A call to the G20 to focus on managing the transition off of fossil fuels

Andreas Goldthau, 

Andreas Goldthau calls for the world’s 20 largest economies to take the helm in managing the transition from fossil fuels while keeping the global economy stable.

Pawel Kopczynski/Reuters

Wind energy and other renewables will replace oil, gas and coal as countries phase out fossil fuels to meet their climate-change commitments.

The world’s energy system needs rebuilding. The Paris agreement to keep global warming “well below 2 °C above pre-industrial levels” demands that we replace fossil fuels with solar, wind, geothermal and biomass energy. The price tag is vast1: investing US$120 trillion in energy projects between 2016 and 2050, at twice the current annual rate of $1.8 trillion a year, will deliver a 66% chance of achieving the Paris target. We must halve oil production and stop using coal to produce electricity. 

The impact on the world’s economy will be immense, and the shape of the energy sector will change fundamentally. Fossil fuels accrue their value mainly at the source — oil, gas and coal producers are among the richest companies in the world. But energy from the Sun, wind and tides is abundant and effectively free. Value can be derived from these sources by supplying devices and services to consumers and industry. In economic terms, energy assets will move further up the value chain, from commodities to technologies2.

There will be winners and losers. Technology leaders of nations in the Organisation for Economic Co-operation and Development (OECD) and China will benefit most. Countries lacking technology and capital, mainly in the global south, will lose out. Those that are rich in fossil fuels, such as Russia, Saudi Arabia and Australia, could become unable to sell oil or coal. The knock-on effects will spiral — the falling tax revenues and account balances of countries and companies with depreciating assets could spell another global financial crisis.

To avert this, the low-carbon transition needs to be governed globally. Three factors are key: credible and legitimate leadership; information about climate-related risks to guide investment; and global partnerships to advance low-carbon technology.

In my role as an academic adviser to the Energy Sustainability Working Group under Germany’s 2017 presidency of the G20, I suggest that this coalition of nations is well placed to take the helm. A global body comprising the 20 largest economies, the G20 consumes 95% of the world’s coal, more than 70% of its oil and gas, and is responsible for 85% of global investment in renewables1. It includes a mixture of wealthy and emerging economies, with and without natural resources.

G20 leaders should revisit the network’s working groups and structures, and examine how they can help to recast the world’s energy system while keeping the global economy stable.

Deep impacts

Pension funds, banks, companies, municipalities and private households all hold assets in fossil energy. The total value of all fossil reserves is up to $100 trillion3 — roughly five times the gross domestic product of the United States in 2016. Burning all these reserves would release three times more carbon dioxide than the Paris accord permits (roughly 900 gigatonnes of CO2 equivalent). So at least two-thirds of these assets will have to be written off: 80% of current coal reserves, one-third of oil and half of natural gas4.

Christopher Morris/VII/Redux/eyevine

Oil-rich countries such as Saudi Arabia will take decades to reduce their reliance on fossil fuels.

Capital investments in old energy infrastructure will not be recouped. The global fleet of coal-fired power plants (which produces almost 2,000 gigawatts of power; see endcoal.org/global-coal-plant-tracker) will have to be retired by 2050. Thousands of mines, wells, pipelines and refineries will become redundant1. Losses will spread beyond investors — fossil fuels account for 20–30% of the worth of major stock exchanges around the world5. This ‘stranded asset’ problem will leach into the global financial system and affect everyone.

Trade flows and tax systems will change. Fossil fuels and mining products accounted for 18% of global exports in 2015 (ref. 6), with oil the most traded commodity. Russia, for instance, generated 36% of its state funds by taxing oil and gas production and export in 2016 (ref. 7); in Saudi Arabia, exports of crude oil account for 73% of its total revenue (see go.nature.com/2qmzxaa). Importing nations tax the consumption of mineral products in the form of energy taxes; these account for roughly 5% of total governmental revenues in the European Union, for example (see go.nature.com/2rdensu). 

Winners and losers

The economic opportunities of the low-carbon transition are widely reported. Solar, wind, wave, geothermal and storage technologies, and the countries using and deploying them, are obvious winners. A 2015 analysis3 by the Citi financial group suggests that aggressive upfront spending on low-emissions technologies and energy efficiency reduces fuel bills later, and is cheaper compared to inaction — even without considering the damages that would be avoided by lessening climate change. A 2016 study8 by the International Renewable Energy Agency (IRENA) found that doubling the share of renewables in the energy mix by 2030 would boost global economic growth by more than 1%, and create jobs and taxable income.

