In the utopian vision of net zero pledges, there will be no new petrol cars on EU roads from 2035, American industry will run on green hydrogen, wind farms will whirr across the North Sea, and solar power will bring all Africans affordable energy.
The IMF claims all this can be achieved without straining government finances.
Estimates by its staff, presented at a recent conference, suggest that co-operation on decarbonisation could ensure countries meet their net zero targets at an overall economic cost of just 0.5 per cent of what global GDP is expected to be by 2030. For most countries, the fiscal impact would be positive or neutral by the end of the current decade, although some would incur later losses.
Take the fund at its word and reaching net zero looks “entirely doable and surprisingly cheap”, said Luis Garicano, a London School of Economics professor and former member of the European parliament.
But there’s a snag. The IMF estimates assume a global accord to price or tax carbon and redistribute the proceeds to the developing world, while also scrapping current subsidies for fossil fuels.
The reality of countries’ attempts to decarbonise their economies is far removed from such hypotheticals.
Less than a quarter of global emissions are currently covered by a carbon tax or price, while governments’ commitments to green targets are under increasing strain. “[The IMF’s scenario] is desirable but it’s just not happening,” said Jean Pisani-Ferry, professor at Sciences Po.
The consequence, said Helen Miller, deputy director of the UK’s Institute for Fiscal Studies, is that when it comes to hitting net zero, lawmakers could opt for solutions that are politically expedient but economically less efficient.
“Ultimately we’ll achieve net zero in a more costly way,” she said.
On any reasonable estimate, the scale of funding required to hit net zero is vast. In 2021, the International Energy Agency calculated that annual investment would need to rise from an annual $2tn to almost $5tn, or 2.5 per cent of global GDP, by 2030. It would still total $4.5tn in 2050.
Lord Nicholas Stern, chair of the London School of Economics’ Grantham institute and a former World Bank chief economist, estimates an extra $3tn a year is needed, totalling $100tn over 30 or 40 years, to boost renewable energy, electrify transport systems, decarbonise the heating and cooling of buildings, and foster green hydrogen.
Economists broadly agree that most of this investment has to come from the private sector. “Some estimates on climate change transition are in the stratosphere,” said Mahmood Pradhan, head of global macroeconomics at Amundi Institute. “The demands of net zero are just too high [to come from governments alone] — they have to come from the private sector.”
But governments are already spending hundreds of billions on incentives and subsidies for businesses and households, on research and innovation, and on public infrastructure ranging from electricity grids and flood defences to bike lanes.
Meanwhile, revenues from carbon taxes — if these succeed in lowering emissions — may not offset the loss of income governments receive through fuel duty.
“Even if they’re successful — while that may be a good thing in itself — they’re not going to raise very much,” said Judith Freedman, professor of taxation law at Oxford university.
New modelling by the OECD, based on a mix of policies closer to current reality, points to a higher fiscal cost than the IMF’s projections. At global level, it finds net public revenues declining by 0.4 per cent of GDP in 2030 and 1.8 per cent in 2050.
The fiscal costs would vary between regions, coming in lower where governments rely more on regulation to cut emissions, and rising to 3.4 per cent of GDP in the Americas, because of generous US subsidies contained in legislation such as the Inflation Reduction Act.
“People have to take into account the scale of the transformation needed,” said Shardul Agrawala, head of the OECD’s environment and economy integration division. “We shouldn’t present things as a free lunch.”
One big uncertainty is whether green investments will displace other investment that might, in the short term, have done more to boost productivity — or whether they will be supplementary, injecting energy into mature economies suffering from sluggish growth.
Stern argued that while there are significant public spending challenges, green investments will pay off amply over time — especially if welfare gains, such as better air quality, to future generations are counted.
“We still live in a world where planned saving is in excess of planned investment,” he said. “This is the growth story of the 21st century.”
Nevertheless, the few countries that have done their own calculations on the likely cost of the green transition expect a bigger impact than the IMF.
The UK’s Office for Budget Responsibility said in 2021 that hitting net zero would add 21 per cent of GDP to debt by 2050, with the loss of fuel duty representing the biggest single cost.
Pisani-Ferry, who led a recent report for the French government, estimated that it could add as much as 25 percentage points of GDP to the public debt by 2040.
This higher figure is partly because taxpayers are likely to shoulder more of the cost in a country where the state traditionally plays a bigger role.
Pisani-Ferry also thinks governments have underestimated how far they will need to help households. For French people on middle incomes, installing a greener heating system would cost a year of earnings, he noted, adding: “It’s too much to assume it will happen without significant public support.”
“The mantra is no additional borrowing, no further taxation,” Pisani-Ferry said. “I don’t see yet how that is going to add up.”
Without new sources of revenue, governments would need to consider whether higher public borrowing can fund the green transition — a big ask given soaring borrowing costs and the need for more spending in other areas, ranging from defence to pensions and healthcare, as populations age.
However, the bill for reaching net zero must be settled no matter how large. “The real metric is, what is the cost of inaction?” said Agrawala.