Editing IPCC:AR6/SR15/Chapter-2 (section)

==== 2.5.2.2 Investments ====

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Realizing the transformations towards a 1.5°C world would require a major shift in investment patterns (McCollum et al., 2018) <sup>[[#fn:r583|583]]</sup> . Literature on global climate change mitigation investments is relatively sparse, with most detailed literature having focused on 2°C pathways (McCollum et al., 2013; Bowen et al., 2014; Gupta and Harnisch, 2014; Marangoni and Tavoni, 2014; OECD/IEA and IRENA, 2017) <sup>[[#fn:r584|584]]</sup> .

Global energy-system investments in the year 2016 are estimated at approximately 1.7 trillion USD2010 (approximately 2.2% of global GDP and 10% of gross capital formation), of which 0.23 trillion USD2010 was for incremental end-use energy efficiency and the remainder for supply-side capacity installations (IEA, 2017c) <sup>[[#fn:r585|585]]</sup> . There is some uncertainty surrounding this number because not all entities making investments report them publicly, and model-based estimates show an uncertainty range of about ±15% (McCollum et al., 2018) <sup>[[#fn:r586|586]]</sup> . Notwithstanding, the trend for global energy investments has been generally upward over the last two decades: increasing about threefold between 2000 and 2012, then levelling off for three years before declining in both 2015 and 2016 as a result of the oil price collapse and simultaneous capital cost reductions for renewables (IEA, 2017c) <sup>[[#fn:r587|587]]</sup> .

Estimates of demand-side investments, either in total or for incremental efficiency efforts, are more uncertain, mainly due to a lack of reliable statistics and definitional issues about what exactly is counted towards a demand-side investment and what the reference should be for estimating incremental efficiency (McCollum et al., 2013) <sup>[[#fn:r588|588]]</sup> . Grubler and Wilson (2014) <sup>[[#fn:r589|589]]</sup> use two working definitions (a broader and a narrower one) to provide a first-order estimate of historical end-use technology investments in total. The broad definition defines end-use technologies as the technological systems purchasable by final consumers in order to provide a useful service, for example, heating and air conditioning systems, cars, freezers, or aircraft. The narrow definition sets the boundary at the specific energy-using components or subsystems of the larger end-use technologies (e.g., compressor, car engine, heating element). Based on these two definitions, demand-side energy investments for the year 2005 were estimated about 1–3.5 trillion USD2010 (central estimate 1.7 trillion USD2010) using the broad definition and 0.1–0.6 trillion USD2010 (central estimate 0.3 trillion USD2010) using the narrower definition. Due to these definitional issues, demand-side investment projections are uncertain, often underreported, and difficult to compare. Global IAMs often do not fully and explicitly represent all the various measures that could improve end-use efficiency.

Research carried out by six global IAM teams found that 1.5°C-consistent climate policies would require a marked upscaling of energy system supply-side investments (resource extraction, power generation, fuel conversion, pipelines/transmission, and energy storage) between now and mid-century, reaching levels of between 1.6–3.8 trillion USD2010 yr <sup>−</sup> <sup>1</sup> globally on average over the 2016–2050 timeframe (McCollum et al., 2018) <sup>[[#fn:r590|590]]</sup> (Figure 2.27). How these investment needs compare to those in a policy baseline scenario is uncertain: they could be higher, much higher, or lower. Investments in the policy baselines from these same models are 1.6–2.7 trillion USD2010 yr <sup>−1</sup> . Much hinges on the reductions in energy demand growth embodied in the 1.5°C pathways, which require investing in energy efficiency. Studies suggest that annual supply-side investments by mid-century could be lowered by around 10% (McCollum et al., 2018) <sup>[[#fn:r591|591]]</sup> and in some cases up to 50% (Grubler et al., 2018) <sup>[[#fn:r592|592]]</sup> if strong policies to limit energy demand growth are successfully implemented. However, the degree to which these supply-side reductions would be partially offset by an increase in demand-side investments is unclear.

