Poll: Investment of 2% to 3% of GDP Required to Achieve Paris Agreement Targets

Oct. 27, 2021
Economic costs of inaction much higher

Investments in green transition worth 2% to 3% of the world output will be needed each year until 2050 to achieve the Paris Agreement goal of net-zero carbon emissions, revealed a Reuters poll of climate economists in the Americas, Asia and Europe. The costs estimated by the economists are far less than the economic cost of inactions, they say. The poll was conducted ahead of the UN talks, which will be held from Oct. 31 to Nov. 12.

Respondents said inaction will lead to a gradual temperature increase of 1.6 degrees Celsius, 2.4 degrees Celsius and 4.4 degrees Celsius by 2030, 2050 and 2100, respectively and result in lost output of 2.4%, 10% and 18% by 2030, 2050 and 2100, respectively.

On the other hand, a joint effort to limit the temperature rise to 1.4 degrees Celsius by the end of the century will have a lesser impact on output. The loss to global output will reduce to just 2%, 2.3% and 2.5% by 2030, 2050 and 2100, respectively.

"If we delay acting on climate change, the higher that cost to reach net zero emission by 2050 goes," said Charles Kolstad, professor of economics at Stanford University.

James Nixon, the head of climate change macroeconomics at Oxford Economics agreed, “While mitigation may be expensive and potentially politically painful, I think it's incumbent on economists to show that not doing anything is even more expensive.” He estimated the cumulative investments required in the energy and other sectors at about $140 trillion by 2050. This is the highest estimate obtained in the survey. The median estimate is $44 trillion.

Emphasizing the need for green transition, Claire Ibrahim, a director at Deloitte Access Economics said, “The economic impact of COVID has been significant but temporary. The GDP impacts of climate, however, are permanent, long-term and grow larger with each year of inaction.”

While most respondents said early and coordinated action will be needed and beneficial, many (18 of 31 economists) also stressed the need to prioritize the establishment of a green climate fund to support developing countries. COP26 host Britain reaffirmed that developing nations require this support and called on the developed nations to raise $100 billion each year for such a fund.

Kolstad added, “Clearly developing countries cannot be expected to pay for mitigation while they are investing in development and helping their poorest citizens. Insisting on their paying will not accomplish anything”

Some (7 economists) suggested setting up a collective financial goal with multilateral financial institutions, including the International Monetary Fund (IMF) and World Bank and 2 economists argued that developed nations owe compensation to those who have suffered or may suffer from the impact of climate change.

The poll also revealed strong support for tougher carbon pricing, at least $100 per tonne, to incentivize net zero emissions. This is much higher than the $75 recommended by the IMF.