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Decarbonising the world’s energy systems will cost less than 0.5% of global GDP while creating trillions of dollars of investment opportunities, new research suggests.

To arrive at this figure, Legal & General Investment Management (LGIM) and management consultancy Baringa Partners have devised a model ‘destination’ for the world’s energy systems. The model calculates the degree of decarbonisation necessary to meet the climate change targets of 1.5C and 2.0C warming above pre-industrial levels.

LGIM says the ‘destination’ will inform its subsequent, long-term investment decisions and it will use the associated energy scenarios to assess climate and transition risk for its clients. It says the research will be substantially independent from those produced by third-party agencies.

With global temperature levels increasing at an alarming rate, LGIM says the research confirms that it is imperative for policy makers to legislate for policies to keep climate change to well within two degrees. Without such policy interventions, the current energy system is progressing towards up to four degrees of global warming.

The modelling has focused on calculating the lowest cost route to a rapidly decarbonising energy system.

LGIM argues that the cost of an accelerated transition can be moderate if it is well-managed. The transition should create trillions of dollars of investment opportunities with profound macroeconomic and geopolitical implications.

The firm says its initial conclusions suggest that the energy transition will bring substantial and previously underestimated benefits to many emerging economies currently dependent upon imported energy and vulnerable to energy price shocks.

The modelling implies that the future energy system will evolve rapidly, with clear, transformational change occurring over the next ten years.

It estimates that the additional gross energy system costs may be less than half a per cent of 2018’s global GDP. However, the costs of inaction will be substantially higher transition costs at a later date.

Sonja Laud, deputy chief investment officer at LGIM, said: “This is an exciting step in our analysis of the energy transition. This modelling presents an even clearer economic rationale for coordinated policy action and presents a compelling case for long-term investors to act to prepare their portfolios today.”

James Greenleaf, climate change director at Baringa, added: “Providing a more robust evidence base for investors is vital to support their decision-making and help accelerate the pace of energy system transition to the level that is needed to meet our climate targets.”

The report comes as climate change website Carbon Brief suggests that today’s children must emit eight times less CO2 than their grandparents to meet the global warming targets.

In a methodology created in cooperation with Dr Ben Caldecott from the University of Oxford, it says that if warming is limited to well below 2C, the global average lifetime carbon budget for someone born in 2017 is 122 tonnes of CO2, only about a third as large as the budget for someone born in 1950. If warming is to be limited to 1.5C, the remaining budget is only 43 tonnes of CO2 and the difference is eight times as large.

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