At the beginning of 2020, the value of sustainable investment in major financial markets globally stood at $35.3trillion. According to the Global Sustainable Investment Alliance it accounts for 36% of all professionally managed assets across the US, Canada, Japan, Australasia and Europe. Governments and companies are increasingly committing to climate action. The world is moving towards a net-zero emissions future, and this transition is expected to have a significant impact on the global economy.

Capital Spending and investment:

Between 2021 and 2050, capital spending on physical assets for energy and land-use systems in the transition to net-zero emissions is projected to reach approximately $275 trillion, averaging $9.2 trillion per year. This represents an annual increase of up to $3.5 trillion compared to current levels. To put this increase in comparative terms, the $3.5 trillion is approximately equivalent, in 2020, to half of global corporate profits, one-quarter of total tax revenue, and 7% of household spending. An additional $1 trillion of today’s annual spend would, moreover, need to be reallocated from high-emissions to low-emissions assets. Factoring in anticipated increases in spending due to rising incomes and populations, as well as existing transition policies, the necessary spending increase would be lower, but still approximately $1 trillion. In addition, technological innovation could reduce capital costs (meaning long term investments) for net-zero technologies faster than expected. The spending would be front-loaded, rising from 6.8% of GDP today to as much as 8.8% of GDP between 2026 and 2030 before falling. Although these spending requirements are substantial and financing remains a challenge, many investments offer positive returns, independent of their role in mitigating physical risks and so should not been seen as mere costs. Research from PwC found that more than three-quarters of larger investors, including pension funds and insurance companies, intend to stop buying conventional funds in favour of ESG (environmental, social and governance – a set of standards for a company’s behaviour) alternatives by 2022. PwC thinks ESG funds will see their assets increase more than threefold by 2052. Similarly, in research conducted by London Stock Exchange Group subsidiary FTSE Russell, 84% of asset owners globally said they were implementing or evaluating sustainable investment strategies in 2021, up from a little over half (53%) in 2018.

Energy:

The world is in the midst of an energy revolution. The shift towards low-carbon sources and the reduction of greenhouse gas emissions will bring about changes in the way the UK produces, distributes, and consumes energy, as well as in the way the UK conducts business and trade with other countries. Industries which work with fossil fuels will experience the most significant impacts, while renewable energy and nuclear sectors are anticipated to experience rapid growth, generating new jobs opportunities and investment opportunities. Transition to a net zero energy system by 2050 should ensure stable and affordable energy supplies, provide universal energy access and enable robust economic growth. This transition should set out a cost-effective and economically productive pathway, resulting in a clean energy economy dominated by renewable resources rather than fossil fuels. Achieving net-zero emissions requires international cooperation on issues such as technology transfer (the sharing of technologies), financing and policy development. The Paris Agreement, signed by 196 countries in 2015, provides a framework for this cooperation and sets a goal of limiting global warming to well below 2 degrees Celsius, which is above pre-industrial levels. The speed and scale of the clean energy revolution promises not only reduced carbon emissions but provides increased energy access for millions of people.

Jobs:

The benefits of moving away from fossil fuels go beyond fighting climate change. The energy transition is an economic opportunity that could create millions of jobs for all. The transition could result in a gain of about 200 million and a loss of about 185 million direct and indirect jobs globally by 2050 (shown in the figure below). This includes demand for jobs in operations and in construction of physical assets. Demand for jobs in the fossil fuel extraction and production sector could be reduced by about nine million jobs, while the fossil-based power sector could be reduced by four million direct jobs. However demand for about eight million direct jobs would be created in renewable power, hydrogen and biofuels by 2050.

Potential implications of the net-zero transition for trade flows:

Increasing production of goods for export tends to increase a country’s own carbon emissions since most manufacturing still involves carbon-emitting processes or energy use. For example in some manufacturing sectors, such as textiles and leather, 30% to 65% of the emissions in China and India are induced by foreign final demand. Another way to think about this phenomenon is to regard exported goods as having their production emissions embedded or embodied in them. A look at the emissions that are embodied in goods traded across borders reveals that considerable quantities of CO₂ are, in effect, moved internationally every year (shown below). As demand for high-emissions goods falls and demand for low-emissions goods increases, trade flows might shift as countries’ comparative advantages change. For example, shifts in consumer preferences or the presence of carbon taxes or other regulatory measures could produce advantages for countries that make products with low levels of emissions. Countries could also pursue opportunities to meet growing overseas demand for new kinds of low-emissions goods or emerging decarbonisation technologies.

The attempt to achieve net-zero emissions by 2050 requires significant economic execution. The transition would bring substantial shifts in demand, capital allocation, costs, and jobs: posing challenges across various stakeholders, particularly due to the uneven distribution of these changes. However, the costs and disruptions associated with a disorganised transition would likely be considerably higher, emphasising the importance of a well-planned transition to mitigate risks. Despite its challenges, the economic transformation required for net-zero emissions presents not only immediate economic opportunities, but also the potential for a radically reshaped global economy, characterised by reduced energy costs and numerous other additional benefits.