Figure 1. Projected global average annual investments in the different climate policy scenarios (left panel); incremental investments and disinvestments by category relative to the baseline (right panel).
The Paris Agreement calls for “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development” in order to keep temperature increases well below 2°C while pursuing a 1.5°C limit. To achieve this, a transformation of the global energy system away from fossil-fuels to low-carbon and renewables is necessary and will inevitably require a profound reallocation of the investment portfolio. IIASA research shows that current Nationally Determined Contributions (NDCs) will not provide the impetus for this structural shift and policymakers need to address a significant low-carbon and renewable energy investment gap.
Investment in clean-energy and in energy efficiency has grown rapidly over several decades. This has been driven by government policy choices and consumer demand. Investment flows into renewable electricity have in fact exceeded fossil electricity investments for more than a decade. However, when upstream coal, oil, and gas extraction are accounted for, fossil energy investments still dominate in the total mix. These trends are likely to continue unless there is a strong global policy push to align energy investment portfolios with achieving the Paris Agreement targets of 2°C and 1.5°C.
An analysis of the current suite of countries’ climate pledges (NDCs) indicates that only a marginal increase in total future investments will be required to meet those commitments. However, this would not address the more urgent need – transitioning the global economy toward a future consistent with a well below 2°C temperature rise. For this, policies sufficiently ambitious to tackle deep decarbonisation and the transformation of the global energy system are called for. This means a marked increase in clean energy investments. For example, low-carbon supply-side investments would need to overtake fossil investments by around 2025 or earlier. To put it another way, at the same time that investment in clean energy and efficiency is scaled up, investment in fossil energy will have to be scaled down. This has important benefits beyond meeting climate targets, for instance, reduced air pollution.
Investments are a powerful tool for policymakers and investors to address greenhouse gas emissions and thus progress towards climate targets. Quantifying the relevant “investment gaps”, that is the investment needed beyond what is already committed, will enable stronger policies and more effective investment. Achieving the current NDC pledges, for example, implies a global near-term (to 2030) low-carbon and energy efficiency investment gap of approximately US$130 billion per year. Put differently, that means a gap of around 7% of all global energy investments made in 2015 needs to be filled over the next several years; a significant investment policy challenge that becomes even greater if the Paris Agreement targets are to be achieved.
The IIASA study deals with quantifying investment needs rather than sources for the required capital but notes multiple possibilities such as businesses, governments, households, banks (private, state-owned or development), and multi-lateral climate finance institutions. It also points out that the ultimate funding portfolio, from macro to micro-scale, will be determined by some mixture of the world’s financial systems, countries’ fiscal and monetary policies, and foreign development aid institutions, among others. In addition, the study deals with the impact of energy investment on other aspects of development goals, for instance, clean and efficient energy such as solar and wind power obviates the need for investing in expensive technologies for air pollution control.
Figure 2. Projected global average annual low-carbon energy supply-side investments as a share of total supply-side investments. Solid lines represent multi-model means; floating bars give the min-max ranges across the models. Estimates shown here include supply-side investments in renewable electricity and hydrogen production, bioenergy extraction and conversion, uranium mining and nuclear power, fossil energy equipped with CCS, and the portion of electricity T&D and storage investments that can be attributed to low-carbon electricity generation. Dashed lines denote important thresholds for low-carbon energy investment.
All investment data supporting this analysis, along with a host of other data describing the various scenarios discussed here (e.g., energy and emissions time-series by fuel sector and region), are available in the publicly accessible CD-LINKS Scenario Database: db1.ene.iiasa.ac.at/CDLINKSDB
IIASA Policy Briefs report on research carried out at IIASA and have received only limited review. Views or opinions expressed herein do not necessarily represent those of the institute, its National Member Organizations, or other organizations supporting the work.
Last edited: 18 July 2019
Guest Senior Research Scholar Integrated Assessment and Climate Change Research Group - Energy, Climate, and Environment Program
Guest Senior Research Scholar Energy, Climate, and Environment Program
Guest Senior Research Scholar Sustainable Service Systems Research Group - Energy, Climate, and Environment Program
Research Group Leader and Senior Research Scholar Sustainable Service Systems Research Group - Energy, Climate, and Environment Program
Senior Research Scholar Integrated Assessment and Climate Change Research Group - Energy, Climate, and Environment Program
Senior Research Scholar Transformative Institutional and Social Solutions Research Group - Energy, Climate, and Environment Program
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