Decarbonizing the global energy system will need over $1 trillion more every year, over and above the current level of capital financing, said UK-based asset manager, Legal and General Investment Management (LGIM).

LGIM’s recent report quoted the United Nations Environment Program’s estimation that nearly $4.1 trillion of funding is needed by 2050 to meet the climate goals under the Paris accord. However, only 3% of the investment has been allocated, primarily through public financing.

The report said the cost of not meeting the climate targets could be catastrophic. A partial ecosystem collapse could cost 2.3% of global GDP, or $2.7 trillion, annually.

For instance, over half of the total global GDP — nearly $44 trillion — currently relies highly on nature.

The Intergovernmental Panel on Climate Change also highlighted in a recent report that financial support from developed economies to developing has needed to be improved over the years. The report said that the assured mobilization of $100 billion under the Paris Climate Accord has yet to materialize for the developing countries.

Referring to the shortage of funding for the global transition, the LGIM report said, “The world could easily absorb the costs associated with realizing the goals of the Paris climate agreement. But the window to successfully meet a 1.5-degree Celsius climate outcome is closing at a worrying speed.”

The report rectifies that not only is scaling new renewable cheaper than other conventional sources, but expanding the use of clean sources can significantly relieve the global energy sector of costs and carbon prices.

Figure 1: Global energy prices until September 2022. Source: LGIM

LGIM predicts that Europe and Asia will experience high energy prices in the coming years if sufficient decarbonization funding is delayed by another decade.

LGIM’s head of climate solutions, Nick Stansbury, said, “Europe is at the epicenter of this crisis, in which the price of energy in all forms has risen dramatically. Inflationary pressures are growing, government finances are increasingly strained, and consumers – especially those on the lowest incomes – fear the onset of winter.”

Europe has also accelerated efforts to reduce emissions to address the rising need for climate action.

Recently, the European Parliament approved a law that effectively bans the sales of new petrol and diesel cars in Europe from 2035 to accelerate measures to cut 100% of carbon emissions produced by new passenger vehicles and light commercial vehicles or vans.

Industries worldwide are trying to reallocate capital from oil and gas to low-carbon alternatives. However, what needs to be added is the amount of funding required to produce the same usable energy.