Gilles Moec, AXA's Chief Economist, and Kathleen Schubert, a Professor at the Sorbonne, delve into the urgent need for financing the green transition. They discuss Europe's significant investment gap and emphasize the crucial role of the private sector in achieving net-zero targets. The conversation highlights the necessity for reliable carbon pricing and clear profitability metrics to attract investments. They also touch on navigating political volatility and the essential differences in sustainability reporting standards between Europe and the U.S.
The green transition necessitates an annual investment increase in Europe to around 800 billion euros, highlighting a significant 400 billion euro gap as of 2022.
Mobilizing private sector capital is essential for closing the investment gap, with clear carbon pricing and risk mitigation strategies fostering greater investor confidence in green projects.
Deep dives
Understanding the Investment Gap for the Green Transition
The green transition requires significant investment, with current estimates for Europe showing an investment gap of approximately 400 billion euros as of 2022. To meet climate goals, annual green investments must rise to at least 800 billion euros, translating to a necessity of around 5.1% of Europe’s GDP, which essentially means doubling investment levels each year going forward to 2050. This gap reflects the difference between the required financial efforts to decarbonize sectors such as electricity generation, transport, and buildings and the current investment levels. The calculations for this investment gap involve uncertainties, mainly due to volatile technology costs and future market conditions, indicating a pressing need for strategic investment policies to close the gap.
The Role of the Private Sector in Financing
Mobilizing private sector capital is crucial for addressing the immense investment gap, especially given the constraints on public funding due to limited governmental debt capacity. Asset managers play a key role in connecting savings to necessary green investments, with many clients expressing a willingness to invest for sustainability, albeit conditionally on ensuring it does not adversely affect investment returns. Establishing a clear carbon price would enhance the desirability of green investments by providing critical information on potential profitability, thus encouraging private investors to consider greener options favorably. This necessitates greater visibility and predictability of climate policy to reassure investors about the long-term viability of green investments amidst ongoing political volatility.
Investment Challenges in Developing Economies
There exists a pressing challenge in increasing investment flow toward developing economies, primarily due to heightened perceived risks and rising global interest rates. Northern investors often hesitate to direct funds to the Global South, where lower marginal costs of emission reduction can be advantageous, yet they demand better risk mitigation strategies. Effective solutions may include multilateral public financial systems that could provide guarantees for higher investment security, such as blended finance options. Additionally, cooperation between Northern and Southern economies is crucial for a realistic approach to energy transitions, empowering emerging markets to avoid the environmentally detrimental phases that developed countries underwent.
The second of three special episodes of VoxTalks Economics recorded at the Climate Change and the Environment Conference in Paris, jointly organised by the AXA Research Fund and CEPR. The green transition needs investment. So who will fund it, and under what conditions? Tim Phillips asks Gilles Moec of AXA and Katheline Schubert of the Sorbonne and PSE about how capital can be mobilised to get us to Net Zero.
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