The economic impacts of the global shift to cleaner energy are complex and unfold over many decades. In the near term, countries must deal with the costs of mitigation and adaptation, including major investments in clean technologies. Over the longer term, however, the benefits of preventing severe climate damage are expected to outweigh these initial expenses.

Understanding this balance has become increasingly important as cost-of-living pressures and tight public finances are often wrongly linked only to decarbonisation efforts. A recent study by the economics team at Wood Mackenzie examined what the energy transition could mean for GDP growth through the year 2100.

The analysis is based on two of the company’s Energy Transition Scenarios: the “net zero” scenario and the “country pledges” scenario. While full results are available through the Lens Energy Transition Scenarios platform, the initial findings reveal how economic performance shifts between the short term and the long term.

In the decades ahead, the global economy experiences early losses before transitioning into gains. By 2050, faster action on climate reduces GDP relative to a higher-temperature baseline scenario. Under the country pledges pathway, which is aligned with approximately 2°C of warming, GDP falls by 1.1% compared to the base case. Under the more ambitious net zero pathway, aligned with 1.5°C, the decline is 1.6%.

These figures reflect the higher costs of early decarbonisation and the adjustments required for industries and consumers. From around 2070 onwards, however, the economic picture changes. The cumulative benefits of avoided climate damage start to exceed the transition costs. By 2100, annual global GDP is projected to be 32% higher under the net zero scenario and 21% higher under the country pledges scenario than in the base case. Long-term growth rates also improve: between 2025 and 2100, the global economy is expected to grow at a compound annual rate of 2.2% under the net zero pathway and 2.1% under the country pledges pathway, compared with 1.9% in the base case.

For governments, this presents a difficult balancing act. Short-term policy decisions must carefully manage the immediate financial pressures of decarbonisation without undermining future economic gains. Energy security concerns — heightened by ongoing instability in the Middle East — add further urgency. Policymakers must also consider how transition financing can be structured fairly, ensuring that both current and future generations share the costs and benefits equitably.

The transition also presents major opportunities for businesses. Achieving net zero will require large-scale technological innovation and adoption of low-carbon solutions. Between 2025 and 2050, achieving net zero will demand US$117 trillion in energy-related investment, most of which will flow into electrification systems and renewable energy technologies.

For companies to fully unlock this potential, governments will need to eliminate existing regulatory obstacles and support large-scale deployment.Households, however, may feel pressure in the short term. Transition-related costs can add to everyday expenses, and although long-term economic benefits will eventually outweigh these early burdens, that reality does little to ease present-day concerns.

Ensuring that costs are distributed fairly — and that long-term gains benefit all households — remains a major challenge for policymakers. The economic impacts of the energy transition will not be uniform across regions. Countries that are particularly vulnerable to the physical risks of climate change will see substantial long-term benefits from avoided emissions under faster transition pathways.

Meanwhile, regions with abundant low-cost hydrocarbons — such as the Middle East — may retain more stable oil output even under accelerated transition conditions, helping to cushion economic impacts.The economies most dependent on hydrocarbons face the toughest road ahead. For these countries, including those with large reserves and heavy reliance on fossil-fuel revenues, stranded assets and extensive decarbonisation demands will significantly constrain growth.

According to the analysis, Russia is projected to experience the most severe economic impact by 2050 under an accelerated transition pathway due to its extremely high dependence on hydrocarbons. Overall, the findings show that while the energy transition introduces short-term financial challenges, the long-term benefits to global economic stability and climate resilience are substantial. The key for governments, businesses and households will be managing the transition in a way that balances immediate pressures with the long-term health and growth of the global economy.