Investing for the long term: quantifying the economic costs of an accelerated energy transition

The economic effects of the energy transition are multifaceted, ranging from mitigation and adaptation costs, including clean energy investment, in the short term to the benefits of avoided climate damage down the line.  

In many economies, cost-of-living pressures and strained public finances are being increasingly conflated with decarbonisation costs. Consequently, the question of whether the energy transition will actually boost economic growth has become more critical for governments, companies and households. 

In a recent report, our economists explored what the energy transition is likely to mean for GDP growth out to 2100 at both global and national level under Wood Mackenzie’s ‘net zero’ and ‘country pledges’ Energy Transition Scenarios. While the full report and datasets are exclusive to our Lens Energy Transition Scenarios solution, you can fill in the form at the top of the page for a complimentary extract and read on for a brief introduction.  

Short-term costs of decarbonisation vs long-term economic gains from climate action

Understanding the full economic story of the energy transition requires taking a view to the end of the century. We find that, over the very long term, the economic benefits of avoided climate damages outweigh the costs of cutting carbon emissions in the immediate future. 

The global economy will take an initial hit from a more rapid energy transition. In 2050, under our country pledges scenario (a 2°C rise in global temperatures compared with pre-industrialisation levels), GDP shrinks 1.1% relative to our base case (a 2.5 °C rise in global temperatures), while under our net zero scenario (a 1.5°C pathway), it declines by 1.6%.  

By 2070, however, cumulative GDP growth turns net positive against our base case under both accelerated energy transition scenarios. By 2100, annual GDP is projected to be 32% higher under our net zero scenario and 21% higher under the country pledges scenario than in our base case. The global economy will grow at a compound annual growth rate (CAGR) of 2.2% between 2025 and 2100 under the net zero scenario and 2.1% under the country pledges scenario, compared with 1.9% in our base case. 

Why equitable energy transition policies are critical for economic growth and cost management 

It is crucial that short-term policy decisions balance the immediate cost pressures of decarbonisation with these long-term economic gains to avoid undermining transition progress. Governments need to weigh the energy security benefits of a faster energy transition against the economic costs of achieving it, and energy supply disruptions caused by the conflict in the Middle East should sharpen focus on this. Furthermore, financing should be optimised to ensure global equity and intergenerational fairness.  

The energy transition presents a significant growth opportunity for companies. The path to higher economic output relies on technological innovation and the deployment of low-carbon solutions. 

Between 2025 and 2050, US$117 trillion in energy-related investment is required to achieve net zero. Most of this investment will go towards electrification and renewables. Companies will look to governments to remove the regulatory barriers currently impeding the development and upscaling of these technologies to unlock this economic potential. 

The upfront transition costs may add to near-term cost-of-living pressures for households. While the economic benefits will eventually outweigh these costs in the very long term, this will be of scant consolation to the taxpayers of today.  

Ensuring a fair and equitable transition – one in which the costs are shared appropriately and the substantial intergenerational economic gains benefit all households ‒ remains challenging. 

The global economic impacts of net zero: regional winners, losers and fossil fuel dependency risks

There will, of course, be winners and losers at country level. Economies highly exposed to the physical risks of climate change due to geographical and environmental factors benefit greatly from avoided emissions under both accelerated transition scenarios. The abundance of low-cost hydrocarbons in the Middle East, meanwhile, protects the region’s oil production even in an accelerated transition scenario, helping to soften the economic blow.  

It is the hydrocarbon-dependent economies that will face the greatest growth constraints in an accelerated transition scenario due to stranded domestic fossil-fuel assets and the extensive decarbonisation requirements involved. Russia’s extreme reliance on hydrocarbons makes it the worst-affected economy by 2050 under an accelerated transition scenario. 

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Plus, learn more about the platforms that power our interconnected intelligence, including Lens Energy Transition Scenarios, Lens Power & Renewables and Lens Upstream.