Under current governmental decarbonization policies, global sustainable infrastructure investment is estimated to remain at around US$2t per year, with cumulative investment between 2020 and 2050 totaling around US$75t. This is a significant investment but still insufficient to achieve net zero. In fact, it is only just over half of the actual investment required.
Our analysis — conducted with the International Federation of Consulting Engineers (FIDIC) — shows that, cumulatively, US$139t needs to be invested in sustainable infrastructure to achieve net zero by 2050, which leaves a shortfall of US$64t based on current investment policies.
Since 2020, countries have submitted national climate action plans, known as Nationally Determined Contributions (NDCs). If implemented effectively, these NDCs could bridge a portion of that US$64t funding gap according to a recent United Nations Environment Programme (UNEP) Emissions Gap Report.
However, most of these commitments have yet to be incorporated into implementation plans, and the current policies in place are insufficient to reach the 2050 goals.
The Investment Need
To achieve an orderly and just transition, global annual spend on sustainable infrastructure will have to nearly triple within the next seven years from around US$2t per year to US$5t per year by 2030. Any further delays in the transition to net zero will require an even higher amount of global investment — US$7t per year — to avoid the worst impacts of climate change.
The largest increases in annual sustainable infrastructure investment will need to take place in the US, China, India, European Union 27 (EU27) and the UK. Of those, China will require the single largest commitment — its annual investment by 2050 is set to make up over 25% of the global total.
Public finance won’t be able to fund the sustainable infrastructure transformation alone. The International Energy Agency (IEA) estimates that over 70% of investment into clean energy will need to come from private sources. This will require governments and firms to provide incentives to investors across the globe to rapidly reallocate and increase capital investment away from fossil fuels into sustainable infrastructure.
By far the largest sector where investment will need to be targeted is the electrification of the global energy supply (it will account for 62% or US$86t of the $139t required to be invested in sustainable infrastructure). The remaining investment will be directed toward decarbonizing heavy industry, such as steel, as well as investment into the transportation system and retrofitting buildings to make them more energy efficient.
Challenges Faced by Major Economies
The issues and challenges faced by each country will differ depending on their legacy infrastructure and their ability to leverage different types of renewable energy, carbon capture or nature-based solutions.
Some of the main investment challenges major economies face will include the following:
Within the EU27 and UK, most of the investment will be directed toward the energy sector, with nearly US$1t of annual investment required by 2050. Reaching net zero will require these regions to decarbonize their energy supplies through electrification and widespread investment into low-emission fuels such as hydrogen.
The US needs to more than double its current spending of US$357b to cover the projected investment gap in sustainable infrastructure. This needs to be accomplished by a combination of issuing financial instruments and policy interventions which can include, but are not limited to, additional taxation and adjusting carbon pricing mechanisms. Current government initiatives such as the Inflation Reduction Act (IRA) and Infrastructure Investment and Jobs Act (IIJA) plan to provide significant funding for sustainable infrastructure projects. However, these are still insufficient to cover the investment gap required to meet the US net-zero target, which is projected to be a cumulative total of over US$10t between 2020 to 2050.
China and India will be required to invest a total of US$1.5t each year to reach net zero by 2050. Current investment in sustainable infrastructure in India is around US$78b per year and is forecast to increase to US$111b per year; however, that needs to rise to US$260b per year to achieve net zero. On a much larger scale, current sustainable infrastructure investment in China is around US$545b per year and is only forecast to increase to US$546b per year by 2050. This needs to more than double to around US$1.3t per year to achieve net zero.
The remaining regions across the world, including Indonesia, Africa and South America, must collectively invest around US$1.7t per year to reach net zero, an almost three-fold increase on the current figure. Emerging economies tend to be disproportionately at risk from the adverse impacts of climate change. This is largely because households often live in areas more exposed to climate risks, such as flooding, drought or extreme weather events. Delivering inclusive net-zero targets that benefit all of society will require global cooperation in a number of key areas, including funding, resourcing and technology developments, and commitment pipelines.
