To transition to net zero, emerging markets need significantly more investment
Developed markets emit the most and have the biggest job to do to transition their economies away from carbon by 2050. However, if developed markets fail to channel net-zero investment into emerging markets while working on their own transition, there will be devastating implications for the planet.
If all markets were to continue on their current paths – with the existing levels and patterns of investment – developed-world emissions would plateau, but emerging market emissions would continue to rise, resulting in global warming of 2°C by 2050, 2.2°C by 2060, and over 3°C by 21006. To achieve the central goal of the Paris Agreement, to limit global warming to well below 2°C – preferably 1.5°C – and avoid a climate emergency, it is estimated that global greenhouse gas emissions need to be reduced to net zero by mid-century.
6 ‘Current paths’ does not include announced policies or targets; it is based on ‘business as usual’ behaviour.
Emerging markets have a great opportunity to adopt low-carbon technology, yet also face tough transition-financing and climate challenges. Many of these markets are reliant on carbon-intensive industries, and many developed economies are also reliant on the products that these industries create. Emissions continue to rise in many emerging markets due to growing populations and strengthening economies.
But climate change does not respect borders: in the race to net zero everyone wins, or everyone loses. A climate emergency will only be prevented if the world reaches net-zero as soon as possible. Although some economies will move slower than others, all will need to transition eventually.
What’s needed is a just transition – one where climate objectives are met without depriving emerging markets of their opportunity to grow and prosper. This will require the support of developed economies. If richer nations do not help finance emerging market transition, either they will not transition at all – meaning that the Paris Agreement goals are missed – or the economic effects of transition will be so harsh that emerging economies will not enjoy the same development richer nations have enjoyed over two centuries, fuelled by carbon. This would be unjust and could cause deepening global inequality and social unrest.
The scale of transformation required to get to net zero is unprecedented, and it needs to be achieved at a phenomenal pace. Without careful planning and a collaborative approach there is a real risk of leaving some of the world’s poorest communities behind, resulting in stranded markets as well as stranded assets. This would ultimately make a successful, global transition impossible, and would also cause social unrest and deepening inequality. We must work together to ensure emerging markets are not left behind.
Emerging markets need to find an additional USD94.8 trillion of transition finance – a sum higher than annual global GDP (projected at around USD93.86 trillion in nominal terms for 2021) to transition to net zero by 2060.
Our 2060 deadline for emerging markets for this study is in line with limiting global warming to 1.5⁰C above pre-industrial levels. However, it does require all markets to make considerable reductions in the short term, and for the developed world to reach net zero by 2050 and to be net negative – removing more carbon than is emitted – thereafter. The 2060 deadline produces a more conservative financing estimate, and accounts for the fact that many emerging markets currently lack transition plans that will take time to be created and executed.
The USD94.8 trillion needed is on top of the capital already committed in each market and is in addition to the estimated USD44.4 trillion raised from emerging market carbon taxes. The USD94.8 trillion includes the investment needed to transition the power sector, to make industry, transport and buildings more energy efficient, and other public expenditure including early scrappage7 schemes and environmental subsidies.
7 These are government schemes to encourage the replacement of older, more polluting vehicles with newer, more environmentally ones, where the government provides a financial incentive or subsidy.
A carbon tax is a type of carbon pricing levied on the carbon emitted in the production goods or services. The taxes are designed to reduce emissions by increasing prices, which reduces the demand for products with a high footprint and incentivises companies to make processes less carbon intensive. Currently, 27 markets have introduced a carbon tax. Among them are several emerging markets including Argentina, Chile, Colombia, Kazakhstan, Mexico and South Africa. It is almost impossible for any market to reach net-zero emissions without carbon pricing. At a cost to households and businesses, carbon pricing could raise substantial revenues, and this has been incorporated into our net-zero transition finance calculation (see figure 3). However, it would not raise nearly enough to fund the entire transition.
There are going to be a number of developing countries that will find transition difficult because of the political economy – for example, regions heavily dependent on fossil fuels. We have to make sure insurance policies are in place in case these countries can’t transition fast enough – as the climate is not going to respect our inability to transition in time.
