Global gross domestic product (GDP) is expected to drop 2% from base-case scenarios by 2050 if targets to cap global warming to a 1.5 degree Celsius increase are met, according to a new report by Wood Mackenzie.
In the report No Pain, No Gain: The economic consequences of accelerating the energy transition, the global research firm said the GDP will recover by the end of the century.
“While preventing more extreme warming is likely to have a positive economic impact over the next 30 years, the action required to deliver it could have an offsetting negative effect. Net, we estimate that keeping warming to 1.5°C would shave 2.0% off our base-case gross domestic product (GDP) forecast for 2050,” said Peter Martin, Wood Mackenzie’s chief economist.
In a base-case energy outlooks, Wood Mackenzie sees global temperatures at 2.5 to 2.7 degrees Celsius above pre-industrial levels by mid-century and global GDP reach $169 trillion. To cap global warming at 1.5 degrees Celsius, global GDP would reach $165 trillion by 2050, which is a cumulative loss of $75 trillion from 2022 to 2050.
After 2035, global GDP will slowly start increasing back to base-case scenarios until 2050, when it is expected to recover.
Wood Mackenzie said despite the loss in GDP, the energy transition will help mitigate economic issues brought about by climate-related events.
“An accelerated transition could pay off in the end, in economic terms. It is likely to lead to stronger economic growth rates for some economies beyond 2030, enabling losses to be recouped before the end of the century. That is the essence of transition economics – short-term pain for long-term gain,” Martin said.
The drop in GDP will affect companies and countries differently, depending on how they’ve progressed in the energy transition so far. Companies and economies that are further along in reaching their net zero goals will be less impacted by the economic changes of the energy transition, whereas those that have farther to go will experience the most economic losses.
“For a fortunate few, the transition need not result in economic loss at all. Those that are better positioned – typically wealthier economies with a strong propensity to invest in new technologies – may even benefit by 2050,” Martin said.
Iraq, for example, is the country most vulnerable to the transition, according to the report, because its hydrocarbon revenues account for 95% of all government revenue and the oil sector makes up 36% of its GDP. Other countries, like Saudi Arabia, have substantial financial reserves to invest in non-hydrocarbon sectors, and low-cost oil assets in the Middle East are likely to retain a significant portion of oil production that will continue through the transition.
France and Switzerland, on the other hand, will have a net boost in GDP by 2050. Europe is generally better equipped for the energy transition with its established emissions trading system and carbon pricing already cutting emissions by about a quarter since 2005.
The US is expected to have a 1.2% loss in total economic output by 2050 if it reaches its net zero targets, but this commitment is questioned due to the current and future state of partisan politics in the country.
China is in the unique position of having strong renewable energy increases, producing more than 505 of the world’s solar and wind technology, but as the world’s largest carbon emitter, it still has a long way to go in decarbonisation. The country would see a cumulative loss of $20 trillion by 2050.