Achieving net zero infrastructure

Affordability of the global infrastructure transition should be at the top of world leaders’ agenda.

Tackling climate change means radically transforming the vast network of infrastructure which makes the modern world go. Big-ticket items such as power generation, transport, buildings and industry make up more than 60% of global greenhouse gas emissions. But, as the coalition of 197 nations strive to meet the Paris Agreement to decarbonise the global economy by 2050, the speed, scale and cost of the transition required to ‘green’ these assets are posing serious challenges to policymakers, business leaders and transnational organisations.

Limiting the rise in global temperatures to 1.5°C means deploying renewable energy at unprecedented scale—equal to installing the world’s largest solar park each day for photovoltaic power alone, according to the International Energy Agency (IEA). Whole areas of the economy will need to be redesigned. Combustion engine vehicles and fossil fuel power plants need to be phased out. Huge stocks of electric vehicles (EVs) need to be created. Buildings and homes need to be retrofitted for energy efficiency. And the clock is ticking.

The green price tag

We face two challenging truths. We can’t afford not to act. And the cost of this transition is difficult to quantify. The OECD calls for US$6.9 trillion in global investment each year to 2030 to meet climate and development objectives—a little under US$1,000 per year for every person on the planet. By most estimates, this will only go part way to solving the problem. Countries around the world are facing unprecedented financial pressures in the wake of the pandemic, and the overall costs of a transition to a green economy have not been fully dimensionalised.

Many countries are burdened with pre-COVID underinvestment in infrastructure spending, estimated at US$3 trillion a year, in addition to the repayment of increased post-COVID debt. Add to this the costs of retrofitting infrastructure, replacing fossil fuel–related income tax, and providing financial incentives to support investment and R&D of green infrastructure. ‘Just transition’ costs, such as compensation of displaced workers and workforce reskilling, are also a factor as we shift away from a fossil fuel economy. 

Decarbonisation pathways

To bring greater clarity to the issue, research undertaken by Oxford Economics on behalf of PwC offers a framework to interpret the global green infrastructure transition through a sample of 80 representative countries and regions (see chart below). Plotted on the ‘decarbonisation challenge’ axis is the level of current and future emissions to abate and the amount of infrastructure to decarbonise; the ‘capacity to pay’ axis reflects each country’s or region’s financial ability to decarbonise both existing and future infrastructure.

Top left
  • Higher (but falling) CO2 emissions to abate
  • Higher levels of existing infrastructure to transition to green
  • Greater ability to afford
Bottom left
  • Lower (but rising) CO2 emissions to abate
  • Higher levels of existing infrastructure to transition to green
  • Lower ability to afford
Top right
  • Higher (but stabilising) CO2 emissions to abate
  • Lower levels of existing infrastructure to transition to green
  • Greater ability to afford
Bottom right
  • Lower (but rising) CO2 emissions to abate
  • Lower levels of existing infrastructure to transition to green
  • Lower ability to afford

