Making Sense of the Climate Paradox
Is the transition to a low-carbon economy moving faster or slower than expected?
The answer may seem paradoxical: Low-carbon technologies have grown far more rapidly than most people would have predicted even a decade ago, yet the transition is still moving far too slowly for the world to meet its climate targets under the Paris Agreement.
This paradox explains much of the confusion over global progress on decarbonization, and exploring it can help us better understand transition-related challenges and opportunities.
By certain measures, the shift to cleaner forms of energy has achieved impressive momentum.
Renewable energy sources now make up more than 46% of global installed power capacity, and they accounted for close to 93% of global power additions in 2024 while setting a new growth record, according to the International Renewable Energy Agency.
As recently as 2018, coal produced three times as much electricity in the United States as wind and solar combined, according to the energy think-tank Ember. Last year, however, wind and solar surpassed coal in U.S. electricity generation, with solar growing at a record pace and contributing 81% of new U.S. capacity additions.
In another historic first, solar eclipsed coal in electricity generation across the European Union, and in June 2025 it became the EU’s largest overall power source.
Looking ahead, the International Energy Agency (IEA) projects that renewable and nuclear power will meet 100% of global electricity demand growth through 2027, with renewables overtaking coal in total worldwide power generation before 2026.
It also projects that electric vehicles will account for more than 25% of global car sales in 2025 and more than 40% by 2030.
All of which has exerted downward pressure on carbon emissions. In fact, the IEA reports that five clean-energy technologies alone — solar, wind and nuclear power, plus electric cars and heat pumps — now help the world avoid 2.6 billion metric tons of emissions each year, which is roughly equivalent to 7% of all global energy-related emissions.
On the financial side, BloombergNEF estimates that global investments in the low-carbon transition reached a new all-time high in 2024 ($2.1 trillion), after growing by 11%.
These milestones suggest that the transition has unfolded more quickly than many analysts had anticipated.
Widespread adoption of low-carbon energy has not yet delivered a significant net reduction in global emissions, nor has it significantly changed the overall global energy mix.
“The clean energy revolution is being driven by fundamental technological and economic forces that are too strong to stop,” Oxford researchers Eric Beinhocker and J. Doyne Farmer declared in the Wall Street Journal last winter.
Unfortunately, the broader climate story is less encouraging.
Global emissions continue to hit new record highs, with atmospheric concentrations of carbon dioxide now 50% above pre-industrial levels, according to the IEA.
Meanwhile, NASA has confirmed that 2024 was Earth’s hottest year on record, and the World Meteorological Organization has confirmed that the first month of 2025 was the hottest January on record.
Scientists believe 1.5 degrees Celsius of warming above pre-industrial temperatures is the long-term limit humanity must uphold to prevent the worst physical impacts of climate change.
How difficult would that be? Well, the United Nations Environment Program (UNEP) calculates that global greenhouse-gas emissions would have to fall 42% below 2019 levels by 2030 for the world to stay aligned with a 1.5-degree temperature-rise pathway. If policymakers scaled back their ambitions and targeted 2 degrees of warming, emissions would have to drop by 28%.
For perspective, the UNEP says that even if all countries met their unconditional climate pledges, they would still reduce emissions by only 4%.
When we look at the emissions trajectories of companies in the MSCI ACWI Investable Market Index, we find that most remain out of sync with global climate goals. As of June 30, just 12% of listed companies were aligned with a 1.5-degree pathway, and 62% were not even aligned with a 2-degree pathway, according to the MSCI Sustainability Institute Transition Finance Tracker.
All of this underscores the climate paradox mentioned above: Widespread adoption of low-carbon energy has not yet delivered a significant net reduction in global emissions, nor has it significantly changed the overall global energy mix.
As the Transition Finance Tracker explains, “Although the share of renewables in global energy consumption has increased in recent decades, overall consumption of all forms of primary energy, including carbon-intensive fuels such as oil and gas, has also continued to rise.”
Indeed, fossil fuels still accounted for about 87% of the total global energy supply in 2024, according to the Energy Institute Statistical Review of World Energy.
The good news is that world economic growth has begun to decouple from emissions growth — not only because of low-carbon technologies, but also thanks to improved energy efficiency, cost-competitive climate solutions, and the increasing role of services (rather than industrial activity) in global output.
Last year, for example, even as the global economy grew by more than 3%, energy-related carbon emissions grew by just 0.8%, according to the IEA.
This decoupling has been driven by rich economies, as the Transition Finance Tracker illustrates: Between 2015 and 2023, the revenues of listed companies based in developed markets increased by 50%, while their direct emissions declined by 16%. Over that same period, listed-company revenues in emerging markets (EMs) more than doubled, and their emissions grew by 71%, indicating that EMs are not nearly as far along in the decoupling process.
To accelerate that process, the world must embrace a wider range of climate solutions, including solutions for high-emitting industries.
The good news is that world economic growth has begun to decouple from emissions growth — not only because of low-carbon technologies, but also thanks to improved energy efficiency, cost-competitive climate solutions, and the increasing role of services (rather than industrial activity) in global output.
All large-scale climate solutions feature three pillars: energy, technology and capital. The importance of that last pillar — capital — cannot be overstated, because it makes everything else possible.
Despite the many headwinds that have buffeted transition finance over the past few years — from Russia’s invasion of Ukraine, to the spike in global inflation, to the subsequent rise in global interest rates — climate-focused investment funds have continued to expand.
For example: Assets under management (AUM) in publicly traded climate funds have nearly tripled since 2020, and they have grown almost 20-fold since 2018, according to the Transition Finance Tracker.
Moreover, investors increasingly recognize that high-emitting, hard-to-abate economic sectors represent not just a unique challenge but also a unique opportunity.
Close to 40% of the AUM in publicly listed climate funds can now be found in transition funds — which are committed to decarbonizing high-emission industries — and private-capital climate funds now allocate 37% of their investments to the high-emission utilities sector.
MSCI is providing additional clarity for investors through our new Energy Transition Framework, an advanced analytical tool that measures company-, sector- and region-specific risks and opportunities.
This tool can help promote consistent standards and a common language for evaluating how well companies are prepared to navigate the changes that will affect them.
When we contemplate the future course of the transition, we must remember that rising global temperatures are making it harder for the world to reduce emissions, because they are spurring greater energy use.
“If weather in 2024 had remained consistent with 2023,” the IEA reports, “about half of the increase in global emissions would have been avoided.”
We must also remember that climate solutions matter for all industries — not just energy, utilities and transportation — and that meaningful progress on decarbonization will require enormous contributions from finance and investment.
These realities will continue to shape the transition, and the larger global economy, in 2026 and beyond.
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Energy Transition Framework
Assess how the energy transition may impact your portfolio and see which companies are positioned to lead with MSCI’s Energy Transition Framework.
Transition Finance Tracker
A quarterly report on financing the shift to a low-carbon economy.
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