Mattia Romani
The world has in its hands a new growth and development story driven by investment and innovation in green technology, boosted by artificial intelligence (AI); it is a much more attractive and inclusive story than the dirty and destructive paths followed in the past.
This new growth story is beginning: in the next 5 years more than half of the tipping points for crucial green technologies will have been met, making them competitive in key markets. The process of structural and systemic change will be multi-decadal. But this decade is decisive to limit the risk of greater climate instability. Acceleration now is essential. AI is creating real opportunities for this acceleration.
The faster growth of Emerging Markets and Developing Economies (EMDEs) relative to richer countries and the location of renewable energy sources will change the world’s industrial geography and patterns of trade. If managed well, these changes can make supply chains more diverse and less fragile; multiple sources of key products and inputs will be necessary. The race has started, with countries across the world competing in investment support to gain dynamic comparative advantage, such as the $1trn US Inflation Reduction Act with its strong focus on green technologies.
Major investment across the world is needed for the transition to rapid, sustainable growth: some $5-7trn a year globally in gross investment for clean energy and digital transformation. Part of this investment will be additional; the necessary global increase in investment will be around 2-3% of GDP, less in richer countries, more in EMDEs. The aggregate world macro position makes this increase in investment possible; there is no global savings constraint. This investment can give impetus to a strong and durable recovery from the current crises and pre-empt a lost decade for development.
The new, technology-driven, sustainable growth story represents the greatest investment opportunity since the industrial revolution. The private sector will provide most of this investment but public-private partnerships in policy, innovation and finance are essential. The opportunities are there for all countries.
There are also immediate challenges of climate vulnerability. All countries are affected but poorer countries have already suffered particularly severe losses from the impacts of climate change. There should be strong international support in their efforts to build resilient economies.
An international, shared, strategic agenda, including on goals, finance, and trade, will enhance confidence necessary for investment. And for technology, particularly AI. Cooperation around the international financial system and the flow of both private and public investment in EMDEs is crucial. The substantial expansion and reform of the multilateral institutions will be at the core of this finance.
1. Opportunity: the drivers of the future economy
Large-scale deployment of low-carbon technologies, enabled and accelerated by artificial intelligence and digital enablers, will transform energy, transport, production, built environment, land-use and ocean systems over the next 25 years. The race is already taking shape and will drive a wave of creative destruction. Countries, companies and investors who understand and act upon these trends will be greatly advantaged for what could be an era of unparalleled prosperity, although the transition itself requires strong investment and the changes will involve disruptions which must be managed.
Low carbon economy: What it means and how to achieve it?
The deployment of low-carbon technologies is accelerating, with key technologies expected to reach tipping points before 2030—which in turn will trigger their scaling-up to mass market. A significant tipping point occurred already in 2018 in the energy sector when the levelized cost of energy generation (LCOE) for solar and wind power fell below that of new coal and gas. A second tipping point, whereby the LCOE includes the cost of short-term battery storage, is expected to be reached in the US in 2023 quickly followed by other countries. This rapid cost reduction led solar and wind to account for more than 75% of energy capacity additions globally in 2021.
We are seeing similar trends in other sectors. Unsubsidized Battery Electric Vehicles (BEVs) are expected to reach cost parity with Internal Combustion Engine (ICE) vehicles in all light vehicle segments by 2025-26 in major regions. The same is happening with agricultural fertilisers where pioneering projects have brought costs of green ammonia down and are enabling the largest fertilizer producers to launch industrial-scale plants this year; green ammonia production is now projected to be economically viable within the next decade. Green hydrogen, vital for a range of industries and activities is also taking off, with policies and major projects expanding rapidly around the world.
The prospects for Artificial Intelligence (AI) are even more wide-ranging, and likely to further accelerate green technology. With continued progress on foundation models, AI is increasingly recognized as the next general-purpose technology, boosting general intelligence, accelerating tipping points and the deployment of breakthrough technologies across economic sectors—such as fusion and solar, quantum chemistry, alternative protein design and many others. AI will also have increasingly powerful implications for data analytics, modelling and predictions, and for ramping up efficiency and productivity in production processes and supply chains. These applications are already being used in the fight against climate change including crop analysis to increase both agricultural productivity and resilience, analysis of complex interactions between climate change and Arctic sea ice loss, and energy demand management, where AI is critical to improving prediction of demand. Al-based approaches not only increase short-term system agility (e.g., enabling batteries and demand management to act as virtual power plants) but also enable longer-term demand and supply matching across the energy system. AI applications are increasingly integrated into industrial systems to improve energy efficiency and reduce peak demand, as well as in maximising renewables in meeting peak demand. AI can also help on resilience: AI is used to improve climate disaster alert systems for vulnerable countries, where deep learning algorithms will continue to improve early warning of climate tipping points in real-world systems with greater sensitivity and specificity to help people better prepare for major changes. Foundation models like ChatGPT (large pre-trained language models which create the ability for anyone to produce text and code on command) are a major tipping point for AI, with the potential to transform work and how we communicate, unlocking new sources of productivity and growth. A recent PwC study estimates that artificial intelligence technologies could increase global GDP by $15.7 trillion by 2030. With economic payoffs as large as this, we can expect a rapid scale-up of and increased investment into AI.