Source: PwC/Oxford economics

Country Decarbonisation challenge Capacity to pay
Higher score indicates a greater decarbonisation challenge Higher score indicates a greater capacity to pay
Algeria 55.5 37.0
Angola 50.8 42.9
Argentina 48.7 46.2
Australia 51.4 60.6
Austria 36.3 59.9
Bangladesh 64.0 30.2
Belgium 42.4 56.7
Botswana 53.9 50.1
Brazil 47.5 36.8
Bulgaria 45.3 49.8
Canada 46.8 67.6
Chile 41.0 51.5
China 49.7 32.4
Colombia 42.0 31.2
Croatia 42.9 54.3
Cyprus 45.9 66.3
Czechia 47.8 55.8
Denmark 32.5 68.7
Ecuador 54.7 41.2
Egypt 53.2 35.8
Estonia 51.2 62.4
Finland 36.6 64.9
France 30.4 56.3
Germany 37.8 59.8
Ghana 59.1 33.7
Greece 45.9 52.0
Hong Kong, China 34.5 72.6
Hungary 42.5 59.3
India 58.0 26.4
Indonesia 53.5 38.0
Iran 61.9 37.0
Ireland 43.9 70.0
Israel 46.1 60.7
Italy 38.9 51.9
Japan 41.6 54.0
Kenya 63.5 32.8
Kuwait 72.6 62.3
Latvia 38.5 56.2
Lithuania 42.9 60.1
Luxembourg 44.9 67.6
Malaysia 51.3 54.2
Malta 38.6 58.7
Mauritius 47.5 58.0
Mexico 49.4 39.8
Morocco 49.8 30.6
Mozambique 73.3 25.3
Netherlands 41.0 64.1
New Zealand 39.2 66.4
Nigeria 57.7 30.2
Norway 31.3 70.1
Oman 63.3 61.3
Pakistan 62.6 25.4
Peru 43.6 39.5
Philippines 55.0 32.7
Poland 49.2 53.6
Portugal 36.0 56.5
Qatar 66.1 72.5
Romania 35.9 57.3
Russia 53.9 47.3
Saudi Arabia 71.1 62.3
Singapore 50.1 72.6
Slovakia 41.2 51.9
Slovenia 44.8 59.7
South Africa 58.6 38.0
South Korea 45.5 61.9
Spain 37.1 55.2
Sweden 30.2 61.5
Switzerland 33.7 70.7
Taiwan 50.1 60.8
Tanzania 65.5 24.2
Thailand 57.9 46.8
Tunisia 54.0 39.5
Turkey 46.2 50.2
Uganda 65.3 26.9
United Kingdom 27.5 68.2
United States 45.5 65.7
Uruguay 45.3 52.6
Vietnam 67.0 35.2
Zambia 55.0 32.0
Zimbabwe 60.1 28.5

The bottom-right quadrant shows middle- to low-income countries, where the OECD estimates that 60% of new infrastructure investment is needed most. These countries have little or no ability to pay for the green transition, despite having lower carbon emissions to abate than developed countries. Trade-offs in these developing economies, predominantly in Africa and Asia, are often more acute than in wealthier nations: these countries have less mature infrastructure, but house more than 3.2 billion (or 40%) of the world’s population. Many who live in these regions are part of an estimated 1 billion people worldwide without access to electricity and 1.6 billion without access to safe drinking water. Leaders in these regions must balance their need to invest in affordable carbon-intensive industries to grow their GDP with the higher lifetime costs of the green agenda. India, for example, derives a high proportion of its energy from fossil fuels, and the main drivers of its carbon emissions—growth in population and GDP per capita—are forecast to grow faster here than in other high-emitting countries, such as China and the US.

Support in terms of foreign direct investment (FDI) and foreign grants is vital to ensure these developing economies have the financing and technologies to support them on their journey to meet net zero targets, such as plans to launch an International Monetary Fund (IMF) climate resilience fund, which could be worth upwards of US$50 billion. However, greater international cooperation among countries is clearly needed. The existing funding pledges are not being met, and there are early signs that future aid packages will also fall short, with only Germany, Denmark, Luxembourg, Norway and Sweden meeting the UN’s recommended contribution target of 0.7% of gross national income in 2020.

The bottom-left quadrant features a group of populous Latin American countries: Mexico, Brazil, Peru and Colombia. These largely upper-middle-income countries have lower CO2 emissions to abate, but those levels are forecast to rise. Currently, hydropower accounts for 45% of the region’s total electricity supply, and most of these countries are forecast to see a decline in carbon-intensive industries as a percentage of their GDP. Brazil has been a world leader in the use of bioethanol in road vehicles, surpassing 50% market share of gasoline-powered vehicles in early 2008. That has had a positive impact on the level of pollution in cities. On affordability, however, a range of factors, including the relatively low average household income and low government revenue per capita, highlight the challenge faced by both consumers and the government in meeting the additional costs associated with transitioning to greener infrastructure.

China is an outlier in this group. Although it currently meets a large share of its energy needs from fossil fuels and has a high share of CO2-intensive sectors in the economy, a number of countering factors lower its score on the decarbonisation challenge index. These include a projected decline in its population by 2050; a growing renewables capacity, including 136 gigawatts (GW) of new renewable capacity in 2020, which is just over half of the global total; and a shifting economic model. The country is expected to pivot from being a maker of carbon-intensive products (e.g., heavy manufacturing, construction) to climbing the value chain to become a producer of high-tech products and a services-based economy. As one of the world’s largest economies, China has significant fiscal firepower. However, the country’s high population, a substantial share of whom still earn low incomes, and lower government revenue per capita could hinder its ability to afford costs over time.

