The Paris Agreement calls for a limiting of global warming to 1.5C above pre-industrial levels as a red line to prevent catastrophic climate damage, but in order for the world to keep to this limit the global economy is likely to suffer, a new report from global research and consultancy business Wood Mackenzie found.
In the report, titled No pain, no gain: The economic consequences of accelerating the energy transition, Wood Mackenzie noted that while an accelerated energy transition will pay off, both economically and environmentally, it will take time for the benefits to be realised, with much of the lasting economic benefits only materialising beyond 2050.
Wood Mackenzie’s base-case for the energy transition sees global temperatures hitting 2.5-2.7C by the middle of the 21st century – significantly over the 1.5C outlined under the Paris Agreement. The firm noted that, “Preventing more extreme warming is likely to have a positive economic impact over the next three decades, by avoiding damage caused by rising temperatures. But the actions required to deliver it could have an offsetting negative effect.”
By looking through existing economic studies on climate change and the impact of mitigating global warming, Wood Mackenzie estimates that actions aimed at limiting global warming to 1.5C would cut the global gross domestic product (GDP) forecast for 2050 by 2%.
The firm’s base-case outlook is for the global economy the double in size by 2050, from $85.6 trillion to $169 trillion. However, accelerating the energy transition will change this trajectory. Using third-party results on the economic impact of climate damage, the firm estimates that avoiding high global temperatures could boost global GDP by 1.6% by 2050, but that actions required to keep global warming to 1.5C could hit GDP by 3.6% in 2050.
This would lead to a cumulative 2% drop in GDP, will GDP hitting $165 trillion in 2050. The firm notes that the loss of $75 trillion from the global economy spread between 2022 to 2050 is “material,” and amounts to just 2.1% of total economic output from the period.
“Accelerating the energy transition is possible without drastically deviating the trajectory of the global economy. However, many factors will influence global GDP over the next 30 years, including unknown unknowns, and it is important to recognise at the outset that the outcome may vary significantly, for better or worse,” the firm said.
Wood Mackenzie added that the impact of the energy transition will also not be evenly distributed, with some countries suffering worse than others, while others may stand to profit.
Governments have often pointed to net zero commitments as opportunities to funnel investment and create jobs – Wood Mackenzie expects the required investment in power supply and infrastructure alone to be at least $50 trillion. However, while the energy transition will create new jobs and investments, they are offset to a degree by lost jobs, profits, and revenues in higher-carbon sectors of the economy.
In addition, energy transition technologies are still in their infancy, and are not as cost competitive as existing hydrocarbon ones. As such, Wood Mackenzie believes that, “To achieve emissions consistent with limiting global warming to 1.5 °C, action needs to be heavily frontloaded in the years to 2030. Therefore, we expect the value added by new transition investments to underperform foregone traditional investments in the early stages.”
Energy transition technologies will come down in price over time, with the firm estimating 2035 to be the break point. At this stage, global GDP growth will outpace the firm’s base case, and help converge GDP levels by 2050. By the end of the 21st century, Wood Mackenzie expects all lost economic output to be recouped.
Economise that already have high renewable penetration of power generation and advanced electrical power grids are already set to benefit from the clean electrification revolution, the firm said. In addition, countries that are home to key natural resources needed for the energy transition, such as battery raw materials like lithium and cobalt, also stand to take advantage. Wealthy and developed nations with high levels of research and development investment will prosper as these areas lend themselves well to investing in transition technologies.
Furthermore, Wood Mackenzie says that economies that are already committed to net zero will see a smaller negative economic impact between now and 2050. The firm called out France and Switzerland as examples of two nations that are set to instead enjoy a modest net boost to economic growth by 2050.
Meanwhile, the firm says that hydrocarbon-exporting and carbon-intensive economies are likely to sustain the biggest loss in economic output. In the Middle East, minimising this economic shock relies on diversifying into other sectors. Saudi Arabia, for instance, has already started on this path with huge multi-billion dollar bets on the future of energy, while simultaneously diversifying its economy under its Vision 2030 plan.
Overall, Wood Mackenzie says that those countries that are less-devleoped and lower income will bear “a disproportional burden when it comes to the cost of transition.”
“Developed economies are committed to climate-finance transfers worth US$100 billion per year to developing economies for climate change adaption and mitigation. But we don’t envisage this equalising the impact of transition around the world. It won’t address the dividend that developed economies have had from powering economic growth by burning fossil fuels for over a century, which developing economies can’t repeat now,” the firm said.
“The developed economies will have to do more to level up impacts if there is to be a truly fair and just transition,” it added.
