Will the green transition help or hinder economic expansion?

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A KEY question for investors in the first half of the century, and on which there is much dissenting opinion, is whether the shift to net zero carbon emissions will help or hurt economic growth.

A recent report by the International Energy Agency concluded that annual investments in the energy sector need to increase from $2 trillion today to $5 trillion by 2030 if we are to to a net zero world. But you can’t just add that extra $3 trillion a year and assume that equates to more growth. Capital is more likely to come from capital that would otherwise have been invested elsewhere. If so, will this zero net transmission lead to less innovation and less productivity growth?

We are optimistic. Some of these investments, for example, will likely be in public infrastructure that encourages job and investment creation and increases productivity. Furthermore, the falling cost of clean energy technologies has exceeded even the most optimistic expectations of ten to twenty years ago. If you assume that the cost of these technologies declines at a similar rate, we might find that the transition actually drives growth. Including the first industrial revolution, we had five great waves of productivity growth, and energy revolutions were involved in four of them. So why can’t we have another industrial revolution powered by cheaper green energy?

Economists from the Bank of England and the Network for Greening the Financial System suggest that the transition to net zero is expected to reduce GDP growth by 2050 by just 1% (so only slightly less growth and if we don’t do nothing). But we’re optimistic, and eliminating the huge downsides of not tackling climate change, which don’t show up in GDP numbers but impact our well-being, is certainly worth it.

However, policymakers must act now to prevent the economic costs from outweighing the benefits over time. Economies and businesses can evolve and adapt much better to well-signalled and spread-out changes. BOE/NGFS economists expect GDP in 2050 to be 5% lower if we delay the transition for ten years.

Therefore, although the recent COP26 global climate summit in Glasgow had its disappointments, we remain hopeful that governments and businesses will avoid a negative impact from this transition by taking significant action as soon as possible, which can lead to improved economic growth and well-being.

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