Who's Gonna Build It?
Who's Gonna Build It?
Why just spending more money won't get us to net zero
Key Points:
Annual global clean energy investment needs to reach $4.5 trillion by early 2030s, rising to $4.7 trillion by 2050 for net zero per IEA estimates.
Current economic setup favors consumption over investment, limiting the world’s ability to build green infrastructure and equipment.
Sectoral resource allocation impacts ability to meet green infrastructure needs; misallocation could hinder or delay net zero progress.
Tough political decisions, like reducing consumption or boosting clean energy returns, needed to redirect economic resources for achieving net zero.
“Without pain, without sacrifice, we would have nothing.” – Fight Club
We often hear large, impressive numbers being thrown around when someone wants to make a splash talking about investment needs for net zero. $2.7 trillion in annual investment says Wood Mackenzie.[1] Bloomberg New Energy Finance raises it to $7 trillion a year.[2] McKinsey tops all the rest with $9.2 trillion a year number by 2050[3] (but they have also said $5 trillion a year in metaverse “revenues” by 2030, so take from that what you will).
The latest contribution to the trillion-dollar club came last week from the International Energy Agency (IEA). In its update to the net zero pathway, it estimates that annual global clean energy investment must reach $4.5 trillion in early 2030s rising to $4.7 trillion by 2050 to achieve net zero.[4] For context, $4.5 trillion is about the same as the cash hand out from governments across G20 countries during Covid-19[5] or just north of 3% of the projected global GDP in early 2030s (see Figure 1).
Source: 8760 analysis based on the IEA projection of energy investment needs and GDP growth in the IEA net zero pathway.
Spending 3% of annual global income (GDP) on clean investment might not seem a grand ask. After all, Americans spend 1.6% of their income just on coffee.[6] Yet, the cost is merely one part of the equation. A bigger question is whether the world can actually deliver over $4 trillion per year of new capital expenditures in green energy infrastructure, equipment, and machines annually.
This is unfortunately where the bad news begins. Our economy is geared towards consuming stuff rather than building stuff. Globally, only 20% of our annual income goes into building and maintaining existing physical assets like houses, equipment, and infrastructure, with 5% channeled towards intellectual property (non-physical assets), leaving the rest towards consumption.
Source: 8760 analysis of gross fixed capital formation and gross domestic product data from all countries available on OECD.
Note: Physical asset additions calculated as total gross fixed capital formation less gross fixed capital formation for intellectual property
In fact, the current rate at which we are producing physical assets is already towards the upper end of the range since 1995 (see Figure 2). There are many signs that we might already be at the limit with the construction industry suffering chronic labour shortage[7], the renewable industry facing cost escalations[8]; and airlines industry having to use used and generic parts to keep planes flying due to parts shortages.[9]
The energy sector currently accounts for 10.8% of global physical asset additions.[10] The IEA’s net zero pathway would imply this share rising further to peak at 15.6% by early 2030s (see Figure 3), assuming we continue to spend around 20% of GDP on physical asset additions.
Source: 8760 analysis of IEA 2023 Net-Zero Pathway
Note: The IEA estimate of clean energy investment includes expenditures for household end-uses such as electric vehicles and electric appliances. Purchases of electric vehicles and electric appliances by households are reported as consumption, not investment, in the national accounting framework. Therefore, we revise down the IEA estimate by up to 20% for comparability with gross fixed capital formation.
The 5% increase would have to come from reduced asset additions in other sectors be it housing, education, health, transport, manufacturing, and/or other infrastructure. Leaving it for the market to decide which sectors get prioritized could produce messy outcomes.
For example, an increase in subsidy hydrogen demand in Europe could increase the demand for LPG ships to move Ammonia from other countries into Europe. Shipping companies are willing to pay more for new LPG ships, and so shipyards are willing to pay more to secure necessary labour. As it turns out, shipbuilding requires many skilled electricians. Electrician wages go up, and other infrastructure projects got delayed or cancelled as project costs increase and more electricians move into shipbuilding. This is of course illustrative, but it goes to show how a surge in one sector could impact other sectors in unexpected ways.
Recently, we have seen more of the capacity for building physical assets being allocated into housing (see Figure 4) as rapidly escalating house prices allow developers to pay more for workers and materials, diverting resources from other sectors. The share allocated to public infrastructure projects declined as a result, causing cost escalations and delays. Perhaps the country that is seeing the most acute impact is the United Kingdom where, for example, the Scottish Government is being warned that it does not have enough money to deliver its public sector infrastructure plan[11], and the UK government is reportedly considering a partial cancellation of a high-speed train project.[12]
Source: 8760 analysis of gross fixed capital formation from all countries available on OECD.
