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Decarbonization and the energy transition: The next supercycle

Keith White, Equity Portfolio Manager
Kinga Darida, CFA, Research Associate
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Key points

  • The transition to a low-carbon economy will require massive capital spending and infrastructure development through midcentury.
  • Supply-and-demand dynamics in many sectors will be upended for an extended period, creating significant asset mispricing.
  • The decarbonization process represents the biggest capital cycle of our lifetime, with attractive investment opportunities.

The transition to a low-carbon economy is underway, with many governments — including the US, China, Japan, and the European Union — committing to net-zero carbon emissions by midcentury. Following the United Nations Climate Change Conference of the Parties (COP26) in November 2021, approximately 100 nations also pledged to cease deforestation, 23 promised to end financing for unabated coal production, and 109 agreed to a 30% reduction in methane emissions by 2030.

Decarbonizing the energy, industrial, and transportation sectors will depend upon sweeping policy initiatives and infrastructure development on a large scale. The massive capex required will upend supply-and-demand dynamics in numerous sectors and drive material growth in emerging industries. In this paper, we explain why we believe decarbonization represents the biggest capital cycle of our lifetime and how investors can potentially benefit.

Massive spending is needed

Getting to net zero will likely require spending between US$1 trillion – $2 trillion annually, in real terms, or approximately 1% – 2% of global GDP (Figure 1). This amount would dwarf past landmark economic stimulus plans, including the Marshall Plan (US$114 billion in today’s dollars) and the American Recovery and Reinvestment Act of 2009 (US$831 billion today). The process of decarbonization will also last much longer, with sustained capex needed for at least the next 20 years. At 7% – 14% of total annual global investment, the capex intensity of global GDP will reach approximately 28%, a level last touched briefly following the global financial crisis and once in the 1970s. 1The combination of outsized spending, policy tailwinds, and shifting consumer and investor attitudes will kickstart a new capital cycle.

Figure 1

Policy as a push and a pull for low-carbon capex

Government decarbonization commitments like the recently passed US$1.2 trillion US infrastructure plan and the European Green Deal help legitimize and accelerate this green capex cycle:

  • Governments are positioning investment in the low-carbon transition as a lever for economic recovery. Renewable energy, for example, is more labor and capex intensive than conventional power generation, so advancing solar, wind, and hydro can create jobs and catalyze economic activity.
  • Consumers are increasingly concerned about the physical risks and economic costs of unaddressed climate change and are holding policymakers — and investors — accountable for inaction.
  • Geopolitical tensions are driving governments to pursue energy security and independence, climate-technology leadership, and…

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1Based on current methods of decarbonization, which emphasize zero-carbon technologies and sunsetting fossil fuels, we believe this capex would be enough to abate between 50% and 75% of global annual emissions. Full abatement through zero-carbon technology — which we do not currently expect — could cost up to US$5 trillion per year. Using nature-based offsets could lower the cost significantly; however, these have considerable limitations.

Authored by
Keith White
Equity Portfolio Manager
Kinga Darida, CFA
Research Associate

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