Many of the new climate and AI technologies are ‘horizontal’, shared by production functions and supply chains throughout the economy, and as such their scale-up can have powerful synergistic effects. Growing deployment of these technologies will increase economies of scale, further driving down costs. As prices fall, new sectors and technologies become commercially viable, further strengthening the feedback loops and generating rapid exponential change. For instance, the expansion in renewables and hydrogen production capacity will also drive down the costs of green ammonia, which in turn facilitates the storage and transport of hydrogen, opening opportunities to green industries such as steel and chemicals. And AI can turbocharge the process of innovation itself, across every sector. As a global leader on AI has put it, “AI can deliver scientific advance at digital speed”.
The comprehensive technological transformation of energy, transport and production processes is at the heart of the 21st century growth story. Figure 1 is the latest update on the historic and estimated progress of key zero-emissions solutions by sector, showing how quickly these tipping points are advancing. There is a major opportunity here for governments and the private sector to focus resources towards bringing this transformation forward in time. Realizing that opportunity will require a large step-up in investment (private and public), supportive policies, and collaboration.
Figure 1: Tipping Points by Sector – Historical Progress and Indicative Future Timeline
The road to progress. Image: Systemiq, Forthcoming - January 2023, The Breakthrough Effect - Triggering the Global Tipping Cascade.Tipping points exist when a set of conditions are reached that allow new technologies or practices to out-compete incumbents. After a tipping point is crossed, reinforcing feedback loops take hold that drive self-reinforcing progress, so that greater deployment of the solution encourages even faster deployment.
2. Global momentum and a new geography of growth: the race is on
The race is already on for leadership of the key technologies, capabilities and assets associated with the drivers of future growth. This race is likely to have profound implications for geo-politics, economic and industrial geography, trade flows, but also structural dislocations.
The energy transition is redrawing the geography of trade and industry and will speed up further as a result of energy security concerns following Russia’s war on Ukraine. Other drivers of the technology transformation, such as AI, will also redraw the map over time. While industrial location in the past was shaped by endowments of coal, oil, iron ore, and other raw materials relative to demand markets, future choices—factoring in the possibilities of direct and indirect electrification of industrial processes—will give greater weight to the availability of reliable, low-cost, low-volatility renewable power. There are also possibilities for tapping differences in geographic endowments (wind in the north of Europe and sun in the south) and for integrating renewable energy within and across countries as Prime Minister Modi has proposed through his “one world, one sun, one grid” initiative. The result will be a different energy and industrial production map, especially in emissions-intensive trade-exposed industries such as steel, aluminium and base chemicals.
The outcomes of recent renewables auctions suggest that the Global South overall is well positioned to gain market share as low-cost zero-emissions power producers, with Middle East and North Africa establishing themselves as the most competitive regions. But some of these economies face a challenge in terms of a policy framework that can attract low-cost capital into renewables, which risks undermining their natural advantage (Figure 2). The map in Figure 2 also indicates where some of the most significant pilot investments in green hydrogen, green ammonia, green steel and low-carbon aluminium are located. This list is not intended to be comprehensive, but it shows that some countries are rapidly taking advantage of their renewable energy potential to establish themselves as early leaders. Chile, Brazil, Saudi Arabia, UAE, Mauritania, Namibia, Kazakhstan, for example, are all developing landmark projects that could see them evolve as strong players in net-zero industry.
Major economies are already competing to secure their position in this future geography of growth. China’s 14th 5-year Plan on Modern Energy System Planning, the EU’s Green Deal, India’s Union Budget, Energy Access and Green Hydrogen policies, and the U.S. Inflation Reduction Act (IRA), all combine incentives and finance for green technology and investments with legal, regulatory and policy support.
Investments are moving quickly in all these locations. They are not alone—similar steps are being taken throughout the world. Warts and all, these initiatives are shaping the new geography of growth and providing momentum to the low-carbon transition. For instance, China’s leadership in the manufacture of solar panels and batteries has played a key role in bringing solar PV costs down by 85% over the last decade. The EU Hydrogen Strategy aims for cumulative investments of $200-500bn in renewable hydrogen by 2050. India is seeing one of the fastest expansions in renewable energy anywhere, with a 2030 target of 500 GW representing four times current capacity. The U.S. Investment Reduction Act (IRA) may lower the financing costs for key climate technologies by 40% on average, enabling a rapid scale-up. As multiple sources at reasonable cost become available, competition and innovation should increase – contestable supply of key inputs will be essential for the overall robustness of supply chains. These developments will imply new perspectives on, and new patterns of globalisation.