Some trends are robust across scenarios (Figure 2.27). First, pursuing 1.5°C mitigation efforts requires a major reallocation of the investment portfolio, implying a financial system aligned to mitigation challenges. The path laid out by countries’ current NDCs until 2030 will not drive these structural changes; and despite increasing low-carbon investments in recent years (IEA, 2016b; Frankfurt School-UNEP Centre/BNEF, 2017) <sup>[[#fn:r593|593]]</sup> , these are not yet aligned with 1.5°C. Second, additional annual average energy-related investments for the period 2016 to 2050 in pathways limiting warming to 1.5°C compared to the baseline (i.e., pathways without new climate policies beyond those in place today) are estimated by the models employed in McCollum et al. (2018) to be around 830 billion USD2010 (range of 150 billion to 1700 billion USD2010 across six models). This compares to total annual average energy ''supply'' investments in 1.5°C pathways of 1460 to 3510 billion USD2010 and total annual average energy ''demand'' investments of 640 to 910 billion USD2010 for the period 2016 to 2050. Total energy-related investments increase by about 12% (range of 3% to 24%) in 1.5°C pathways relative to 2°C pathways. Average annual investment in low-carbon energy technologies and energy efficiency are upscaled by roughly a factor of six (range of factor of 4 to 10) by 2050 compared to 2015. Specifically, annual investments in low-carbon energy are projected to average 0.8–2.9 trillion USD2010 yr <sup>−1</sup> globally to 2050 in 1.5°C pathways, overtaking fossil investments globally already by around 2025 (McCollum et al., 2018) <sup>[[#fn:r594|594]]</sup> . The bulk of these investments are projected to be for clean electricity generation, particularly solar and wind power (0.09–1.0 trillion USD2010 yr <sup>−1</sup> and 0.1–0.35 trillion USD2010 yr <sup>−1</sup> , respectively) as well as nuclear power (0.1–0.25 trillion USD2010 yr <sup>−1</sup> ). Third, the precise apportioning of these investments depends on model assumptions and societal preferences related to mitigation strategies and policy choices (see Sections 2.1 and 2.3). Investments for electricity transmission and distribution and storage are also scaled up in 1.5°C pathways (0.3–1.3 trillion USD2010 yr <sup>−1</sup> ), given their widespread electrification of the end-use sectors (see Section 2.4). Meanwhile, 1.5°C pathways see a reduction in annual investments for fossil-fuel extraction and unabated fossil electricity generation (to 0.3–0.85 trillion USD2010 yr <sup>−1</sup> on average over the 2016–2050 period). Investments in unabated coal are halted by 2030 in most 1.5°C projections, while the literature is less conclusive for investments in unabated gas (McCollum et al., 2018) <sup>[[#fn:r595|595]]</sup> . This illustrates how mitigation strategies vary between models, but in the real world should be considered in terms of their societal desirability (see Section 2.5.3). Furthermore, some fossil investments made over the next few years – or those made in the last few – will ''likely'' need to be retired prior to fully recovering their capital investment or before the end of their operational lifetime (Bertram et al., 2015a; Johnson et al., 2015; OECD/IEA and IRENA, 2017) <sup>[[#fn:r596|596]]</sup> . How the pace of the energy transition will be affected by such dynamics, namely with respect to politics and society, is not well captured by global IAMs at present. Modelling studies have, however, shown how the reliability of institutions influences investment risks and hence climate mitigation investment decisions (Iyer et al., 2015) <sup>[[#fn:r597|597]]</sup> , finding that a lack of regulatory credibility or policy commitment fails to stimulate low-carbon investments (Bosetti and Victor, 2011; Faehn and Isaksen, 2016) <sup>[[#fn:r598|598]]</sup> .

Low-carbon supply-side investment needs are projected to be largest in OECD countries and those of developing Asia. The regional distribution of investments in 1.5°C pathways estimated by the multiple models in (McCollum et al., 2018) <sup>[[#fn:r599|599]]</sup> are the following (average over 2016–2050 timeframe): 0.30–1.3 trillion USD2010 yr <sup>−1</sup> (ASIA), 0.35–0.85 trillion USD2010 yr <sup>−1</sup> (OECD), 0.08–0.55 trillion USD2010 yr <sup>−1</sup> (MAF), 0.07–0.25 trillion USD2010 yr <sup>−1</sup> (LAM), and 0.05–0.15 trillion USD2010 yr <sup>−</sup> <sup>1</sup> (REF) (regions are defined consistent with their use in AR5 WGIII, see Table A.II.8 in Krey et al., 2014b) <sup>[[#fn:r600|600]]</sup> .

