The cost of the transition
We are quickly reaching the trillion of dollars scale when talking about the cost of the transition to net zero, which I always have trouble to remember has 12 zero’s: 1,000,000,000,000. At such scale I can’t place whatever subject is discussed in a real, digestible environment, for me the trillion worth issue becomes an abstract and ethereal object rather than a real, tangible matter. Only a few privileged people who daily manage these figures would have a formed perception of the scale. And I would not dare to put my hand on the fire when it comes to determining the accuracy of the net zero transition cost estimations.
An easy way to start assimilating the cost of the transition is to check and crosscheck what consultancy firms and autonomous inter-governmental organisations are diagnosing. The overall number that McKinsey is showing at this point in time adds up to $3.5 trillion in terms of global spending by governments, business and individuals. That’s a 60% increase on today’s level of investment. In the IEA Net Zero Emissions by 2050 Scenario (NZE), 70% of clean energy investments over the next decade will need to be carried out by consumers, financers and private developers. Furthermore, a $1 trillion would also need to be reallocated from high-emission to low-carbon assets.
A more specialized in the petrochemical sector database, such us NexantECA, determines that transitioning production of chemicals, including capital expenditure and standstill costs, comes with the overall bill of more than $1 trillion. The rounded number again, but only for this value chain present everywhere.
It is not a question of who is right or wrong about how much would it cost, the figures are dazzling anyway, the key to the question is the clear $ billions per year funding gap that needs to be addressed.
What could the mitigation costs mean?
The authors of Zero-Emission Pathway for the Global Chemical and Petrochemical Sector calculate that the average, total mitigation costs amount to $310 billion per year in 2050. Moreover, the total cost of mitigation equals more than 35% of the total energy and feedstock cost of the global chemical and petrochemical sector, which is in line with what other authors suggest, an increase in production cost of 20–43% by 2050 for the deep decarbonisation of plastics. These studies make Bill Gates’ predictions of a green premium for ethylene between 9-15% appear rather shy in comparison.
The investment prognosis relies entirely in the contribution share each and every technology solution will have in the total package by a certain date. Additionally, one should always read the footnotes to take into account whether infrastructure costs are being included. In many cases, moreover, cost may be underestimated. For example, the investment cost for circular economy solutions may be uncertain due to the complex supply chains, therefore more research is warranted.
Cost-optimal pathways towards net-zero chemicals and plastics based on a circular carbon economy study provides a bottom-up process model, which reiterates the necessity to increase the capital expenditure in order to achieve net zero by, in this case, 36-51% over the next 30 years. This paper also restates that net zero production, and its costs will rely on the availability of renewable electricity and biomass. At the same time, high (re)cycling rates are a key to keep resource demands low and reducing the sensitivity to high resource prices.
What could the delay mean?
If making the cost calculation of the best possible scenario is rather complicated, putting a number behind a delayed climate action becomes a similar guestimating exercise. Nonetheless, according to the launched report of a joint initiative by the Oxford Sustainable Finance Group at the University of Oxford and the non-profit think tank 2° Investing Initiative the expected additional loss that the financial sector could face when climate action by companies is delayed is $150 billion per year. Not much is being reported in the specific case of the chemical industry, in terms of financial implications of a delayed transition to net zero. Although, models suggest that when industrial CCS, which is part of the solutions package, is not available, global costs of reaching the target will be higher by 71% in 2100.
My takeaway about the cost of the transition is threefold. Inflow of billions of dollars is plainly needed, a notable increase in the investment percentage is expected and surely the cost of production is going to increase in a significant proportion.
Therefore, there is a clear importance of private sector capital flowing into a net zero industry, given that achieving net zero means almost tripling overall decarbonization investment for 2021-2025 compared to current investment levels. Around 30% of industry decarbonization investments could flow from corporations themselves, while government financing might support the development of immature technologies through co-investment.
