The cost of net-zero…

The debate over whether the Earth is facing (or is in) a climate ‘crisis’ seems to be over, and the so-called ‘climate deniers’ have clearly lost. The populist consensus has shifted 180° from the widespread claim in the 1970s that we faced the threat of a global cooling, to today’s dominant view that the threat is actually global warming. While the science underpinning both sides of the argument is complex and would tax the patience of a doctorate student, the financial impact of trying to mitigate the impact of global warming – of limiting temperature rises of either 1.5°C or 2°C – is easier to understand, and perhaps just as alarming as the forecast temperature rise.

According to the Berlin-based Mercator Research Institute’s ‘Carbon Clock’, the global temperature will probably rise by 1.5°C by 2028 or 2°C by 2045, at a constant rate of the current annual emissions of CO₂. For the Institute, as for Greta Thunberg and other activists anxious to prevent further global warming, “the clock is ticking”. But if there is now a consensus that global warming is happening, there is little agreement on the financial cost of actions to mitigate that warming’s effects.

…Is debatable but huge

Unhelpfully it all depends on who you ask. For the Organisation for Economic Cooperation and Development (OECD) $6.9 trillion a year up to 2030 to meet the Paris Agreement goals (limiting global warming to well below 2°C) will need to be invested in low-carbon, climate-resilient infrastructure. That’s almost $49 trillion, about $17 trillion than the national debt of the US. Where’s the money coming from? The OECD says that “mobilising public and private resources across the financial spectrum is an essential part of generating the trillions of dollars needed…” A report by McKinsey puts the cost about aa third higher and for longer: “transformation of the global economy needed to achieve net-zero emissions by 2050 would be universal and significant, requiring $9.2 trillion in annual average spending on physical assets…that increase is equivalent to half of global corporate profits and one-quarter of total tax revenue in 2020.” That puts the overall bill at a staggering $248.4 trillion. Or one could prefer a co-authored report by Oliver Wyman and the World Economic Forum, which says ‘approximately’ $50 trillion “in incremental investments is required by 2050 to transition the global economy to net-zero emissions and avert a climate catastrophe.” The Energy Transitions Commission (ETC) estimates in March this year that “around” $3.5 trillion a year of capital investment is needed between now and 2050 to build a net-zero economy, i.e. $94.5 trillion. So take your pick - $49, $50, $94.5 or $248 trillion. Other estimates are also available; whatever the choice it’s going to be an eye-watering sum.

All estimates are ballpark in this ‘guess the cost’ game. Take hydrogen for example. Green hydrogen is preferable to either blue or grey hydrogen, both of which release more CO₂; the Energy Transitions Commission estimates that 500 million tonnes of hydrogen will be needed for a net zero energy system by 2050. The cost of production will no doubt fall but green hydrogen production is currently reliant on subsidies, in the US of up to $3 per kilo under President Biden’s misnamed Inflation Reduction Act; but the US subsidies currently expire after 10 years.

Where’s the money coming from?

The staggering costs of getting to a net-zero global economy rival the current global debt, which the Institute of International Finance said was a near-record $305 trillion in the first quarter of 2023. Global wealth more than tripled between 2000 and 2020; asset values bubbled from about $440 trillion (more than 13 times gross domestic product) to $1,540 trillion over the same period. Yet little of this growing wealth has been based on economic growth, which has been tepid on average; much of this supposed wealth is due to rising real estate valuations, which in 2020 accounted for two-thirds of net worth. So the past two decades have seen many people feel richer, a feeling which the current burst of inflation may not have dislodged, thanks to the multi-trillion Dollar give-aways from governments during the Covid-19 pandemic, money that is still making its way through the system.

Funding this revolution will be difficult given the context: about $1 trillion will one day be needed to rebuild Ukraine; our aging populations are already stressing governments’ ability to fund healthcare; China and the US are sabre-rattling over Taiwan; countries in Africa and elsewhere either have or threaten to slip into default. High levels of debt are already impeding economic growth; borrowing more becomes more expensive and servicing the interest on already accumulated debt diverts money away from more productive uses. As the World Bank says, “high public debt can inhibit private investment, increase fiscal pressure, reduce social spending, and limit governments’ ability to implement reforms.”

No-one wants to pour cold water over the efforts to minimize global warming, but it is legitimate to worry about how to pay for it. One anxiety is that in the race to bat away climate worries, governments under pressure may go for the easy option and simply print more money. That would alleviate the financing problem; but it would be a short-term solution, storing up risks for the long-term. The purchasing power of fiat currency has already been eroded by the worst bout of inflation in four decades; paying the trillions needed for the climate revolution by money creation would be like playing with a hand grenade with its pin removed.