Cost of energy transition so low ‘you’ll need magnifying glass’

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It will cost a lot less than one might think to wean the global economy off fossil fuels and invest more in clean alternatives, according to Legal & General Investment Management.

The £1.2 trillion ($1.5 trillion) asset manager said in a report published Wednesday that it has undertaken a “root-and-branch review” of all its climate scenarios and found that, to its surprise, it would cost a “statistically insignificant amount” to limit the increase in global temperatures to less than 2°C. That outcome could be achieved for the equivalent of as little as 1 basis point of global GDP per month over the next quarter century, said LGIM, without specifying how much that would be in dollar terms.

“The total economic cost when annualized over the next quarter century would be so low you would need a magnifying glass to see it,” Nick Stansbury, LGIM’s head of climate solutions, said on a media call.

The transition to a net-zero economy and energy system will be the greatest economic overhaul of modern times and will create winners and losers. For investors, the risk and opportunities are manifold, with some industries winding down while others emerge.

LGIM, which is the investment arm of Legal & General Group Plc, said it has “consistently underestimated the pace of cost and efficiency improvements in low-carbon energy technologies.”

Costs for key decarbonization technologies, such as renewable energy and electric vehicles, have declined significantly over the past decade with the levelized expense of electricity for newly commissioned solar PV projects falling by 88% between 2010 and 2021, and the cost for onshore wind declining 68%, LGIM said.

Transitioning to below 2°C “would be so cheap it wouldn’t affect long-term economic output to any significant extent,” LGIM said. In fact, “the cost of transitioning is no longer an especially relevant factor” and instead focus should shift to “the speed at which capital can be deployed into low carbon energy systems.”

While the cost is lower than anticipated, the window in which to achieve a 1.5°C outcome consistent with net-zero emissions by 2050, the so-called stretch goal of the Paris climate accord, “is closing fast” with 2022 “being yet another year of largely inadequate action,” LGIM said.

The global economy will save about $19 trillion by 2050 if the transition process begins in earnest today instead of 2030, according to LGIM. And for investors, the speed and nature of the transition pose significant potential volatility for portfolios, Stansbury said.

“The energy transition is one of the most important and underrated drivers of future asset prices,” he said. “We struggle to find a financial instrument somewhere in the world that won’t be affected in some way by climate change and the energy transition.”

(By Alastair Marsh)


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