Figure 2: Large low-carbon industrial projects are being announced across the globe, bolstered by attractive renewables markets and growing capacity
A variety of low-carbon projects are being announced around the world. Image: Climatescope 20223. Scale of investment required
There is no doubt about the direction the world is moving. But the challenge and dangers of climate change imply a need for greater urgency and speed, meaning the world must step up the pace of investment and innovation.
The investment that can create the new growth story will be in four forms of capital: physical, human, natural and social. They are all necessary and complementary.
Major increases in physical capital investment will be required for the new low-carbon infrastructure in energy and transport, cleaner and more efficient cities, and new forms of production of services and goods. Global gross investment required for this broad energy systems and digital transformation will be an estimated $5-7 trillion per year by 2030; part of this investment will be additional. This is a significant increase from today’s annual investments of around $1.5-2 trillion, but will also be accompanied by reduced fossil fuel investments and inputs over time.
The costs of loss and damage from the impact of climate change are significant, and investment in adaptation and resilience is unavoidable. For example, 20% of GDP was lost due to climate change impact in Vulnerable Twenty (V20) economies over the last two decades. A massive ramp up is needed in investments in adaptation and resilience, and the faster it is done, the lower will be future loss and damage. The kind of investment in technologies for emission reductions described in this paper, as well as improvements in predicting and preventing future losses (where AI technologies can help), will reduce the cost of adaptation, but significant investment will still be required. This could be in the range of $0.5-$1 trillion per year by 2030. There should be strong international support in their efforts to build resilient economies.
A total of around $3 trillion per year by 2030 is also required in human capital. The challenges of the Covid legacy and major demographic change will put pressure on health services and on education, given existing gaps and as some populations age and the population of the developing world other than China increases by almost 2 billion over the next three decades, primarily in Asia and Africa.
As the world transitions away from fossil fuel-based sectors, up to 5 million jobs could be lost in those sectors, even though net jobs resulting from higher investment and reconfigured supply chains will almost certainly grow.
Our natural capital and ecosystems constitute the ecological environment in which we must live and are closely intertwined with climate change, water systems, air, and much more. Protecting and restoring these ecosystems will require an estimated total of $275-400 billion per year by 2030.
Investing in social capital is less about direct additional resources and more about the quality of institutions and the distribution of prosperity and assets. The fundamental change in the structure and systems of our economy implies that we must focus on the management of change and of potential dislocation of lives and livelihoods. For example, protecting and reinvesting in natural capital will require capacity building and supportive institutional arrangements, especially to enable indigenous communities (who act as stewards for a significant proportion of the world’s biodiversity and its most critical biomes) to have more voice and control over their collective assets.
This may sound like a daunting challenge. For we as a world collectively to succeed, global investment levels must be restored and raised by around 2-3% of GDP p.a. above pre-pandemic levels over this decade, excluding human capital—more in the Global South, less in the Global North and China.
However, while the scale of necessary investment is large, it should be feasible from a macroeconomic perspective. Since the 1990s, global planned saving has generally exceeded planned investment, which has been associated with low interest rates, low investment and low growth, including low productivity growth. Some speak of “secular stagnation”. In fact, if we go back to the decades before the 2008 financial crisis, investment as a proportion of GDP was much higher than now. OECD member countries specifically have seen investment fall from 26% to 22% of GDP since 1980. Public investment accounts for a disproportionate share of the decline, reflecting attempts to rebalance fiscal accounts and control public debt as fiscal consolidation tends to come at the expense of capital outlays.
4 pioneering solutions for clean energy investment in emerging economies
Thus, while a big push on investment is crucial for the future of the planet, for recovery, and to create the new growth story, it is not an impossible stretch. A step up in public investment by 1-2% of GDP should be at the heart of this investment push, as it provides direction and lays the ground for private investment; this would represent a natural shift from the public consumption spending during crisis. By increasing economic productivity and reducing climate risk, this public investment would lay the foundations for a stronger medium and long-term fiscal position.
Given that so much of the investment and innovation must be in the private sector, the policies and institutions shaping the investment regime will be fundamental. Strong country leadership to credibly signal the future pathway will provide confidence in driving a big investment push. To be credible and trusted, public commitments must be supported by strong institutions: those that are consistent across government and well-resourced with the right skills and expertise. They are effective when they combine some degree of independence with credible monitoring, and when they are embedded in the political system, while harnessing technocratic effectiveness and the ability to directly engage with the private sector and civil society.
4. Collaboration on finance, technology and trade
In order to effectively drive growth and prosperity, the investment push and deployment of technology must be global. This will necessarily involve both competition as countries and companies vie for leadership in key new technologies and markets, and strengthened collaboration around shared goals on climate action, public health, prosperity and peace.
