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The writer is an analyst at UBS
The climate debate can be captured in three simple questions: is there an emergency? Will we address it? And who should pay the costs?
The first question seems to have been settled by the latest IPCC report and its conclusion that we are likely to experience global warming of 1.5C within 20 years, shattering the hopes of the Paris agreement. The second should be settled this November at the COP26 climate conference, where for the first time in history the US, Europe and China will arrive having already pledged a pathway to zero emissions. So a repeat of the 2019 conference, where nothing of note was agreed, seems almost inconceivable. Which means that we are left today with the last and hardest question: how to pay for the green transition.
This is no longer a question for the energy sector, where clean technologies have been maturing for decades. Our research suggests that if we could simply take the capital we still invest every year in coal, oil and gas (recently around a trillion dollars) and switch it to green projects (where we have been spending a lot less) we could at least double our clean energy budget and put ourselves broadly on track for a 100 per cent clean energy supply.
But a clean supply is not the only thing we need. In addition, we need clean demand. Ultimately what that means is that we will have to replace all the assets in the economy, such as buildings, boilers and cookers, that were built with, or built to run on, fossil fuels. Our research suggests that this is where the big money will be needed.
Take as a simple example an A-rated domestic fridge-freezer. If it runs on a typical power supply it could be contributing 175kg of CO2 emissions each year. To get rid of those emissions you need to plug it into a renewable power supply. Since the premium for renewables is already heading to zero, that will soon be an option in many places.
What is harder to imagine is how you will replace that fridge when it breaks down. Then you will need many things which do not yet exist: zero-carbon metals, plastics, rubber, glass, paints, adhesives, electronics, refrigerant, foaming agent for the insulation, and so on.
You will need these things produced, shipped and assembled through a zero-carbon supply chain. Employees along that supply chain will need to work in zero-carbon offices and factories around the world. And when the new appliance gets to market you will need to buy it on a zero-carbon website that offers delivery in recyclable packaging and preferably with the option of recycling your old appliance too.
What’s true for you is true for everyone. There are 1.5bn domestic fridges in the world and 200m new ones sold each year. And what’s true for fridges will be true for everything else from pugmills to pencil sharpeners. In total we think as much as $300tn in extra investments could be needed to re-tool the global economy with assets that can be fabricated, distributed, operated and eventually recycled using clean energy sources alone.
To put that in context, humanity’s investment spend today (for everything we do) is about $20tn dollars a year. Finding another $300tn over 30 years may not be impossible. But then our investment budget needs to go up by 50 per cent from tomorrow and the increase must be funded somehow. The options are to raise debt, raise taxes (including wealth taxes) or to adopt a wartime mentality and sacrifice living standards. None are politically attractive, which at a profound level is the reason why the finance question remains unanswered — and the climate crisis unsolved.
Another possibility is that we set big targets today but do not achieve them, and we watch as the more extreme temperature scenarios outlined by the IPCC unfold. If we want to avoid that dire outcome, then we must urgently address the question of how we are going to pay for a better one.