Until now, IAM investment analyses of 1.5°C pathways have focused on middle-of-the-road socio-economic and technological development futures (SSP2) (Fricko et al., 2017) <sup>[[#fn:r601|601]]</sup> . Consideration of a broader range of development futures would yield different outcomes in terms of the magnitudes of the projected investment levels. Sensitivity analyses indicate that the magnitude of supply-side investments as well as the investment portfolio do not change strongly across the SSPs for a given level of climate policy stringency (McCollum et al., 2018) <sup>[[#fn:r602|602]]</sup> . With only one dedicated multimodel comparison study published, there is ''limited to medium evidence'' available. For some features, there is ''high agreement'' across modelling frameworks leading, for example, to ''medium to high'' ''confidence'' that limiting global temperature increase to 1.5°C would require a major reallocation of the investment portfolio. Given the limited amount of sensitivity cases available compared to the default SSP2 assumptions, ''medium confidence'' can be assigned to the specific energy and climate mitigation investment estimates reported here.

Assumptions in modelling studies indicate a number of challenges. For instance, access to finance and mobilization of funds are critical (Fankhauser et al., 2016; OECD, 2017) <sup>[[#fn:r603|603]]</sup> . In turn, policy efforts need to be effective in redirecting financial resources (UNEP, 2015; OECD, 2017) <sup>[[#fn:r604|604]]</sup> and reducing transaction costs for bankable mitigation projects (i.e. projects that have adequate future cash flow, collateral, etc. so lenders are willing to finance it), particularly on the demand side (Mundaca et al., 2013; Brunner and Enting, 2014; Grubler et al., 2018) <sup>[[#fn:r605|605]]</sup> . Assumptions also imply that policy certainty, regulatory oversight mechanisms and fiduciary duty need to be robust and effective to safeguard credible and stable financial markets and de-risk mitigation investments in the long term (Clarke et al., 2014; Mundaca et al., 2016; EC, 2017; OECD, 2017) <sup>[[#fn:r606|606]]</sup> . Importantly, the different time horizons that actors have in the competitive finance industry are typically not explicitly captured by modelling assumptions (Harmes, 2011) <sup>[[#fn:r607|607]]</sup> . See Chapter 4, Section 4.4.5 for details of climate finance in practice.

In summary and despite inherent uncertainties, the emerging literature indicates a gap between current investment patterns and those compatible with 1.5°C (or 2°C) pathways ( ''limited to medium evidence, high agreement'' ). Estimates and assumptions from modelling frameworks suggest a major shift in investment patterns and entail a financial system effectively aligned with mitigation challenges ( ''high confidence'' ).

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'''Figure 2.27'''

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Historical and projected global energy investments.
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(a) Historical investment estimates across six global models from (McCollum et al., 2018) <sup>[[#fn:r608|608]]</sup> (bars = model means, whiskers full model range) compared to historical estimates from IEA (International Energy Agency (IEA) 2016) (triangles). (b) Average annual investments over the 2016–2050 period in the “baselines” (i.e., pathways without new climate policies beyond those in place today), scenarios which implement the NDCs (‘NDC’, including conditional NDCs), scenarios consistent with the Lower-2°C pathway class (‘2°C’), and scenarios in line with the 1.5°C-low-OS pathway class (‘1.5°C’). Whiskers show the range of models; wide bars show the multimodel means; narrow bars represent analogous values from individual IEA scenarios (OECD/IEA and IRENA, 2017) <sup>[[#fn:r609|609]]</sup> . (c) Average annual mitigation investments and disinvestments for the 2016–2030 periods relative to the baseline. The solid bars show the values for ‘2°C’ pathways, while the hatched areas show the additional investments for the pathways labelled with ‘1.5°C’. Whiskers show the full range around the multimodel means. T&amp;D stands for transmission and distribution, and CCS stands for carbon capture and storage. Global cumulative carbon dioxide emissions, from fossil fuels and industrial processes (FF&amp;I) but excluding land use, over the 2016-2100 timeframe range from 880 to 1074 GtCO <sub>2</sub> (multimodel mean: 952 GtCO <sub>2</sub> ) in the ‘2°C’ pathway and from 206 to 525 GtCO <sub>2</sub> (mean: 390 GtCO <sub>2</sub> ) in the ‘1.5°C’ pathway.

Original Creation for this Report. The data comes from: – McCollum, Zhou et al. (2018). Nature Energy (https://www.nature.com/articles/s41560-018-0179-z) – IEA (2016) (“World Energy Investment 2016”) – IEA / IRENA (2017) (“Perspectives for the Energy Transition—Investment Needs for a Low-Carbon Energy System”)

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