Changing the discourse on capital, politics and employment energy needed to reach net zero
Forward-looking policies can accelerate the transition, reduce uncertainties and ensure the maximum benefits from the energy transition. This is the message of the last IRENA Prospects for global energy transitions.
The report stresses that sharp adjustments in capital flows and a shift in investment are needed to align energy on a positive economic and environmental trajectory. The average annual investment of $ 4.4 trillion required is high. “But it is doable and is equivalent to around 5% of global GDP in 2019,” the report says.
Francesco La Camera, Director General of IRENA, said: “This perspective represents a concrete and practical toolbox for a total reorientation of the global energy system and writes a new positive energy narrative as the sector undergoes a dynamic transition. “
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Developments in investment and capital markets
IRENA’s outlook sees the energy transition as a great business opportunity for multiple stakeholders, including the private sector, by shifting financing from equity to private debt capital.
The latter will increase from 44% in 2019 to 57% in 2050, an increase of almost 20% compared to the planned policies. Energy transition technologies will find it easier to obtain affordable long-term debt financing in the years to come, while fossil fuel-related assets will increasingly be shunned by private financiers and therefore forced to rely on on equity financing from retained earnings and new equity issues.
But public financing will remain crucial for a rapid, fair and inclusive energy transition and for catalyzing private financing. In 2019, the public sector provided some $ 450 billion through public capital and loans from development finance institutions. In IRENA’s 1.5 ° C scenario, these investments will almost double to some $ 780 billion. Public debt financing will be an important enabler for other lenders, especially in developing markets.
Perspectives on Coal, Oil and Gas
The phasing out of coal, limiting investment in oil and gas to facilitate rapid decline and managed transition as well as the adoption of technological, policy and trade solutions will put the global energy system on the right track for a trajectory. 1.5 ° C.
By 2050, a total of $ 33 trillion in additional investment is needed in efficiency, renewables, end-use electrification, power grids, flexibility, hydrogen and innovations. The benefits, however, far outweigh the costs of the investments.
When air pollution, human health and climate change externalities are taken into account, the return on investment is even higher, with every dollar spent on the energy transition adding benefits valued between $ 2 and $ 5.5 , in cumulative terms between $ 61 trillion and $ 164 trillion by mid-century.
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Fair and integrated policies will remain imperative to realize the full potential of the energy transition.
As markets alone are not likely to move fast enough, policymakers must incentivize but also take action to eliminate market distortions that favor fossil fuels and facilitate necessary changes in financing structures.
This will involve phasing out fossil fuel subsidies and changing tax systems to reflect the negative environmental, health and social costs of fossil fuels. Monetary and fiscal policies, including carbon pricing policies, will improve competitiveness and level the playing field.
Enhanced international cooperation and a comprehensive set of policies will be essential to drive the broader structural change towards resilient economies and societies. If not well managed, the energy transition risks inequitable results, two-track development and an overall slowdown in progress.
Today’s policies, finances and socio-economic analysis complement the technological avenues outlined for a 1.5 ° C compatible energy pathway, providing policy makers with a guide to achieving optimal results from the transition.
Launched by energy leaders at the Agency’s High Level Global Forum on Energy Transition, these Perspectives aim to increase ambition towards the United Nations High Level Dialogue on Energy and Climate COP26 plus late this year.
Read the whole Prospects for global energy transitions.