The Economic Benefits of Climate Action
How decarbonization can enhance competitiveness and growth
In this joint publication with KfW (Kreditanstalt für Wiederaufbau), we present a comprehensive economic case for climate action, demonstrating that it is both an environmental imperative and a strategic economic opportunity, with decarbonization driving growth, innovation, and competitiveness, while outlining the challenges and policies critical for a successful transition.
Climate action is no longer a distant matter but has become an increasingly important imperative for economies and businesses worldwide. The consequences of climate inaction are already evident, with climate-related disasters causing trillions of dollars in economic damage over the past decades.
Over the past five years, only climate-related damages sum up to more than $ 1 trillion, not even counting indirect effects such as longer-term health consequences and natural resource depletion. The social cost of carbon in the latter half of the century would exceed $ 1,000 per ton of carbon dioxide emissions – far more than any carbon price applied in the foreseeable future. Damage often materializes through disrupted supply chains, damaged infrastructure, or productivity losses.
Mitigating these threats opens up scope for economic activity. At the same time, geopolitical tensions and resource dependencies have intensified systemic risks, further underscoring the urgent need for a transition to a resilient, low-carbon economy.
Objective and approach of this decarbonization study
This study by Deloitte and KfW presents a comprehensive economic case for climate action with a particular focus on how decarbonization can enhance competitiveness and growth. It describes chances for companies both supplying and employing green technologies – especially at a time when many traditional industries are facing disruption, declining demand, and shifting consumer preferences.
The study argues that competitiveness can be strengthened by participating in growing and innovative markets, as well as through cost reductions, whether by increasing resilience, improving efficiency, or securing better financing options. Moreover, the study examines the main obstacles for climate action during the transition phase and describes policy measures that are needed to enable a successful transformation.
Market perspective and business opportunities
Growing green markets are coming within reach. Despite the withdrawal of the US from the Paris Climate Agreement, countries responsible for more than three-quarters of global economic output have now committed to achieving greenhouse gas neutrality goals. For businesses, this translates into significant opportunities to access rapidly growing markets through manufacturing, exporting, or innovating sustainable solutions.
Technology is pivotal to linking climate action to business opportunities. The global market for green technologies has already been growing rapidly in the past. Both the demand for green technologies and capital inflows into the sector have recently increased at a dynamic pace, averaging around 7,3% and 9,6% per year, respectively. If these observed trends continue, the overall market volume could double in less than ten years.
Looking further ahead, growth prospects for the green tech sector also remain strong: With the continued pursuit of ambitious climate policy plans, the global market for green technologies could triple or even quadruple by the middle of the century. However, political decisions will be crucial in shaping this growth potential.
Competitive advantages of sustainable business models
Firms moving towards sustainable business models can gain competitive advantages in three fields:
Overview of transformation challenges
In the transition phase towards seizing the prospects of climate action, a number of challenges have to be overcome, such as:
- Technological immaturity of infant green innovations: One-third of the emission reductions need-ed by 2050 will depend on technologies that are currently still in the demonstration or prototype phase.
- Price volatilities in energy and critical raw material markets: Future electricity prices will depend on the efficiency of the power systems and on the speed of investment in the current power grids in particular. Supply of raw materials like copper, lithium, or rare earths is vital to new technologies. Political and regulatory uncertainty hampers investment in new technologies.
- Uncertainties regarding future policy regulations: Carbon pricing involves significant price uncertainties and considerable international variations, negatively impacting the risk-return profiles of green investments.
Five key areas for policy measures
To address these challenges and help businesses realize the returns of climate action, targeted policy measures in five key areas are essential.
Public support instruments are crucial in reducing the risks of green investments, making them more attractive to private investors and bridging the climate investment gap.
Hans-Jürgen Walter, Global Leader Sustainable Finance