The economic risks are less appreciated. Countries that hold or export fossil resources face a double whammy: they cannot sell their main economic asset and its faltering value prevents them from tapping financial markets to set up alternative industries. Entire nations could become ‘stranded’9— either tempted to cash in by selling more of their fossil fuels now while they can, or to monetize their reserves. For instance, Saudi Arabia plans to float its national oil company, Saudi Aramco, on the stock market next year.

Although some energy-rich countries such as the United Arab Emirates have started to diversify their economic bases, the low-carbon transition could happen sooner than their economies can adapt (see ‘Energy shift’). These countries are locked into carbon-intensive development patterns, so reducing their reliance on fossil resources will take decades rather than years. It will require political capital, economic steering and investment. And because some oil-rich states distribute their wealth to secure the positions of powerful elites, such countries could face domestic unrest as well as economic hardship.

Sources: (a) World Bank; (b) http://go.nature.com/2QNSSZD

When technology takes over as the economic driver in the energy sector, developed economies will have the competitive edge. OECD countries and China dominate global energy innovation, according to patent counts. These countries’ economies will benefit most from investments in energy research and development, and from the spillover of related knowledge into other sectors such as transport. Although some low-carbon technologies such as solar panels are spreading globally thanks to falling costs, others such as carbon capture and sequestration, advanced biofuels from organic waste or offshore wind are restricted by intellectual-property rights or high costs.

Non-OECD countries and developing nations need access to green and smart technology, but they often lack an investment climate that attracts capital and may have few institutions that cultivate domestic enterprises and seed investors. Some emerging economies such as India are intent on boosting decentralized systems of renewable power generation. But deployment on large scales remains a challenge in most developing nations.

“Countries could face domestic unrest as well as economic hardship.”

Global governance

Three things are needed to steady the global economy during the transition to low-carbon energy.

First, credible and legitimate global leadership is necessary to balance interests. The G20 is well placed to offer this. It includes nations that lead in technology and those that lag behind; industrialized economies (such as the United States and those in the European Union); rising powers (China and India); resource-rich nations (Saudi Arabia, Russia) and resource-poor ones (Japan). The G20’s regular meetings of finance ministers should become the steering committee for the low-energy transition.

Second, a global mechanism is needed to share information about climate-related investment risk. Investors will be able to plan and make better choices if they know the chances of an asset losing its worth. Financial markets need to be able to judge an energy investment over its lifetime. For example, some major insurers and pension funds (such as AXA in Paris, Allianz in Munich and California’s health-benefits agency, CalPERS) are veering away from holdings in coal companies. Information about the trajectories of low-carbon policies could be provided by the G20’s Task Force on Climate Related Financial Disclosures, an expert group established in 2015. This task force should be made permanent and produce regular reports like the 2017 study by the International Energy Agency (IEA) and IRENA1, commissioned by the German G20 presidency.

Third, global partnerships are needed between technology leaders and laggards to advance the take-up of low-carbon technologies. The G20 Energy Sustainability Working Group, the coalition’s main body for sustainable growth and clean energy, should champion these partnerships. It could make them a G20 policy goal alongside promoting energy efficiency or the end of fossil subsidies. The partnerships could use existing avenues — including the IEA’s International Low-Carbon Energy Technology Platform and the Low-Carbon Technology Partnerships initiative, a business-focused forum — to discuss and share knowledge about best practice. Helping ‘low-carbon losers’ benefit from the shift up the energy value chain — through technology transfer, for example — is the best way to neutralize their calls for compensation for lost revenues.

These measures alone will not close north–south divides. But they will aid sound low-carbon governance and energy justice10 in a fragile global community that is already strained by inequality.

Nature 546, 203–205 (doi:10.1038/546203a

  1. IEA/IRENA. Perspectives for the Energy Transition (IEA/IRENA, 2017); available at http://go.nature.com/2pgkfwd Show context
  2. Kraemer, R. A. et al. Green Shift to Sustainability (G20 Insights, 2017); available at http://go.nature.com/2pf4vwt Show context
  3. Channell, J. et al. Energy Darwinism II (Citi GPS, 2015); available at http://go.nature.com/2ppksuf Show context
  4. McGlade, C. & Ekins, P. Nature 517, 187190 (2015). Show contextArticlePubMedChemPort
  5. Unburnable Carbon (Carbon Tracker, 2011); available at http://go.nature.com/2ppxcyh Show context
  6. World Trade Statistical Review 2016 (World Trade Organization, 2016); available at http://go.nature.com/2pf2kdo Show context
  7. Annual Report on Execution of the Federal Budget (Ministry of Finance of the Russian Federation, 2017); available at http://go.nature.com/2r06jht Show context
  8. Renewable Energy Benefits: Measuring the Economics (IRENA, 2016); available at http://go.nature.com/2rf8u6q Show context
  9. Manley, D., Cust, J. & Cecchinato, G. Stranded Nations? The Climate Policy Implications for Fossil Fuel-Rich Developing Countries. OxCarre Policy Paper 34 (Oxford Centre for the Analysis of Resource Rich Economies, 2017); available at http://go.nature.com/2r7gcwy Show context
  10. Goldthau, A. & Sovacool, B. K. Energy Policy 41, 232240 (2012).

