According to Irasin,The analytical news platform Eurasin reports that both those who want to do more to combat climate change and those who prefer to take no action share one feature: both agree that decarbonizing the global economy is horrifically expensive. At the United Nations’ annual climate change conference held in November in Baku, Azerbaijan, the figures discussed reached into the trillions of dollars.

Many see these costs as a waste of wealth. Donald Trump described the 2015 Paris Agreement, which aimed to reduce global emissions, as “harmful and costly” for Americans and withdrew the U.S. from the agreement during his first term. Environmental activists, while acknowledging the high costs of this fight, argue that when weighed against the destructive effects of climate change, these expenses are justified. In reality, this is a mistaken point of agreement between climate activists and carbon-dependent parties. Greening the global economy turns out to be far cheaper than either group imagines. The Economist, based on the views of a spectrum of economists, consultants, and other researchers, has assessed the global cost of the “energy transition” and the move toward net-zero emissions—assessments that usually inform policy decisions. These figures range from roughly $3 trillion to $12 trillion per year, which is indeed a very high number. However, four factors explain why these numbers appear exaggerated.

How Many Degrees? How Much Capital?

First, the scenarios on which cost estimates are based aim to reduce carbon emissions very quickly and abruptly, resulting in extremely high costs. Second, it is assumed that the world population and economy, particularly in developing countries, will grow rapidly and irrationally, consuming energy at a high pace. Third, these models underestimate the rapid cost decline of key low-carbon technologies such as solar energy. Fourth, these assessments overlook the fact that the world must invest heavily to increase energy production anyway—whether clean or polluting. Therefore, the capital cost required to achieve the main goal of the Paris Agreement—limiting global warming—should not be considered in isolation but compared with alternative scenarios in which increased energy demand coincides with dirty fuel production.

The cost of emission reduction is likely to be less than $1 trillion per year, which is under 1% of global GDP. While this is not a trivial amount, it is far from unattainable. Even optimistically, this figure is still overestimated, as it only corrects the fourth factor mentioned above. Slower economic growth, cheaper technology, and more balanced goals at the time the world reaches net-zero carbon could reduce this figure even further. According to the International Energy Agency (IEA), around $3 trillion, or 3% of global GDP, was invested in energy in 2024. This is a record, partly due to periodic investments in oil and gas and partly due to increasing investment in clean energy, which were at similar levels in the 2010s but have since rapidly grown. About three-quarters of this capital comes from private sources, with one-quarter provided by governments.

The destination of these investments has changed significantly since the Paris Agreement. In 2015, clean technology received less investment than fossil fuels. Today, clean technology receives twice as much. In 2024, solar energy attracted $500 billion in investment, more than all other energy sources combined.

These figures underscore the importance of clean energy, as they include investments in electric vehicles, heat pumps, and grid development, which may not directly reduce carbon emissions but, by ensuring that electricity is sourced from low-carbon means, pave the way for significant emission reductions. For example, the widespread adoption of electric vehicles in China reduces global oil demand but has minimal impact on carbon emissions because the vehicle batteries are charged from coal-powered grids.

Despite this, the climate outlook is improving. In 2015, the UN Environment Programme’s Emissions Gap Report projected that, based on existing policies, global average temperatures would rise 5°C above pre-industrial levels by the end of the century. However, the 2024 report predicts a 3°C increase. Other forecasts are more optimistic: the IEA predicts 2.4°C, while Bloomberg’s research unit estimates that current policies and declining green technology costs will result in a 2.6°C rise by 2050. In any case, none of these projections foresee an average temperature below 2°C, the primary goal of the Paris Agreement. Opinions vary regarding the investment needed to achieve this goal. Naturally, keeping global warming below 1.5°C is costlier than limiting it to 2°C.

Economists assess costs by combining an economic model with a scenario representing the achievement of a given goal—for example, pathways to 1.5°C or 2°C, or targets for greenhouse gas emissions at a given time. The IEA’s net-zero scenario estimates that by mid-century, total greenhouse gases emitted will be offset by equivalent removal measures. According to this modeling, achieving net-zero by 2050 requires $5 trillion in annual clean energy investment until 2030—twice the $2 trillion currently spent on clean energy, and two-thirds more than total energy investments. Bloomberg’s comparable scenario estimates a need for $5.4 trillion annually over this century.

Abandoning Fossil Fuels Isn’t Costly!

Reducing overall global warming by a few tenths of a degree would be cost-effective, as it would result in less damage to the planet. However, three challenges could cloud this positive outlook. First, although decarbonizing power generation and transport is the main driver of emission reductions, it is not the only one. Agriculture is a significant source of non-CO₂ greenhouse gases, such as methane and nitrous oxide. Technologies that could reduce these emissions are less utilized, making reliable future cost predictions harder.

Misaligned incentives are the second issue. Those most harmed by global warming often lack the financial capacity to pay for emission reductions. Poorer countries need greater investment in this area but cannot afford it.

This issue is compounded by capital costs. Most climate scenarios have historically assumed a single capital cost for the entire global economy. Poorer countries, which are more at risk, face higher capital costs than wealthier nations. The Climate Policy Initiative calculates that investors in a solar farm in Germany need a 7% return on investment to break even. In Zambia, exorbitant business loan interest rates raise this ROI to 38%. Until financing costs fall in developing countries, the price tag for decarbonization will remain high.

The third challenge is that models inherently assume rational behavior. In reality, policies are often unreliable due to implementation inefficiencies and constraints imposed by other political objectives. Most models assume society will complete the energy transition as cheaply as possible. But this will not happen. Many governments have recognized the need to use effective techniques to reduce climate change costs, such as carbon taxes and subsidies for technologies that curb emissions. Political imperatives are required to manage mineral lobbies, fossil-rich regions, or producers unable to compete with cheaper battery and solar panel manufacturers.

While these caveats are important, they do not change the fact that the cost of abandoning fossil fuels has always been overstated. This is no coincidence: both climate proponents and opponents have reasons to talk up costs. Opponents use these alarming figures to justify inaction, while activists cite them to request more funding. The reality is that climate change is neither the end of the world nor a costly deception. It is a real and difficult problem, but it can be managed at a reasonable cost.

Source: The Economist