How could an energy transition impact global markets and economies?

Executive summary:

• A transition away from fossil fuels is likely required to avert a significant warming of the planet
• The primary risk to markets is the energy transition itself, which would require substantial capital expenditures
• Disruptions to agriculture appear to be the most relevant concern at an investor’s time horizon

Today’s global economy still runs overwhelmingly on fossil fuels – chiefly, oil, gas and coal – but scientific literature has made it increasingly clear that if the planet is to avoid a significant warming, a transition to cleaner energy sources is critical.

Not only would such a shift be a tectonic change for the world economy, but current projections indicate that the pace of a transition away from fossil fuels needs to be nearly twice as fast as previous energy transitions in order to prevent significant physical damages to the global economy in the future. These damages could include, among others, disruptions to agriculture and infrastructure, biodiversity loss, ocean acidification and deoxygenation, and adverse impacts to human health.

Needless to say, an undertaking of this magnitude and pace faces enormous obstacles, including navigating an abundance of political, social and economic issues that could have significant impacts on the global population. Key among these challenges is bringing low-carbon alternatives online at the required speed. Currently, a considerable gap exists between the world’s present capabilities and what is needed to fully transition away from a fossil-fuel-based economy. This is a key risk to markets, as the capital expenditures needed to finance such a transition are staggering. By one estimate, global clean energy investment would need to more than triple to $4 trillion by the early 2030s to bring the global economy into alignment with the goals of the Paris Climate Agreement.

So, how might such a transition play out? Will the global economy really move away from fossil-fuel-based systems altogether by mid-century? And what happens if the transition occurs at a slower pace than required – how severe could the economic damage be? Could global growth decline at a perilous pace as the earth continues to sizzle?

And, regardless of the speed at which the transition occurs, what are the short- and long-term implications for investors? Should markets be bracing for persistent volatility? What role could private investing play in all of this, especially given the need for a significant increase in capital spending?

These are difficult questions to ponder, and even harder ones to answer. But based on an extensive review of the current scientific literature, a deep-dive analysis of the latest climate-risk models and our own unique insights into the intersection of politics, markets and economies, we’ve produced a comprehensive, deep-dive report on how we think the energy transition may unfold.

The report is divided into three parts. The first part provides a primer on the clean energy transition, including the economic risks posed by a warming planet. The second part takes a look at the challenges of transitioning to cleaner energy, including from both technological and infrastructure standpoints. The third and final section addresses the potential implications for economies and markets, including key risks for investors.

Please feel free to reach out to us with any questions.