It has now been three years since the coronavirus pandemic turned the world upside down. Since then, we in the West have experienced macroeconomic conditions not seen in decades. The post-COVID economic recovery and the disruption of supply chains have created an imbalance between supply and demand and led to significant inflation. Added to this were the consequences of the war in Ukraine and rising energy and food prices. This has led to an inflation rate not seen in the eurozone since the creation of the single currency. At the same time, many countries—led by the United States and the United Kingdom—have experienced labor shortages, and in many European countries, we are seeing a resurgence of social conflict related to the distribution of wealth between labor and capital.

And what about the energy transition in all of this? What if, instead of helping to ease these tensions, the energy transition were to add fuel to the fire and reinforce the various inflationary dynamics? This is what our group of engineers and economists from UCLouvain, the French Development Agency, the Shift Project, theUniversité Grenoble Alpes , and Inria has studied in detail. In an article recently published in the journal *Ecological Economics*, we attempt to answer the following question: “What macroeconomic dynamics would be generated by a rapid global energy transition consistent with the Paris Agreement?”

While many economists approach this issue by referring to “brown capital” that needs to be replaced by “green capital”—relatively abstract concepts—we have taken care to base our model on the technical characteristics of solar and wind energy worldwide in order to accurately determine their global potential.

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These two types of energy are likely to account for the vast majority of the energy mix in the future, regardless of the decarbonized energy mix envisaged. The model we have developed, called Temple, provides a unified representation of the interactions between the energy system, the real economy, and the financial sector. A key innovation lies in the use of detailed projections of how various characteristics of the energy-economy system will evolve during the transition. These include changes in the energy sector’s capital requirements—based on calculations of the Energy Return on Investment ( EROI )—changes in the energy intensity of various economic sectors, and overall demographic shifts.

Temple thus makes it possible to model a global economy that, while continuing to grow, would undergo a rapid energy transition through 2050. He leads us to six key conclusions.

• The energy transition will require a tenfold increase in the energy sector’s capital needs. In other words, meeting a given global energy demand using solar panels and wind turbines—while taking into account energy storage solutions and the necessary grid upgrades—requires 10 times more machinery and equipment than their equivalents in oil wells, gas wells, coal mines, thermal power plants, and current power grids.

• Due to massive investments in the energy sector, the transition is driving a rebound in economic growth.

• Contrary to Keynesian intuition, supply constraints prove to be decisive in the transition. It is not the physical availability of renewable energy that is lacking, but rather the economy’s productive capacity. In other words, the demand for investment in the energy sector is such that the productive apparatus cannot meet both this new demand and households’ demand for consumer goods. A crowding-out effect on industrial production emerges from the very beginning of the transition. Note that Temple models both the real and financial sectors of the economy: the constraint highlighted above pertains specifically to the real economy, as the transition does not appear to face any major obstacles from a financial standpoint.

Savings, Labor Shortages, and Inflation

• According to our model, the global economy’s investment rate (that is, the portion of GDP not allocated to household and government consumption) is expected to rise from 26% today to more than 40% at the peak of the transition.

Such a situation has not been seen in a Western country since the end of World War II in the United States. In other words, the model’s simulations correspond to a wartime economy in which the production of tanks, shells, and bombers would be replaced by that of solar panels, wind turbines, and power grids. Just as during World War II, households would be forced to save a significant portion of their income to help finance these investments.

• The economic dynamism driven by the transition not only saturates productive capital but also creates significant pressures on the labor market. In the main scenario studied with Temple, the employment rate thus increases by 20% between now and 2050.

As noted by J. W. Mason, a professor of economics at John Jay College in New York, this leads to a labor shortage and thereby significantly increases workers’ bargaining power when it comes to wages. An indirect effect of such a transition would be to raise the share of wages in GDP again—by about 10 percentage points—even though this share has been steadily declining for the past 40 years across all Western economies.

• Finally, the rise in capital costs for energy companies, the persistent imbalance between demand for capital and consumer goods on the one hand and industrial production on the other, as well as rising wages, make the energy transition highly inflationary. In the scenario analyzed with Temple, we observe sustained inflation averaging 10% for the global economy.

This level of inflation is similar to what European Union countries experienced in the months following Russia's invasion of Ukraine.

A Necessary, Far-Reaching Restructuring of the Economy

Of course, such an energy transition scenario is unlikely to materialize in practice, given the sacrifices it would entail. The results presented above contrast sharply with what can be observed today in certain European countries at the forefront of the energy transition—such as Denmark—where the transition appears to be unfolding as a relatively smooth process. However, in absolute terms, these few countries are still only at the beginning of decarbonizing their energy systems. Furthermore, the solar panels and wind turbines installed there are primarily manufactured in other countries, which themselves rely on a fossil-fuel-based energy mix: the constraints on production capacity are therefore hidden from view.

By combining the perspectives of engineers and economists on the transition, the simulations conducted using Temple thus highlight the significant economic disruptions that would result from an ambitious energy transition. However, we do not conclude from this that a 100% renewable energy system is unattainable. Indeed, the scenario proposed above can be qualified in various ways, particularly by questioning the growth of the global economy.

Our goal is rather to highlight the profound restructuring of the economy that a transition to a carbon-free energy system entails. Such a transition is highly inflationary and brings the issue of the distribution of wealth between capital and labor back to the forefront. It requires the adoption of new forms of ecological governance, both to manage this social conflict and to ensure the proper allocation of productive capital to key sectors of the transition.