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The “Transwarming” World: A Net Zero Primer

In the global effort to achieve carbon neutrality, investing will be crucial. Here are the benefits of – and obstacles to – reaching net zero.

 

CLIMATE CHANGE IS RESHAPING MORE than just the natural environment — it’s also altering the way global society will function for the next millennium. In response, governments, nonprofits and the private sector are racing to find ways to limit the environmental consequences of a warming world.

 

One promising opportunity is net zero — the point where the total amount of carbon added to the atmosphere is equal to the amount removed, either by natural or technological means. In fact, 197 nations, representing the vast majority of people, economies and ecosystems on the planet, have pledged to achieve net zero carbon emissions by 2050. That’s the deadline most experts believe needs to be met in order to manage global warming.

 

The coming decades will be critical in the push to reach net zero. To help get there, investors large and small are devoting an increasing amount of capital to Environmental, Social and Governance (ESG) investments. ESG funding — a way of committing capital to a variety of efforts, including renewable energy production, greater economic opportunity to underserved communities and innovative technology to retool entire economic sectors — was expected to account for about $3 of every $10 of flows into global equity funds in 2021.1

 

While this level of commitment is potentially promising, questions remain for anyone working toward decarbonization, from investors to policy-makers to local communities. Is reaching net zero even possible? What sort of impact would net zero have on nations and their respective economies? How do the costs of reaching net zero compare with the costs of doing nothing? These topics and others are addressed in the new report, “Transwarming” World: Net Zero Primer, by Haim Israel, Head of Global Thematic Investing Research at BofA Global Research.

 

How much will it cost the global economy to “go green”?

It’s clear that the price tag for achieving net zero is steep. While the public and private sectors have ramped up spending the past 20 years, from $33 billion in 2004 to $524 billion in 2020,2 that’s just a beginning. The transition to a net zero economy by 2050 will cost an estimated $150 trillion by 2050, or $5 trillion a year over the next 30 years.3 To put this into perspective, that’s equivalent to the entire annual U.S. tax base.

 

Failing to combat climate change could, by 2030, account for a loss of more than 3% of global GDP. 

But while the task ahead is enormous, the potential consequences of inaction are even greater. Failing to combat climate change could, by 2030, account for a loss of more than 3% of global GDP. By 2100, that number could grow to $69 trillion, and 5% of the market value of global equities — the equivalent of $2.3 trillion — could be wiped out permanently.4

 

Averting this worst-case scenario and fully funding net zero will depend upon a combination of public and private funding sources through corporate bond issuance, commercial bank funding, government debt and carbon taxes. In other words, everyone will need to chip in.

 

What are the opportunities net zero could offer?

A project that involves transforming the global economy, by definition, is likely to provide plentiful investment opportunities. Over the next 30 years, in addition to the annual $5 trillion in investment funding, an additional $2 trillion of R&D will need to be poured into moonshot technologies focused on decarbonizing the global economy. Taken together, these investments could produce as many as 42 million green economy jobs5 — as well as a more habitable planet. On the macroeconomic level, inflation would likely increase by 1% to 3% per annum6, but this could be partially absorbed by a green economy GDP boost.

 

How do we achieve net zero?

Getting to net zero will ultimately require a second industrial revolution, powered by existing and new technologies throughout all sectors of the global economy. An endeavor on that scale obviously will take time, but the race to net zero can be jumpstarted by initial, more targeted efforts, including:

 

  • Transitioning to a clean energy economy will be a major factor in achieving net zero by 2050. Costs for solar, wind and battery technologies have declined over the last 20 years and are on pace to drop even further, which could drive a reduction in greenhouse gas emissions more rapidly than anticipated.7 In fact, solar, wind and energy efficiency could deliver half of the emissions reduction needed by 2030, as projected by the IEA.8

  • Making agriculture greener. The sector currently accounts for 24% of all greenhouse gas emissions, emitting more than all cars, trucks, trains and airplanes combined9 Food production alone is responsible for a significant amount of the emissions via supply chains, livestock and fisheries, crop production and land use. We will need to reduce food loss and waste, shift diets from large mammal-based food to plant-based food, and promote vertical farms that can help dramatically reduce water and land use and limit the impacts of extreme weather and pests.

  • Making transportation more efficient can also contribute to a reduction in carbon emissions. That could mean working to increase use of public transport, as well as investments in developing a robust electric vehicle (EV) charging and battery swapping network that would address consumer hesitancy about EVs’ range and convenience. In commercial aviation, stricter fuel efficiency standards and a transition to sustainable aviation fuels (SAF) could help decarbonize air travel.

 

What are the obstacles to achieving net zero?

Geopolitics could play a large role in how nations approach their net zero commitments. The effort isn’t free of tradeoffs. For example, a fast transition to EVs could impact or even destabilize oil-sensitive economies. As global superpowers vie for dominance in climate action, they may take competitive actions that could also potentially trigger resource scarcity as well as curtail the free movement of goods, capital, knowledge, people and information between countries. These countries could clash over regulatory restrictions or trade tariffs, placing some of the more fragile relationships between nations under greater stress.

 

As a counterbalance, the United Nations’ Climate Change Conference of the Parties (COP) could amplify and expedite plans to achieve net zero, increase international cooperation between governments and businesses and determine how associated costs would be distributed. It’s one model for what climate change leadership might look like in the decades to come.

1 BofA Global Research

2 Bloomberg New Energy Finance (BNEF)

3 IEA (International Energy Agency)

4 Moody’s Analytics, BofA Global Research

5 IEA

6 BofA Global Research

7 RethinkX

8 IEA

9 United Nations FAO, World Economic Forum

 

Important Disclosures

 

Opinions are as of 1/7/22 unless otherwise noted and are subject to change.

 

Investing involves risk including possible loss of principal. Past performance is no guarantee of future results.

 

Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.

 

BofA Global Research is research produced by BofA Securities, Inc. (“BofAS”) and/or one or more of its affiliates. BofAS is a registered broker-dealer, Member SIPC, and wholly owned subsidiary of Bank of America Corporation.

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