In the top-right quadrant are several high-income economies that have higher but stabilising CO2 emissions to abate, and lower levels of existing infrastructure. These countries and regions are relatively small—together, they have a total population of just over 100 million—and they have a greater capacity to pay for the green transition because of their wider tax base. Notably, this quadrant includes some key fossil fuel–producing countries. Oil-exporting nations have the added challenge of transforming their economies to green amid a gradual decline in demand and export revenues, in addition to finding money for transition costs and fossil fuel tax replacement.

In the top-left quadrant, we find developed economies such as the US, Europe and parts of Asia-Pacific. Their combined GDP, US$47 trillion, represents more than half of the world’s GDP. Their ability to pay for the transition is greater due to having wealthier populations and relatively efficient tax systems. But these countries and regions also have higher, albeit falling, CO2 emissions to abate, and more existing infrastructure to transition to green. Their populations’ relative wealth means these economies are more likely to transfer the transition costs onto consumers. The decision whether to spread the costs across taxpayers or to increase charges to consumers is a sensitive issue, and will become even more so as costs of living increase. COVID-era borrowing also means that many governments will have to make difficult trade-offs that will not always benefit the green transition. 

Buy now, pay later?

The good news is there is a sizeable amount of private capital at the ready, and investor appetite is picking up. PwC’s Prime time for private markets report shows that global infrastructure assets under management and cash reserves reached record levels in 2019, amounting to US$975.6 billion and US$229.8 billion, respectively. There is also an increase in government- or international finance–backed partnerships that provide assurances for investments in new and largely untested technology, such as the UK’s Green Financing Framework or the UN-backed Glasgow Financial Alliance for Net Zero, which convenes financial institutions to align their investment portfolios with Paris Agreement targets. The European Green Deal, as yet the largest green financing project to be announced, seeks to mobilise €1.8 trillion in sustainable investments through a mix of public and private sources.

However, financing is only half the story. Even if enough money can be found to break ground on the projects that are needed, there is still an open question about how these upfront costs will be repaid over the lifetime of new and retrofitted infrastructure. The affordability challenge for policymakers is threefold. First, they must balance these costs against a myriad of non-climate-related financial priorities, such as economic development, security and healthcare. Second, they must manage expectations that costs are spread fairly across stakeholder groups, such as taxpayers and consumers, or achieved through other funding sources, in the form of foreign aid in emerging economies or from ancillary revenue such as land value capture (discussed below). And third, they must shape infrastructure projects to ensure that revenues repay the public or private finance.

Projects that do not have fair and equitable generation and distribution of revenue will struggle: they will need to be affordable for taxpayers and users, and they need to be stable, or investors won’t be interested in financing them. In practical terms, this can be achieved by designing incentivisation and commercial models. Or, in the case of foreign aid or grants-based projects, development hubs and public–private partnerships can help to establish reliable revenue streams from the outset.

International cooperation efforts, such as the EU Carbon Border Adjustment Mechanism, which seeks to ensure that carbon is taxed irrespective of where the goods are produced, will be key. But as yet, governments are largely weighing up their options in private. They face a difficult conversation about the trade-offs policymakers will have to make to balance their domestic environmental, social and economic obligations. Pressures on public budgets are leading many governments to consider a range of ways to find the cash, including conducting affordability assessments of their capital project pipelines to find long-term money-saving efficiencies. Others are considering money-generating schemes such as land value capture to raise tax and rental income from public land; and capital recycling, where public roads, railways and even parks are leased or sold to pay for new infrastructure projects.

Governments also have a range of policy measures at their disposal. Carbon taxes can help raise money towards decarbonization infrastructure, provided they are not used by governments as a general tax—for instance, to compensate for lost fuel duties. Emissions trading systems, also known as cap-and-trade, allow companies to buy and sell government-issued emissions allowances, encouraging them to reduce their emissions in order to be able to sell their excess quotas. Subsidies and relief for taxpayers and customers of carbon-intensive services can subsidise what may otherwise be unaffordable customer tariffs, whereas regulations can enforce standards or ban certain carbon-intensive technologies, such as coal power or internal combustion engines, altogether.

Ultimately, governments will need to consider a mix of unpopular measures like raising taxes and increasing charges on end users. In four-to-five-year political cycles, the temptation to defer these decisions still remains high. But this only passes the buck, increasing pressure on future generations and the affordability of the transition to net zero. 

