What policymakers should know about energy transition affordability: three critical policy ELEMENTS when stepping up from “STEPS” to Net Zero
To limit global rises in temperature, the economies of the world need to radically change the way they produce and consume energy. Policies currently in place to address this challenge, often referred to as “stated policies” or the “STEPS” scenario, are not sufficient. For a sustainable future, the world will need to reach net zero emissions, the so-called “NZE scenario”, driven by substantially more ambitious climate policies.
In this brief, we examined whether it is possible to deliver an affordable green transition, the investment needed to go from STEPS to NZE in terms of emissions, and what policies make this process as affordable as possible.
We use INTERSECT℠, our newly developed global climate-economic model co-developed with Bain & Company, to provide quantifiable insights informing the answers to these important questions. The model forecast can be based on different climate scenarios, such as the IEA STEPS or NZE.
While the transition effectively lowers consumers’ real income by increasing production costs based either on more expensive but green technologies or a CO₂ tax, our calculations suggest that the cost of going from STEPS to NZE is manageable.
When we run the scenarios in our model, we estimate that the reduction in private consumption in NZE compared to STEPS may be as low as 2% to 4% annually by 2040 in most countries, with high-income countries typically at the lower end of this range.
While these costs are not negligible, forecasters expect per capita income to have increased by more than 50% in a majority of countries by the middle of this century.
To deliver on net zero while maintaining this level of affordability, policies will need to be timely, efficient, and credible to drive and support the green transition. This requires a combination of three critical elements in climate policy: 1. higher carbon pricing, 2. international cooperation (notably on burden-sharing), and 3. maturing of critical technologies.
As we run the emissions reductions from the NZE scenario in our model, we see that the effective carbon price needs to increase significantly across all regions. As high-income countries already need to make significant emission cuts towards 2030, they have to implement a carbon price above USD 100 (see Figure 2). In developing countries, the price needed is significantly lower, around USD 50-80 in 2030. Later, as all regions will need to decarbonise more aggressively, carbon prices must increase to much higher levels to incentivise the uptake of the most expensive options.
International carbon trading highlights how global cooperation can make the energy transition more affordable by breaking the direct link between a region’s transition costs and its marginal abatement costs. To illustrate the potential of international cooperation to improve affordability, Figure 3 shows our model’s estimate of what happens under a global carbon trading mechanism (with all regions participating). As one might expect, the biggest exporters of CO₂ allowances will be regions like China and India, reflecting the fact that these countries have a large potential for cheap abatement, in particular by phasing out coal power. Both regions are large emitters of CO₂ and therefore have great potential to increase the supply of allowances. The potential scale of this mechanism is significant: our model predicts that the total potential corresponds to 12% and 67% of global gross emissions in 2030 and 2050, respectively.
However, turning this potential into a credible multinational policy is complex. Success depends on robust governance, international standards for measuring carbon content in traded products, and strong investment in renewables. Without these, the comparative cost advantages of carbon trading could be lost, limiting its impact on affordability and emissions reductions.
Reaching net zero will require significant uptake of new technologies such as Carbon Capture, Utilisation, and Storage (CCUS), direct air capture (DAC), and Power-to-X (PtX), which are expected to play a crucial role in decarbonising hard-to-abate sectors. Even in the NZE scenario, model simulations suggest it will be cost-effective for some subsectors—such as certain areas of manufacturing and transportation—to continue using fossil fuels and remain net emitters, with their emissions offset by CCUS and DAC. As most critical green technologies become cheaper over time due to learning effects, early maturity of CCUS will be especially important, as it can reduce the necessary carbon price towards 2050. Nevertheless, achieving carbon neutrality by 2050 will still require the most disruptive economic changes seen in decades.
Click below to download our report and discover more about our key findings.
INTERSECT℠ is a CGE model combining economic theory with real-world data across 30 sectors and 18 regions, allowing for simulations up to 2050. Learn more about its capabilities and how it can help you here.
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