Where $200trn of climate investment needs to flow to reach net zero

Almost $200 trillion of investment into climate solutions is needed to achieve net zero carbon emissions globally by 2050, a study by the Climate Policy Initiative and Allen & Overy has found.

This includes $6.2 trillion of climate investment each year up to 2030 and $7.3 trillion each year between 2030 and 2050.

Only a fraction of this need is actually being committed by investors to climate solutions: CPI estimates that known climate investments will have amounted to just over $1 trillion in 2022, the highest annual commitment figure.

Broken down by climate subsectors, transport requires the most investment at a minimum of $3.2 trillion per year – more than half the total climate investment needs. Energy systems investment is the second largest, at $2.1 trillion of investment needed annually – around 32 percent of the total annual investment need.

To calculate these figures, the researchers used the UN Intergovernmental Panel on Climate Change’s 2021 report, which developed scenarios of how climate solutions need to be scaled for us to reach net zero globally by 2050. The researchers also used estimates of the current costs of these solutions and the cost curves over time to 2050 to calculate the investment needs.

For some sectors, such as agriculture and industry, the estimated costs of reaching net zero are less certain because the pathways to decarbonise these sectors are “a little more nebulous”, Matthew Solomon, a senior analyst at CPI and a co-author of the study, told New Private Markets. “We don’t really know what technologies are going to make up that number.”

The investment gap reflects the cost of scaling technologies that are currently available and tested, rather than possible ‘moonshots’. Most of these investments will take the form of venture and growth capital, infrastructure project finance and corporate equity or debt. Governments and institutions can also provide loans to companies and households to adopt cleaner technologies, such as electric vehicles.

Meeting this finance gap will involve both public and private funding, Solomon said. Governments can provide project finance, loans and subsidies, and should take on technology risk and play a catalytic role with newer climate solutions to draw in private and institutional capital.

Part of the problem is that investors struggle to find climate-related opportunities that meet all their criteria, Ken Rivlin, global head of Allen & Overy’s Environmental Law group and a co-author of the report, told NPM. “There’s so much dry powder out there with funds and banks and corporates committed to impact. They’re hungry, they’re looking everywhere. There’s a lot of money chasing and not enough opportunities. It’s an exciting time, but it’s also frustrating if you can’t find the deals.”

“All of the sectors need to see rapid scaling in order to meet the goals of the Paris agreement,” said Solomon. But there should be changing investment priorities over the next 27 years to 2050, he added. “Between now and 2030, energy systems will be the single biggest sector. And then decarbonising transport becomes the largest sector through to 2050.”

Wind and solar together make up the largest investment need within the energy theme, at a combined total of $807.3 billion per year. Other energy sources that will play a role in the transition and require more investment include marine ($38.9 billion per year), geothermal ($37.1 billion per year), hydropower ($35.1 billion per year), biofuel ($62.4 billion per year) and nuclear ($55.4 billion per year).

Within transport, the greatest financing need is for battery electric vehicles at $1.1 trillion per year. Decarbonising rail and urban transport will require $770 billion of finance per year. Other transport solutions include energy efficiency of vehicles ($278.8 billion per year) and electric vehicle charging infrastructure ($103.8 billion).