Economics: Support low-carbon investment Nathan Fabian 

Private finance can drive the energy transformation needed to meet global emissions goals — if backed by the right policies, says Nathan Fabian. 

Illustration by Derek Bacon

Markets and governments are converging to address climate change. As scientific evidence and government actions strengthen, investors and financiers are reducing the exposure of their portfolios to risks from rising greenhouse-gas emissions. They are allocating more capital to low-carbon activities and less to carbon-intensive industries1.

 In September 2014, banks, insurance companies, charities, and pension, mutual and endowment funds announced that they would direct an extra US$125 billion per year until 2020 to investments that address climate change. Fossil fuels are being divested from by influential funds, including the Rockefeller Brothers Fund of New York, and universities in the United States, the United Kingdom and Australia.

Those commitments represent just the tip of the financial iceberg. Around $300-trillion worth of assets is managed globally2 and more than $20 trillion of new investment is forecast to flow into the global economy each year3. Private finance has the capacity to fund the wholesale shift to a low-carbon economy that the world needs to keep global warming to within 2 °C, the limit agreed on by national governments. The International Energy Agency estimates that such a transformation could be achieved by a sixfold increase4 in annual investments in clean energy and energy efficiency, from around $390 billion in 2013 to $2.3 trillion per year by 2035 (see ‘Investors clean up’).

Source: Ref. 1

Government policies are the sticking points. Carbon pricing, favourable tax regimes and rebalancing of subsidies will encourage demand for low-carbon capital. Supply will be increased by government support for research and development and improved financial policies. Countries that understand these dynamics will benefit from more private financing and clean growth, as are Vietnam and Germany now. Those that do not will be left squeezing the last remnants of value out of waning industries.

Cash flow

Putting portfolios on a lower carbon footing is in the interests of financiers. In exchange for providing capital to support economic activity, investors earn a return, at a rate that reflects the level of risk. Because of the growing costs of emissions, low-carbon activities such as renewable energy and green buildings are a safer bet than many carbon-intensive ones. The prospect of unburnable fossil-fuel reserves makes many new coal and tar-sands projects too risky to invest in.

Source: Climate Bonds Initiative

Banks and investors increasingly see climate change as a raft of risks that they must respond to directly rather than waiting for governments alone to fix (see ‘Black to green’). For example, by early 2015, nine international banks had chosen not to invest in the development of the Carmichael coal mine in Queensland, Australia, which is part of one of the largest coal basins in the world. Leading financiers are also under public pressure to manage risk more carefully. Former US Secretary of the Treasury Hank Paulson wrote last year5 that he sees the emerging “climate bubble” as an equally enormous danger to the world economy as the 2008 financial crisis.

Black to green

Low-carbon investment announcements totalling more than US$600 billion at the 2014 United Nations climate summit in New York highlight how the market is moving.

Insurance companies pledged to invest $420 billion over five years in renewable energy, energy efficiency and sustainable agriculture projects.

Commercial banks will issue $30 billion in green bonds in 2015, building on $37-billion worth issued in 2014.

Foundations are abandoning fossil fuels. The Rockefeller Brothers Fund, an investment fund based on oil wealth, led a $50-billion coalition that will divest from fossil fuels in the next three to five years.

University endowments are shifting capital out of emissions-intensive activities. Stanford University in California is selling its shares in coal companies; Britain’s Glasgow University is freezing new fossil-fuel investments; and in February 2015, the University of Sydney in Australia announced a three-year plan to cut the carbon footprint of its investments by 20%.

Pension funds are following suit. The four regional investor groups on climate change (for Europe, North America, Australia and New Zealand, and Asia) asked fossil-fuel companies in 2014 to justify expenditure on expanding reserves. The pension funds CalSTRS, APG and PensionDanmark committed up to $31 billion in low-carbon allocations by 2020. The Portfolio Decarbonization Coalition, a group of pension funds and fund managers established in September 2014 and led by the UN Environment Programme Finance Initiative, is encouraging investors to decrease the carbon exposure of $100 billion of assets by the end of 2015 (see go.nature.com/fczzfd).

