Carbonomics: The Economics of Reaching Net Zero

The Carbonomics cost curve—or carbon abatement cost curve—is a critical tool for understanding global decarbonization efforts, by providing insights into the carbon price needed to make different low-carbon technologies economically competitive.

“Carbonomics: The Economics of Reaching Net Zero” highlights the challenges and opportunities in the ongoing energy transition, revealing significant shifts in costs across sectors such as power generation and transportation in 2023 compared to 2022.

Written by researchers from Goldman Sachs, this paper demonstrates that there has been a reshaping of the Carbonomics cost curve and that the impact of technological innovation leaves room for optimism.

The 2023 Carbonomics cost curve presents a mixed picture. Some technologies, particularly in the lower-cost part of the curve—such as renewable power—became more expensive due to several factors, including lower fossil fuel prices, higher interest rates, and cost inflation for clean technologies.

Conversely, technologies at the higher-cost end of the spectrum—most notably those related to transportation—became cheaper, largely due to falling battery prices and improved economies of scale in electric vehicle (EV) production. The Carbonomics cost curve offers a detailed model of the cost of achieving net-zero carbon emissions using more than 100 decarbonization technologies.

Key Factors

The paper finds several key factors contributed to the shifts seen in the 2023 cost curve, including the following:

• Lower long-term energy prices: Energy prices for natural gas, coal, and oil products declined from their 2022 peaks, which paradoxically made the transition to cleaner technologies more expensive.
• Clean tech cost inflation: The cost of equipment for renewable power generation, particularly in offshore wind, rose in 2023.
• Higher interest rates: Rising interest rates globally have increased the cost of capital, which has directly affected the financing of clean technologies, such as solar, wind, and other renewable energy projects.
• Battery deflation and EV economies of scale: The transportation sector has seen significant cost reductions, particularly in electric vehicles (EVs), thanks to declining battery costs and improved production efficiencies.
• Lower-cost technologies: The cost to decarbonize power generation increased year over year, driven by higher costs for offshore wind projects, due to inflation in equipment prices and rising interest rates.
• Higher-cost technologies: The decarbonization of transportation became more affordable due to battery deflation and advances in EV technology.

This shift in the cost curve means that while it is now more expensive to achieve the first 75% of global decarbonization, the cost of achieving the remaining 25% has decreased. Specifically, the annual cost of decarbonizing up to 75% of global anthropogenic greenhouse gas (GHG) emissions has risen to approximately $3.2 trillion (up $0.1 trillion from 2022). However, the cost of achieving full decarbonization—particularly for the last 25% of emissions—has fallen by $0.6 trillion annually compared to 2022.

Policy Support and the Role of Carbon Pricing

Government policies and incentives are playing a significant role in driving decarbonization efforts. The US Inflation Reduction Act (IRA), for example, has unlocked around $500 billion in clean tech investments since its enactment in 2022. The IRA has significantly reduced the cost of decarbonization in the United States by offering tax credits and incentives for renewable energy projects, hydrogen production, and carbon capture.

The authors assert that carbon pricing is a crucial tool for achieving net-zero emissions. As of 2023, 73 carbon pricing initiatives are in place across 39 national and 33 regional governments, covering around 24% of global GHG emissions. However, the global average carbon price remains low, only $5 per ton, which is insufficient to drive large-scale decarbonization. The European Union Emissions Trading System (a “cap and trade” system that sets a yearly cap on GHG emissions from stationary installations) and the upcoming (in 2026) Carbon Border Adjustment Mechanism (the EU’s tool to put a fair price on the carbon emitted during the production of carbon-intensive goods that are entering the EU) are expected to tighten carbon pricing and incentivize further decarbonization across the EU.

Summation

The 2023 Carbonomics cost curve underscores the complex and evolving nature of the global transition to net-zero carbon emissions. While some sectors, particularly power generation, face rising costs due to inflation and interest rates, others, such as transportation, are seeing significant cost reductions thanks to technological advancements in EVs and batteries. Government policies, particularly in the United States and Europe, are playing a vital role in accelerating decarbonization efforts, but the challenge remains significant.

Achieving full decarbonization will require continued innovation, investment, and coordinated policy support across sectors. As carbon pricing mechanisms expand and such technologies as clean hydrogen, carbon capture, and renewable energy storage scale up, the path to net zero may become more financially viable, enabling global progress toward climate goals.

Authors

Michele Della Vigna, CFA, Managing Director and Head of Natural Resources Research in EMEA, Goldman Sachs Bank Europe SE, Milan

Yulia Bocharnikova, Associate, Goldman Sachs International, Dubai

Anastasia Shalaeva, Analyst, Goldman Sachs International, Dubai

Quentin Marbach, Analyst, Goldman Sachs International, London