Collaboration on financing the necessary investment in the Global South will be critical. EMDEs other than China will need to spend around $2.4 trillion per year by 2030 (6.5% of GDP) for all climate related investment necessary to transform their economies. This is a significant increase on today’s investments of about $0.7 trillion a year (although such a step up will be accompanied by savings from reduced fossil fuel investments and input, which will accrue over time). But the cost of capital in EMDEs is too high for a significant step-up in long-term investments, partly for structural reasons and partly because of debt levels. Addressing debt vulnerabilities to reduce the cost of capital for new investments must be an immediate priority. This will require collaboration on strengthening mechanisms for resolving debt, building on and enhancing the effectiveness of the G20 Common Framework.
As argued by the recent IHLEG report, in order to ensure a reasonable cost of capital new public debt should be financed on terms similar to those offered by IFIs. New debt might include mechanisms to provide low-cost finance for climate vulnerable countries; and adopt climate contingency debt contracts such as the natural disaster clauses piloted in Barbados. Finance from the Multilateral Development Banks can and must scale up by a factor of three over the coming years and offer concessional solutions for global public goods. Country platforms for purposeful collaboration can bring all actors, public and private to the table; if modelled on Just Energy Transition Partnerships (JETPs) being piloted in South Africa, Egypt, Indonesia and Vietnam, they can be powerful tools to create new highways for finance to flow at scale to accelerate the transition.
Collaboration on technology is imperative. R&D coordination is necessary in some key areas, where, for instance, AI can be applied to accelerate research into gene-editing, synthetic biology, fusion, CCUS and even geo-engineering, where it is critical to work on international science policy and governance. Efforts are required to support greater technology innovation and diffusion capacity in developing economies, linking up firms, governments and civil society.
More generally, collaboration, public and private, could be based on countries shared national interests in the growth of green production and conditions for smooth trade. Governance initiatives are emerging, with several shepherded by the World Economic Forum, and overarching goals provided by the Glasgow Breakthrough Agenda. Collaboration can take the form of joint innovation (such as through Mission Innovation), converging around standards (such as through the International Partnership for Hydrogen and Fuel Cells, or the Global Cement and Concrete Association), creating buyers’ clubs or coordinated green procurement programmes for pioneering products and processes (such as through the First Movers Coalition or the Industrial Deep Decarbonisation Initiative), or agreeing rules of the game for state support.
Enhanced collaboration on trade has an important role to play in order to break down perceived zero-sum competition over innovation and to seek, where possible, mutually beneficial growth of new industries and approaches—through smooth trade in a wide range of green products and necessary materials, technology diffusion and financial support. New international standards and data protection models will also be needed as AI applications become pervasive and inevitably spill over international borders, making it critical for states to agree new rules of the game for AI-based, digitally-intensive economies.
In today’s geopolitical context, the shift in trade patterns will inevitably raise new questions around the reliability of supplies. There must be enough competition across key supply chains to avoid capture and the formation of new exploitative oligopolies. While localisation and friend-shoring may seem attractive, creating the conditions for broader global production and competition will be a more effective and resilient strategy. There is an urgent need for clear principles for preserving and encouraging competition across crucial supply chains.
5. Creating the future
This future story of growth is emerging and is within our grasp. The potential reach and rewards of the technical change we are witnessing—in terms of quality of life, productivity and jobs—are enormous.
What's needed to ensure energy security and a net-zero future
Turning technology, innovation and investment into a new growth story and a road out of crisis requires a shared understanding of the possibilities and of the strategies which are necessary for action. From there, it needs stepped-up investment, major innovation, and collaboration—collaboration both between the public and private sector, and across countries. International institutions will have a key role to play. This investment can give impetus to a strong and durable recovery from the current crises and pre-empt a lost decade for development.
Investment and innovation require optimism on and confidence in future possibilities and a recognition of the necessity of change. These are there and growing. A shared vision is crucial to crafting reality. The coming decades will be decisive for the planet, and investment and innovation embodying new technologies, together with the drive to net-zero will yield the growth story of the 21st century.
This paper was prepared at the suggestion of Klaus Schwab by a team from the Grantham Institute at the LSE and Systemiq under the leadership of Prof. Nicholas Stern (IG Patel Chair of Economics and Government, London School of Economics and Political Science) and Dr Mattia Romani (Partner, Systemiq). Those involved were: Amar Bhattacharya, Danae Kyriakopoulou, Hans Peter Lankes, Jeremy Oppenheim, Isha Patel, and Katherine Stodulka. We are very grateful for discussions with Demis Hassabis and James Manyika, in their individual capacities. We are also grateful for the guidance of Saadia Zahidi. The views expressed are based on the research of the team and do not reflect institutional views from the LSE or Systemiq.
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