Incremental costs for green growth
At least US$ 0.7 trillion in incremental costs beyond business-as-usual spending is required to support green growth.
Aside from the challenge of greening investment in the sectors described above, to achieve climate stabilization at 2°C at least US$0.7 trillion in incremental, net investment is needed beyond spending under a business-as-usual approach (a further ~US$ 14 trillion by 2030).i Data on current and historical investment flows in low-carbon transport, building energy efficiency and green industrial spending is insufficient. Further analysis is needed to improve estimates of the necessary investment flows beyond what is predicted under a business-as-usual scenario. To define the incremental cost gap, this section assumes investment will follow a business-as-usual path in line with the IEA’s Current Policies (6°C) scenario.
The incremental costs are for investments in power generation, transport vehicles, energy efficiency in buildings and industry (sourced from the IEA) and forestry (sourced from UNEP Finance Initiative). The US$ 0.7 trillion per year in net new investment takes into account an estimated US$ 146 billion per year in business-as-usual energy spending that would need to be redirected from conventional outlays for fossil fuel-powered electricity, heat and transport to less-emitting options. Setting forestry aside, half of the incremental cost is needed for energy efficiency while the remainder is needed to cover investments to decarbonize power generation and transport.
The IEA estimates that these incremental costs are economically viable: the corresponding predicted fuel savings will more than compensate for the higher investment needs in the transition to a low-carbon energy sector. Between 2010 and 2050, even when applying a 10% discount rate to savings from reduced demand for coal, gas and oil, the IEA forecasts a net saving of about US$ 5 trillion over the period, indicating that decarbonizing the energy system is clearly affordable.43
More spending will need to be diverted from conventional to clean power in the future, with a much higher proportion of spending targeted in the renewables sector under a 2°C scenario.
- The IEA estimates that total investment requirements of the power sector are US$ 758 billion per year or US$ 15 trillion to 2020j (Figure 7).
- Investments are needed in conventional (fossil) and clean and renewable technologies but reduced investment in fossil fuel-based energy generation provides some relief (46%) towards the incremental capital required for renewables, nuclear and carbon capture and storage.
- For coal and gas power, carbon capture and storage is a critical technology that requires much greater investment; US$ 52 billion per year in total to 2030 on top of the investment needs for gas and coal power generation.
- By 2050, almost all gas and coal power infrastructure will need to have carbon capture and storage under the 2°C scenario.44
Fuel savings from gasoline and diesel more than compensate for the incremental costs required in the transport sector.
- The IEA estimates that more than US$ 1 trillion per year to 2030 is needed in transport vehicle investmentk (~US$ 21 trillion over the next two decades);46 the OECD predicts that a further US$ 0.8 trillion is needed per year in transport infrastructure.l
- The net additional investment required compared with a business-as-usual scenario is estimated at US$ 187 billion per year, taking into account a diversion of US$ 26 billion per year from gasoline vehicles to greener alternatives, such as hybrid vehicles, electric and natural-gas powered vehicles.
- Under the 2°C scenario, US$ 784 billion per year will become available from gasoline and diesel-fuel savings, of which just US$ 69 billion will be needed to cover increased costs of natural-gas usage, biofuels, electricity and hydrogen.
Approximately US$ 296 billion per year in incremental energy-efficiency investment is needed in the buildings sector to 2030.
- The IEA estimates that more than US$ 13 trillion overall needs to be invested in energy efficiency over the next two decades in the buildings sector. This will be crucial to reduce the demand for producing new energy.
- New buildings will need to meet stringent energy-performance requirements, while existing buildings will need retrofits with longer paybacks; this raises the importance of financing mechanisms, discussed further in Part 2 of this report, to help unlock energy efficiency investment for commercial and residential buildings.
Incremental costs in the industrial sector are estimated at US$ 35 billion per year to 2030.
- In the five most energy-intensive sectors (cement, iron and steel, pulp and paper, aluminium and chemicals and petrochemicals), significant opportunities exist in improved energy management, fuel switching, recycling and carbon capture and storage to capture process emissions.
- Compared with a business-as-usual scenario, the incremental investment required for a 2°C pathway is lower than in other sectors, estimated by the IEA at US$ 35 billion per year.47
An additional US$ 40 billion per year is needed in the forestry sector.
Forests play a central role in climate regulation and carbon sequestration, and one billion people rely on forest ecosystems for shelter, food, fuel, jobs, water, medicine and security. The Food and Agriculture Organization has estimated that the forest industry contributed almost US$ 0.5 trillion to global GDP in 2006.48 Competition from other industries, such as agriculture, for land use puts pressure on forest ecosystems, resulting in the current unsustainable rates of deforestation. In many countries, much of the native forest cover has been stripped to support charcoal production, and in others, reliance on wood fuel for cooking can lead to increased pressures on local forests and natural resources.49 The green investment challenge for forests is to provide policies and incentives that help avoid unsustainable deforestation, encouraging green growth and driving resource productivity, particularly in developing countries.
- UNEP estimates that approximately US$ 64 billion is invested in forests annuallym, of which 28% is spent on forest management and the remainder invested in forest product processing and trade.
- An additional investment of US$ 40 billion per year is needed for reforestation (54% of the total) and to pay landholders to conserve their forests (46% of the total).
- Through this additional investment, forest area is predicted to increase, leading to 28% higher carbon storage, greater employment and a gross added value of US$ 600 billion in 2050 compared with a business-as-usual scenario.