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The energy transition could relieve the global economy by 75 trillion dollars by 2050, says Wood Mackenzie

An accelerated energy transition to mitigate climate risk will have tangible economic impacts, saving global gross domestic product by US$75 trillion between 2022 and 2050 as countries scramble to meet their climate commitments.

The global economy will double in size in real terms, growing from $85.6 trillion now to $169 trillion by mid-century, Wood Mackenzie said in his latest report detailing the economic implications of the energy transition.

In its baseline scenario, the research firm expects temperatures to be 2.5 to 2.7°C above pre-industrial levels by mid-century. However, in order to limit this warming to 1.5 °C in line with the Paris climate pledge, the energy transition must be accelerated.

Measures to lower the temperature will increase global GDP by 1.6 percent overall by 2050, estimates Wood Mackenzie. At the same time, however, the necessary measures to successfully contain climate risks could reduce production by 3.6 percent. The push agreed in the Paris climate agreement to limit the values ​​to 1.5 °C will lead to a net drop of around 2 percent by 2050.

“While preventing even more extreme warming over the next 30 years is likely to have a positive economic impact, the actions required to do so could have a compensating negative effect,” said Peter Martin, Wood Mackenzie’s chief economist.

“The cumulative loss of $75 trillion from 2022 to 2050, while significant, accounts for only 2.1 percent of total economic output over that period.”

Some economies will feel the impact of the accelerated transition more than others. Economies that are already closer to net-zero targets will experience less of an impact between now and 2050, according to a study by Wood Mackenzie.

“For a lucky few, the transition need not result in economic losses at all,” said Mr. Martin.

“Those that are better off – typically wealthier economies with a strong propensity to invest in new technologies – could benefit even into 2050.”

However, there is “no doubt that the economic impact of the energy transition will not be felt evenly” as less developed and low-income economies would bear a “disproportionate burden” during the energy transition.

Some of the hydrocarbon-exporting and carbon-intensive economies are likely to suffer the most from economic output. Climate finance for lower-income countries, including government transfers and private sector investments, can help fight injustice.

Pledges by governments around the world to mitigate climate risk came into focus during last year’s Cop26 in Glasgow, with world leaders pushing to accelerate the energy transition.

Wealthy nations also secured long-awaited $100 billion a year funding for developing countries to help them meet their climate goals. Funding is expected to be available in 2022, a year earlier than previously thought. However, Wood Mackenzie said more needs to be done.

“A truly fair and just transition will require action beyond our current expectations,” it said.

To determine the distribution of GDP impacts, researchers assessed countries’ resilience to climate change and the impact of policies to mitigate it.

Economies with high renewable energy capacity in power generation and advanced power grids are well positioned for a low-carbon future. Generally better positioned are wealthier economies with deep capital markets and a high propensity to invest in new technologies, or an existing presence in emerging transition sectors, the study showed.

The cumulative loss of $75 trillion between 2022 and 2050, while significant, accounts for only 2.1 percent of total economic output over that period

Peter Martin, Chief Economist, Wood Mackenzie

Some of the hydrocarbon-exporting economies with large fiscal buffers are also doing well. But others, like Iraq, are not.

“Iraq is the country most vulnerable to the energy transition, with hydrocarbon revenues accounting for 95 percent of all government revenues and the oil sector accounting for 36 percent of GDP,” Mr. Martin said.

“An accelerated energy transition would reduce Iraq’s GDP by 10 percent in 2050 compared to our baseline.”

The world has the means, motives and opportunities to limit global warming. It is imperative to avoid environmental and humanitarian crises caused by extreme temperature increases, the report said.

“An accelerated transition could ultimately pay off economically,” Martin said.

“It will likely result in stronger economic growth rates for some economies beyond 2030, allowing losses to be recouped before the end of the century.”

Updated January 22, 2022 at 5:00 am

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