We should ensure that there is sufficient capacity for building the needed equipment and infrastructure to enable net zero. This is especially true over the next ten years when investment needs will be the greatest according to the IEA. But achieving that will require tough political choices to be made.
On the one hand, governments could enact measures to reduce consumption in order to free up productive capacity for green infrastructure. Less demand for flying would reduce demand for new planes and free up plane manufacturing workers to perhaps produce wind turbines. Lower consumption will also lead to more savings, increasing the pool of capital available to finance green projects at a lower cost of capital.
But measures to reduce consumption are likely unpopular or outright rejected in certain jurisdictions. These measures include reducing government spending, increasing taxes and recycling the proceeds into green projects, reducing social welfare payments, hiking mandatory pension contributions, and raising retirement age.
On the other hand, governments could try to enact measures to increase returns available to clean energy investment so the sector can attract resources from other sectors. These measures include, for example, higher price guarantees for green products, direct grants and subsidies, and tax credits. But these measures would make it more expensive for other sectors to secure capacity for building new assets and attract required investment. Like in the UK, this would require governments to decide which sectors to prioritize, and which deprioritize.
These choices are tough, but the reward for reaching net zero is commensurably large. The IEA estimates that the cumulative savings on fuel spending net of additional investment could be as high as $12 trillion by 2050.[13] This is in addition to avoided costs of climate adaptation and mitigation. In the US, extreme weather events have caused $57.6 billion just in the first 8 months of this year; a new record[14]. With these disasters still fresh in people’s mind, the time to act is now.
[1] Wood Mackenzie (14 September 2023), “New Wood Mackenzie analysis warns world heading for 2.5C global warming without immediate action”, available at https://www.woodmac.com/press-releases/energy-transition-outlook-2023/
[2] Bloomberg New Energy Finance (7 December 2022), “The $7 trillion a year needed to hit net-zero goal”, available at https://about.bnef.com/blog/the-7-trillion-a-year-needed-to-hit-net-zero-goal/
[3] McKinsey & Company (January 2022), “The net-zero transition: what it would cost, what it could bring”, available at https://www.mckinsey.com/capabilities/sustainability/our-insights/the-net-zero-transition-what-it-would-cost-what-it-could-bring
[4] International Energy Agency (September 2023), “Net zero roadmap: a global pathway to keep the 1.5°C Goal in Reach”, available at https://www.iea.org/reports/net-zero-roadmap-a-global-pathway-to-keep-the-15-0c-goal-in-reach
[5] International Monetary Fund (20 May 2020), “Tracking the $9 trillion global fiscal support to fight covid-19”, available at https://www.imf.org/en/Blogs/Articles/2020/05/20/tracking-the-9-trillion-global-fiscal-support-to-fight-covid-19
[6] National Coffee Association of U.S.A (undated), “The NCA USA economic impact report”, available at https://www.ncausa.org/Research-Trends/Economic-Impact
[7] CNBC (29 July 2023), “The iconic American hard hat job that has the highest level of open positions ever recorded”, available at https://www.cnbc.com/2023/07/29/the-hard-hat-job-with-highest-level-of-open-positions-ever-recorded.html
[8] Supply Chain Digital (1 August 2023), “Renewable energy supply chains under pressure”, available at https://supplychaindigital.com/articles/renewable-energy-supply-chains-under-pressure
[9] Reuters (13 April 2023), “Focus: Airlines, repair shops in North America rely on used, generic parts to keep aircraft flying”, available at https://www.reuters.com/business/aerospace-defense/airlines-repair-shops-n-america-eye-used-generic-parts-keep-aircraft-flying-2023-04-13/
[10] This is based on the IEA estimate of total energy investment, including clean and fossil, in 2022 divided by gross physical asset additions in 2022.
[11] Engineering and Technology (28 September 2023), “Scotland can’t afford its ambitious infrastructure plan, auditor warns”, available at https://eandt.theiet.org/content/articles/2023/09/scotland-cant-afford-its-ambitious-infrastructure-plan-auditor-warns/
[12] New Civil Engineer (14 September 2023), “Government considering cancelling HS2 north of Birmingham to save money”, available at https://www.newcivilengineer.com/latest/government-considering-cancelling-hs2-north-of-birmingham-to-save-money-14-09-2023/
[13] International Energy Agency (September 2023), “Net zero roadmap: a global pathway to keep the 1.5°C Goal in Reach”, available at https://www.iea.org/reports/net-zero-roadmap-a-global-pathway-to-keep-the-15-0c-goal-in-reach
[14] CBS News (11 September 2023), “U.S. sets record for billion-dollar weather and climate disasters in 2023”, available at https://www.cbsnews.com/news/us-sets-record-for-billion-dollar-natural-disasters-climate-catastrophes-in-2023/