Better risk analysis from scientists is needed to reinforce policies and accelerate the reallocation of capital. It is especially important to understand non-linear forces such as carbon-cycle feedbacks that could influence global warming, as well as information about rare but severe impacts such as extreme weather events, even at low levels of warming.

How should the low-carbon economy be financed? Robust banking systems, transparent governance and stable currencies are baseline requirements. Predictable long-term energy policies and emissions-reduction frameworks are an essential overlay. If any of these aspects are missing, publicly funded measures can assist. Governments can also raise awareness, build partnerships and change financial regulations to increase private finance flows.

The finance sector’s priorities for climate policy were outlined in a statement signed by around 350 institutional investors contributing more than $24 trillion, presented at the United Nations climate summit in New York last September and delivered to the Group of 20 (G20) governments ahead of its November 2014 meeting in Brisbane, Australia (see investorsonclimatechange.org). The priorities are: carbon pricing, targets or subsidies for renewable-energy and low-carbon technologies, phasing out fossil-fuel subsidies and addressing unintended constraints on the financial system, such as policies that hamper information flows or reduce the availability of investable capital. The United Kingdom, Brazil and the state of California have brought investors into their climate and energy policy-making circles to get the details right.

Carbon pricing is a tool that markets understand. Emissions-trading schemes, carbon taxes or any other mechanism that applies a cost to releasing greenhouse gases are the best ways to distribute the burden of emissions reductions, encourage the market to innovate and achieve abatement cheaply. With lessons learned from the European Union’s Emissions Trading Scheme, 73 countries supported the World Bank’s renewed push on carbon pricing at the New York summit. Regulation and subsidies — such as fuel standards for cars or emissions standards in energy generation — are not as efficient, flexible or scalable. That said, they have a complementary role and can help to offset existing fossil-fuel subsidies.

Yet governments are vacillating. Spain and Italy have rowed back on emissions reduction and green-technology commitments. Energy feed-in tariffs and renewable-energy targets remain under threat in Australia, whose emissions-trading scheme was repealed in 2014. Financiers now question the economic credentials of such governments. Convinced of the benefits of low-carbon investments, they will increasingly take their money elsewhere.

Capital is mobile. Pension funds, asset managers and insurance companies allocate up to 50% of their assets to international markets. Even though cross-border, low-carbon financial flows have been relatively low7, they will grow as policies improve, investor experience increases, trade costs come down and new opportunities emerge. Investors will shift more capital to the offshore markets that best meet their long-term objectives.

Illustration by Derek Bacon

Negotiating table

The role of private finance should be taken more seriously in the international climate-negotiation process. Political posturing on the relative levels of emissions cuts is too far removed from the workings of the real economy. As well as negotiating with each other, countries should pitch their emissions-reductions plans to the finance community for input and capital at international meetings such as the G20 summits.

Finance flows to less developed and emerging economies will help to achieve the 2 °C goal. Multilateral and national development banks must continue to expand their roles. Investment funds and financial instruments that reduce currency volatility, select the best projects and partially absorb unexpected losses can increase financial flows. The Private Sector Facility of the Green Climate Fund — a component of the UN Framework Convention on Climate Change — will play an important part in leveraging private finance, increasing the size and impact of public climate finance.

Even with the best of intentions, policy missteps will occur. Financiers should see through short-term policy volatility by backing governments with clear low-carbon policy agendas and making them aware of the consequences of unpredictable changes. Because markets cannot solve climate change alone, authorities such as the Financial Stability Board, which monitors the global financial system, must continue to provide direction.

If appropriate policies are delivered, the capital shift that is under way will gather steam. If not, investment will not be enough to meet the 2 °C global-warming limit.

Nature 519, 27–29 (doi:10.1038/519027a


  1. Mills, L. Global Trends in Clean Energy Investment (Bloomberg New Energy Finance, 2015).
  2. United Nations Environment Programme. Aligning the Financial System with Sustainable Development: Pathways to Scale (UNEP, 2015).
  3. The Global Commission on the Economy and Climate. The New Climate Economy Report (The Global Commission on the Economy and Climate, 2014). Show context
  4. International Energy Agency. Special Report: World Energy Investment Outlook (IEA, 2014). Show context
  5. Paulson, H. M. Jr ‘The coming climate crash’ The New York Times (21 June 2014). Show context
  6. UK Law Commission. Fiduciary Duties of Investment Intermediaries (UK Law Commission, 2014). Show context
  7. Organisation for Economic Co-operation and Development. Mapping Channels to Mobilise Institutional Investment in Sustainable Energy (OECD, 2015).
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