, lenders, investors and project developers to jointly develop and agree on mechanisms to foster bankability.

The report sheds light on the key financial instruments that can foster investments in the green transition, notably in developing economies, focusing on the energy-industry nexus.

Financial tools to foster investments in green and sustainable projects

Net zero by 2050 requires $200 trillion. Financing the goal is an issue

Governments play a key role in the value chain. “They should work with financial institutions to develop mechanisms and instruments that can reduce risks and unlock private finance at attractive costs. These risks are associated with political, market and transformation barriers.”

“The key action levers to overcome them can be grouped in three main categories: reducing the risks of green projects, bridging the cost gap between fossil-based GHG-intensive products and their green counterparts and cutting the use of fossil fuels.”

Meanwhile, governments of richer economies are urged to provide a helping hand to those of developed economies. “About 70% of the $7 trillion per year investment that is required should take place in low- and middle-income economies. Achieving bankability in these markets is a key lever of success,” said Steinmann.

Providing insight into one possible solution, Deloitte leader Hans-Juergen Walter said: “To further lighten the financial burden on the Global South, governments, financial institutions and international organisations must implement concessional finance – a loan made on more favourable terms than the borrower could obtain in the market – through innovative financing structures that mobilise private capital for climate action.”

Steinmann concluded: “Achieving climate goals is a formidable challenge. Decisive and coordinated policy support, and collective action from investors and policymakers are paramount to guide investments toward green and sustainable projects.”