Economics of the Transition to Net-Zero
According to a McKinsey report, the capital spending on physical assets for energy to transition to net-zero between 2021 and 2050 would require a global investment of $275 trillion, or $9.2 trillion per year - an increase of $3.5 trillion on todays spend. To put this increase in perspective, that’s a 7 percent increase in household spending worldwide. However, as incomes and populations grow, and the likely reduction in the costs of new sustainable energy technologies there may be not need for increased investment per household, only a redirection away from fossil fuel sources towards renewables sources. The spending would be front-loaded, rising from 6.8 percent of GDP today to as much as 8.8 percent of GDP between 2026 and 2030 before falling. While these spending requirements are large and financing has yet to be established, many investments would have positive return profiles (even independent of their role in avoiding rising climate risks) and should not be seen as merely costs.
As already seen to date, technological innovation and economies of scale will reduce capital costs for net-zero technologies faster than expected. In this scenario, the global average delivered cost of electricity would increase in the near term but then fall back from that peak, although this would vary across regions. Indeed, it’s likely that overall future levelized electricity prices will become lower than now over time.
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