Where Will All This Money Come From?

As the UN convenes its COP28 Conference in Dubai amid the conclusion of another year during which the global community used record amounts of coal, oil and natural gas, concerns are mounting about the future direction and prospects for success of the energy transition.

Much of the concern centers on the rising cost of capital and whether the world can even afford the stunning price tag of the transition. Cost estimates range from $110 trillion (per the Energy Transitions Commission) to $275 trillion (McKinsey & Co.), the latter of which represents roughly 2.6 times total global GDP for 2023. Global consultancy Deloitte pegs its estimate in the mid-range at roughly $5-$7 trillion per year through 2050.

These are truly mindboggling numbers, the magnitude of which the average person has a difficult time digesting. Even the smaller estimate amounts to about $3.5 trillion annual investment from 2023 through 2050. For some context, the U.S. Inflation Reduction Act contained about $369 billion in subsidies and tax breaks for green energy investments over a 10-year time frame, or about 1/90^th of the total global investment required during that time according to the estimate by the Energy Transitions Committee. It would take almost 250 IRA-sized tranches of money to meet the levels of investment envisioned by McKinsey & Co.’s estimate.

Now, consider that the cost of raising capital has more than doubled since the McKinsey estimate was published in early 2022, and the magnitude of the real problem starts to come clear. The challenges of raising this level of capital, most of which would come from developed nations already mired in near-overwhelming levels of national debt, will be a major topic of discussion at this week’s COP28 conference in Dubai, but solutions will not be easily devised.

“I’m very worried,” Gauri Singh, deputy director general at the International Renewable Energy Agency (IRENA), told the Reuters Global Markets Forum recently. “What used to be available at Libor plus 50 (basis points) or Libor plus 100 is not available at those rates any more.”

Linda-Eling Lee, head of the MSCI Sustainability Institute, recently expressed her concerns that companies cannot be expected to commit to long-term development plans without stable public policy, as reported by Reuters. “Finance needs more policy certainty,” Lee said.

Elections Present Potential Roadblocks

These concerns are perfectly valid, but they also highlight the complications presented by democratically held elections in the U.S., Europe and elsewhere.

The suite of debt-funded spending and tax breaks authorized in the IRA are combining with high inflation and rising interest rates to become a significant political liability for U.S. President Joe Biden heading into the 2024 election campaign. Acting to repeal some or all of the IRA green energy provisions has become a popular campaign issue for Donald Trump and most of the other candidates in the Republican field. With the President’s polling numbers at or near his all-time lows, prospects for another change in U.S. government direction are rising.

Given that the IRA funding was enacted on strict party line votes in both houses of congress last year, the simple fact of the matter is that there is no bipartisan consensus on this type of spending. This always has been and remains a clear Achilles Heel of the Biden energy policy.

The public pushback against green policies seen as causing constantly rising costs for all forms of energy is far from limited to the United States. In Canada, Justin Trudeau trails his likely conservative opponent in next year’s election by wide polling margins. In the UK, Prime Minister Rishi Sunak felt so threatened by rising public opposition to his party’s green policies that he made a major speech in September promising major revisions. In Italy, Georgia Meloni was elected Prime Minister last year after campaigning against this kind of debt-funded spending. More recently, opponents to such spending prevailed in elections in both Argentina and the Netherlands.

The Bottom Line

Amid all the rosy scenarios, innovative proposals and grandiose ideas that will no doubt be presented in Dubai this week and next, the central problem delegates to COP28 most need to address is the practical one of where will all this money come from? The controversy that has risen in the U.S. over the IRA spending is highly instructive.

That spending represents little more than a rounding error of the amount of capital investment needed to achieve the climate alarm community’s ultimate goals. No amount of fright rhetoric from UN Secretary General Antonio Guterres and U.S. Climate Envoy John Kerry can force the formation of the bipartisan consensus that would be needed to not only sustain such spending but multiply it many times over across the next 27 years.

Elections can be messy things, but so long as they exist in what we still commonly refer to as the Western democracies, from which the overwhelming majority of this spending is supposed to come, they will represent a likely roadblock to some or all of the lofty goals that will no doubt be agreed to in Dubai.