Rise of green tech

The deployment of green technology—both known and as yet unknown—will be an important lever in bringing costs down. Consider the example of electricity. Costs from renewables have fallen sharply over the past decade, as increasing efficiency has led to greater commercial viability of a range of technologies. International Renewable Energy Agency data shows that solar photovoltaics’ cost declined globally by 82% and offshore wind’s by 29% over 2010–2019. Perhaps most dramatically, the cost of lithium-ion batteries has dropped by 98% in the past three decades, making EVs increasingly competitive with gas-powered cars. These reductions have been driven by policy changes, investment in technologies, economies of scale, increasingly competitive supply chains and growing developer experience.

Total global offshore wind capacity surpassed 35 GW in 2020, led by investments in the UK, China and Germany. This demonstrates that there are solutions, particularly in high- and middle-income countries, that can make green infrastructure technologies more affordable in the long term. The UK government’s intervention in offshore wind changed the sector from unaffordable and unbankable to financeable within a ten-year period using the ‘contracts for difference’ model: developers were incentivised to take on projects with high upfront costs and long lifetimes because the government protects them from volatile wholesale prices, and in turn, the developers protect the end-user fees when electricity prices are high.

Looking to the future, the IEA predicts that roughly half our carbon efficiency by 2050 will be powered by technologies that currently only exist as prototypes. These emergent technologies include advanced biofuels, CO2 recycling, energy demand response, battery storage, hydrogen-based fuels, hydropower, geothermal and carbon capture. Considering the scale of technological innovation of the past 30 years (from the internet to the International Space Station), there is reason to believe that as yet unknown technology will play a pivotal role in the fight against climate change, provided that policymakers lay the groundwork for innovation to flourish.

Governments will therefore need to accelerate their policies to shape a future market for climate R&D and innovation in order to make nascent infrastructure technologies more investable. This means using public money to achieve early-stage commercialisation for disruptive new technologies. It also means fostering new business models and services, such as energy-as-a-service platforms, electric car sharing and circular supply models. These will help lower emissions for both production and consumption on a global scale, as infrastructure is built and retrofitted to meet new standards. Early indications show excitement building amongst private market investors for these ‘climate tech’ solutions, with potential for investment to scale up rapidly. PwC’s State of Climate Tech finds that investment in climate tech in the first half of 2021 exceeded US$66 billion, more than ten times the amount invested in the equivalent period just five years prior.

A green future

The hope is that policymakers, armed with the recent International Panel on Climate Change (IPCC) report, transform dire predictions—about what awaits should we not act quickly—into meaningful global policy. According to PwC’s Net Zero Economy Index, limiting warming to 1.5°C will now require a 12.9% annual global rate of decarbonisation—more than five times the rate of 2.5% registered in 2020. Never before has the need for political will to take important decisions been greater.

There has been a significant focus on the climate impact, and rightfully so, but less so on the social and economic context. Policymakers need to consider all three of these simultaneously to ensure the planet and its inhabitants are protected in a sustainable manner.

Infrastructure is a big part of the world’s climate change challenge—and perhaps therein lies its solution, but only if there is a public and transparent discussion about how we pay for the transition on an affordable and fair basis. 

The index was calculated using the following criteria. Decarbonisation challenge: share of energy from fossil fuels, CO2 emissions per capita, share of carbon intensive sectors in the economy, population growth (2050 vs 2019), long-term GDP impacts from climate change (pp change in 2050), energy intensity level of primary energy, GDP per capita growth (2050 vs 2019), percentage of population with energy access, historic CO2 emissions per GDP (level change from 2019-1999), forecast increase in services as a percentage of GDP (2019-2050), forecast increase in industry as a percentage of GDP (2019-2050), exports of fuels as a percentage of GDP, energy transition index (readiness score). Capacity to pay: (consumers ability to pay) household spending on energy as a share of total spending, share of household earning < $10,000 per year, Gini coefficient, average household personal disposable income, percentage of population with access to electricity, ratio of electricity to average household disposable income, share of household spending on essential items. (government ability to tax) government revenue per capita, labour tax rate, individual income tax rates, corporate tax rates, informal sector size (share of employment in informal sector), Corruption Perception Index, paying taxes (Ease of Doing Business Index component).

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