Energy transition may shave 2% off global GDP by 2050

The world has the means, motive and opportunity to cap global warming to the 1.5°C limit agreed in the Paris Climate Accord, new research released today by Wood Mackenzie, a Verisk company (Nasdaq: VRSK) shows.

But there will be tangible economic implications of an accelerated energy transition. While global economic output is likely to take a hit until 2050, it could be recoverable by the end of the century, according to Wood Mackenzie’s report, No Pain, No Gain: The economic consequences of accelerating the energy transition.

Peter Martin, Wood Mackenzie’s chief economist, said: “While preventing more extreme warming is likely to have a positive economic impact over the next 30 years, the action required to deliver it could have an offsetting negative effect.

"Net, we estimate that keeping warming to 1.5°C would shave 2.0% off our base-case gross domestic product (GDP) forecast for 2050.” 

Some economies will feel the effects more than others, Martin said, with less developed and low-income economies likely to bear a disproportionally high burden during the transition.

Economies that are already closer to net-zero targets will see a smaller economic impact from now to 2050, Wood Mackenzie’s research shows. 

Martin added: “For a fortunate few, the transition need not result in economic loss at all. Those that are better positioned – typically wealthier economies with a strong propensity to invest in new technologies – may even benefit by 2050.”

Under Wood Mackenzie’s base-case outlook, the global economy is set to double in size in real terms ‒ from US$85.6 trillion to US$169 trillion ‒ by 2050. Accelerating the energy transition will inevitably alter this.

Martin said: “In our 1.5°C scenario, annual global GDP hits US$165 trillion in 2050. The cumulative loss of US$75 trillion over 2022 to 2050, while material, amounts to just 2.1% of total economic output over the period.”

Speeding up the energy transition is possible without major disruption of the global economy’s trajectory.

“A turning point is reached after 2035. Under our 1.5°C scenario, global GDP growth outpaces the base case, kick-starting the slow convergence of GDP levels. Lost economic output is eventually recouped before the end of the century,” Martin said.

He added: “Many factors will influence global GDP over the next 30 years, some of which are unknown. It is important to stress that the outcome may vary significantly, for better or worse.”

However, what is not in doubt is that the economic impact of energy transition will not be felt evenly. To determine the distribution of the GDP impact, Wood Mackenzie assessed countries on their resilience to climate change and the impact of actions to avoid it.

Economies with high renewable penetration in power generation and advanced power grids are well placed for a low-carbon future.

Those that are better positioned are, typically, wealthier economies with deep capital markets and a high propensity to invest in new technologies or an existing presence in nascent transition sectors.

Hydrocarbon-exporting and carbon-intensive economies will incur the biggest losses of economic output.

Minimising the economic shock of the energy transition relies on diversifying economic activity. Some, such as Saudi Arabia, have substantial financial reserves to invest in non-hydrocarbon sectors. Others, such as Iraq, do not.

Martin said: “Iraq is the country most vulnerable to the energy transition, with hydrocarbon revenues accounting for 95% of all government revenue and the oil sector making up 36% of GDP. An accelerated energy transition would slash Iraq’s GDP by 10% in 2050 versus our base-case outlook.”

Less developed and low-income economies will bear a disproportional burden when it comes to the cost of transition.

Developed economies are committed to climate-finance transfers worth US$100 billion per year to developing economies for climate change adaption and mitigation. But this alone will not equalise the impact of transition around the world.

“A truly fair and just transition will require actions to exceed our current expectations,” Martin said.

Limiting climate warming to a global average of 1.5°C above pre-industrial levels is imperative if the environmental and humanitarian crises wrought by extreme temperature increases are to be avoided.

Martin said: “An accelerated transition could pay off in the end, in economic terms. It is likely to lead to stronger economic growth rates for some economies beyond 2030, enabling losses to be recouped before the end of the century.

"That is the essence of transition economics – short-term pain for long-term gain.”