The initial brief was to model the capital investment required worldwide to achieve the Paris climate goal. As we assessed the existing literature on the physical and transition costs of climate change, and the different existing modelling frameworks, it became clear that while numerous studies existed, none had yet taken a systematic approach from the macroeconomic perspective towards global investment needs. The International Energy Agency, for example, tells us the amount of investment in different energy systems required to get to net zero, but this is calculated from the bottom up rather than the top down, and covers only one part of the total picture.
Fathom’s approach differs by employing robust macroeconomic methodology. To answer the question we used a modified Cobb-Douglas approach, in which ‘clean’ and ‘dirty’ capital were identified – that is, assets that were already consistent with the transition, and assets that would need to be replaced for net zero to be accomplished – and simulated economic growth and changes in the capital stock, and its composition, in a business-as-usual and net-zero scenario.