Responsible Investor: What is the thinking behind the report?
Victoria Cumming: This report builds on the findings of BNEF’s energy and climate scenario, New Energy Outlook 2024, published in April. Although NEO models 19 individual markets, this latest report is the first to specifically examine emerging markets, particularly economies outside of China, as a group.
In recent years, China has seen a significant increase in investment in energy transition, particularly in renewable energy and electric vehicles. However, other emerging markets lag far behind, not only in their overall energy systems but also in terms of investment in low-carbon solutions. However, these markets are expected to experience rapid economic and population growth in the coming decades. Therefore, without urgent action in these economies, the world will not be able to realize the goals of the Paris Agreement.
This report focuses on the energy system investments needed to get China and other emerging markets back on track, and the progress made to date.
We consider these issues through the lens of two energy systems and climate scenarios. The economics-driven baseline scenario, known as the Economic Transition Scenario, projects emissions to fall by 27% by 2050, which would mean 2.6 degrees of warming by 2100. The net-zero scenario is coherent and provides a path to net-zero global emissions by mid-century. 1.75℃ of global warming as stipulated by the Paris Agreement.
RI: How much progress have you made?
VC: Emerging markets (defined as low- and middle-income countries based on World Bank ratings) invested $2.2 trillion in energy systems in 2023, an increase of 35% from 2020. Although high-income economies will see $1 trillion in energy demand, emerging markets outside of China will grow to meet the projected increase in energy demand. need to be accelerated.
Additionally, these markets need to direct more investment into energy transition technologies. China and high-income countries have increased low-carbon investments over the past four years. Last year, low-carbon solutions accounted for 49% of China’s total energy investment, up from 20% in 2020. This surge was primarily driven by renewable energy and electric vehicles.
In 2023, emerging markets outside of China attracted $1 trillion in energy transition investment, an increase of 52% from 2020. However, this accounted for only 14% of total energy system spending last year.
RI: What insights can you gain from different scenarios?
VC: In a net-zero scenario, China would require $46 trillion in total investment in its energy system by 2050, while other emerging markets would need $69 trillion. This compares to $100 trillion for high-income countries. In our economic transition scenario, for emerging markets outside of China, that number is $63 trillion.
Therefore, there is no significant difference when it comes to the two scenarios for dollar investment. The biggest challenge is where that investment will go. In the economic transition scenario, investment is split relatively evenly between fossil fuels and low carbon, while in the net zero scenario, 87% of investment would need to be directed to low carbon solutions.
This means that under a net-zero pathway, emerging market countries other than China would invest an average of $2.2 trillion per year by 2050. This compares to $1 trillion in the economics-based base case and $0.2 trillion on average from 2020 to 2023.
RI: What are your priorities for achieving your net zero goal?
VC: On the supply side of the energy system, low- and middle-income economies outside of China will need to significantly increase investment in renewable energy and electricity grids. In a net-zero scenario, these economies will invest an average of $0.6 trillion annually in these technologies by 2050. This is five times the historical average from 2020 to 2023 and twice the base case by 2050.
Achieving this will require significant policy support, including the introduction of mechanisms such as renewable energy targets, tariffs and auction systems, as well as public investment and incentives for private companies developing electric vehicle charging infrastructure. It will be. These need to be expanded rapidly. Achieving large-scale electrification in end-use sectors, especially transportation, requires the availability of clean electric vehicles.
Many emerging markets already require significant investment in their power grids. And this need will only increase in the coming decades as power generation and storage capacity expands. These economies will also need to increase investment in electric vehicle charging infrastructure, especially as electric vehicles represent the largest component of projected investment on both the demand and supply sides. Under a net-zero pathway, emerging markets outside of China would spend an average of $1.4 trillion on energy demand systems such as cars and heat pumps by 2050, of which $1.2 trillion would be for EVs.
Interestingly, these economies will spend less on on-demand systems in the net-zero scenario compared to the base case. This is because the former will require a faster transition to EVs, which are increasingly cheaper than vehicles with internal combustion engines. By contrast, reaching net zero will be more costly for China and other high-income countries, as existing ICE vehicles will need to be retired to accelerate the decarbonization of existing fleets.
RI: What about progress around the world?
VC: It really depends on the region. Brazil has experienced significant growth in recent years, particularly in renewable energy, thanks to favorable hydropower and wind resources and policy support such as rooftop solar programs. As a result, investments in renewable energy increased by 41% from 2020 to 2023 on an annual compounded basis. While India has slowed by 20%, other markets have lagged further behind, with Indonesia actually seeing a 20% decline.
While some emerging markets are making progress in adopting renewable energy, most countries outside of China have significant room for improvement when it comes to electric vehicle adoption. Private consumption needs to increase significantly, and governments need to start introducing policies such as subsidies for EV purchases and support targeted at low-income earners. Governments need to start introducing tougher policies such as fuel economy mandates and carbon prices, as it is much more cost-effective to increase investment now rather than waiting decades.
Countries such as India and Indonesia have plans to introduce or strengthen such compliance regimes, but are behind schedule. Furthermore, governments introduce large concessions to ease the transition, but tend to leave them for long periods of time for fear of a backlash if they withdraw them. If the government offers concessions, it should also set a deadline for phasing them out.
The path to net zero presents an incredible investment opportunity and I am quietly optimistic that we can get back on track. We hope this report will give you some idea of the amount of funding that will be needed. We need to start ramping up investment now, and governments have a big role to play in creating an environment that attracts investment. We cannot wait decades in hopes of making a last-minute dash towards net zero by 2050.
This article was republished from Responsible Investor.
