A new report released by DNV highlights what is needed to achieve an affordable energy transition to mitigate climate change.
The Financing the Energy Transition report states that there is an urgent need for industry stakeholders to change their mindset and to heavily reduce spending on carbon-heavy technologies by shifting focus to renewables.
To align with targets set by the Paris Climate Agreement, DNV states that emissions need to fall by half by 2030, however, with the pace at which the world is decarbonising emissions are likely to fall by just 9%.
DNV predicts the percentage of world gross domestic product being spent on energy will decline by 50% from 3.2% in 2019 to 1.6% in 2050. The report states that if the current GDP percentage being spent on energy remains constant, funding for clean energy would increase by around $2 trillion each year and reach $63 trillion by 2050, enough funds to support the energy transition.
To ensure the massive investments required to deliver the energy transition, DNV says financiers, bankers, and government need to play a leading role in climate financing.
The report, however, states that financiers face significant challenges, particularly around how to price the risk of often multi-decade energy projects in a rapidly changing energy system and a warming climate.
This includes the potential for stranded assets, climate risk in infrastructure, and pressure on profitability and rates of return if too much capital chases a limited number of projects.
Together with policymakers and energy companies, financiers also face the challenge of de-risking and improving the profitability of clean-energy opportunities that are currently high-risk, low-return, long-term investments, which are often not considered bankable, but which are needed for an accelerated transition.
Ditlev Engel, CEO, Energy Systems at DNV, said: “The world is consuming the remaining carbon budget way too fast, and the chances for reaching the goals and objectives in the Paris agreement are now in real danger. Governments and businesses need to recognize that the remaining global carbon budget needs to be used very wisely and we must place this approach at the center of all decision-making.
“As confirmed in our ETO, we remain very technology optimistic, but the real potential of technology can only be achieved if the required policies and actions are in place on a national and international level. We can mobilize and redirect the required capital and achieve a deeply decarbonized energy system.”
“It’s clear that we have the financial capacity to accelerate the transition, hence the question we have to put forward to COP26 is that as world leaders, we have to prioritize upfront investment and ensure governments don’t just deal in long-term climate commitments, but also in short-term climate action. Targets must be grounded with a credible baseline for emissions, translated into action every year for at least the next 30 years.”
Find out more about the report.