How to Close the US$64 Trillion Funding Gap
The engineering and wider infrastructure community can play a crucial role in defining a clear investible pipeline of the most climate-impactful projects with inbuilt resilience to help policymakers match-make investors and rapidly accelerate project initiation.
By implementing five key actions globally, countries can facilitate the rapid unlocking of substantial additional funding and expedite the most impactful projects:
- Establish a new industry standard for the open sharing of embedded carbon data and define a new methodology for the grading of infrastructure project sustainability across the lifecycle,
Adoption of such a rating scale, like energy efficiency ratings for consumer products, could drive all countries to minimize embedded carbon by helping to proliferate some of the most easily replicable practices for sustainable construction. This will help to bring an improvement in the quality of implementation of sustainable infrastructure projects.
- Define clearer pathways to net zero within each country that recognize technological and sector constraints to provide a pipeline of certified and investible projects that are commercially feasible.
To define such pathways, each country needs to individually assess and determine an achievable future net-zero energy mix for 2050, with a national investment ambition to deliver it. Projects which are considered the most commercially feasible to deliver and provide maximum emission reduction pre-2030 should be initiated immediately.
- Create a global repository of successful project case studies that can accelerate project initiation by sharing lessons learnt and clear data-driven benchmarks.
Cross-organizational collaboration will be required to develop a global repository that shares successful project case studies, good practice lessons that can be drawn from them, and how they can be applied to other projects. The repository will be bolstered with clear data-driven benchmarks and training materials for practitioners.
- Create a global platform to match funding opportunities for infrastructure projects in emerging economies — and build confidence and capacity in their governance.
Creating collaborative partnerships among nations, donor agencies, multilateral development banks and philanthropic organizations through global and transparent communication is key to improving investor confidence to effectively address climate inequity. The creation of a transnational funding platform would promote transparency and foster international collaboration where emerging countries can showcase their certified and investible sustainable projects. This would create a data bank for advanced countries to support projects that are in their area of expertise.
- Champion a sustainable financing ecosystem that helps influence policymakers to attract more private investors, providing better pricing incentives, leveraging innovative financial instruments and easing transnational capital controls.
One enabler of the rapid increase in private finance needed would be the creation of an effective sustainable financing ecosystem that allows both the public and private sector to work in a collaborative manner. It would deliver policy interventions that pull more private investment toward sustainable infrastructure through subsidies and grants (scaling down fossil fuel subsidies, for example). It would also deter carbon-intensive infrastructure through taxation and carbon pricing while matchmaking investors to the right projects, supported by clearly defined taxonomy and KPIs for measuring success and easier capital flow mechanisms.
This ecosystem will require four levers to stimulate involvement from policymakers and private sector:
- A clearer definition of sustainable projects to attract more private capital
- Direct market intervention to make investment in sustainable infrastructure more attractive
- The ability to disincentivize demand for unsustainable products whilst minimizing disruption
- The creation of regulatory frameworks that open access to wider funding sources and leverage innovative instruments
There will be numerous obstacles that business and government will need to overcome on the path to achieving net zero. Advanced nations will have to balance funding their own decarbonization transition with providing support for emerging nations. The latter, meanwhile, must navigate a path of rapid economic growth that isn’t reliant on fossil fuels. They will have to become more open to capital flows and create greater transparency while mitigating associated risks for international investors. Together, all nations must seek a just transition — achieving these goals while also protecting and improving the well-being of communities through new ways of engagement.
Despite these challenges, the risks of failing to take decisive action now far outweigh the challenges of achieving net zero. The engineering community prides itself on coming up with solutions for tough problems. By advocating and acting now, it can play a crucial role in defining a clear investible pipeline of the most climate-impactful projects, with inbuilt resilience, and helping policymakers match-make investors and rapidly accelerate project initiation.
Author’s Note: The views reflected in this column are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.
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