Global debt 2030: Can the world afford a multifaceted transition?

High climate, digital and aging transition costs

$37 trillion needed to finance transition over 2024–2030

The cost of climate inaction is substantial. Lower- and lower-middle-income countries face up to 12% of GDP being at risk of physical hazard losses by 2050 under a slow transition scenario and absent adaptation (see “Investment in climate adaptation needs have high returns on growth” to learn more). Meanwhile, the challenge of energy security, affordability and sustainability looks very different in developing economies than in Europe and the US, where per capita incomes are as much as 40 times higher (see “The multidimensional path to net-zero"). Concurrently, IT advances are continuing apace, e.g., generative AI (see Can generative AI create a productivity boom?”), requiring governments and corporates to make further investment. On the societal front, many countries are facing an increasingly aging population, which could stymie further economic growth. There is a cost in caring for such aging populations (see “The challenges of aging: Fast and slow”).

Besides the baseline scenario described above, we have developed a supplemental “cost of transition” scenario that assumes additional debt (over the baseline) is raised to fund climate mitigation and adaptation, digital transformation and an aging population. We have not compared results with other development pathways that countries might take, which could be more costly than this transition scenario (e.g., failure to act on climate change).

Climate financing takes up the largest share of debt for transition. We estimate that a cumulative $37 trillion of debt — $25 trillion for climate, $7 trillion for digital transformation and $5 trillion for aging — may have to be raised between 2024 and 2030 (see chart). In arriving at these transition sums, we have used a variety of proprietary and external sources. For climate, we refer to the Intergovernmental Panel on Climate Change’s “Sixth Assessment Report” and the UN Environment Programme’s “Adaptation Gap Report 2023.” For digital, we refer to the Organisation for Economic Co-operation and Development’s “A Roadmap Toward A Common Framework For Measuring The Digital Economy.” For aging, we drew on S&P Global Ratings' “Global Aging 2023” report. Our measure of climate mitigation costs includes those for the energy transition, and digital transformation costs are gross fixed capital investment in digital technology to transform nondigital processes and services into digital ones.

We acknowledge that there is always a high degree of uncertainty in such estimates and variability in ranges of estimates for this financing gap. For example, we note that more recent estimates around climate scenarios suggest higher financing needs or wider gaps. Also, other sources such as taxes, including a carbon tax, and equity financing could contribute to financing gaps. Nonetheless, the proposed transition scenario represents in our view a reasonable midrange estimate to support our discussion.

Cost of transition could push leverage up another 7%. In our scenario, absolute debt could grow to $373 trillion between 2023 and 2030, 11% more than the baseline $336 trillion. This translates to the global debt-to-GDP ratio rising to 254%, 7% more than the baseline 238% (see chart). Because the weight of physical risk falls disproportionately on low- and low-middle-income countries (see “Investment in climate adaptation needs have high returns on growth” for more on climate adaptation costs), we see the absolute debt and, consequently, the debt-to-GDP leverage rising faster for emerging markets than for mature markets (see charts below). The lower-income cohort of our emerging markets sample (classified as lower-middle-income economies by the World Bank) could fare even worse; they may see absolute debt increase 19% and debt-to-GDP jump 14% in the transition scenario compared with the baseline.

Higher debt servicing costs

Interest expense will be higher than pre-COVID-19

We estimate that global borrowers are paying annual interest expenses of $9 trillion, 50% higher than 2019’s $6 trillion (see chart). In our baseline, this rises to $12 trillion by 2030 given higher nominal debt. Our cost of transition scenario shows the amount climbing 8% against the baseline to $13 trillion. We estimated interest to revenues for corporates from the financial statement data of 50,000 entities, sourced from S&P Global Market Intelligence’s Capital IQ database; for governments from S&P Global Ratings’ Sovereign Risk Indicators, published Oct. 9, 2023; and for households based on mortgage rates from national sources and disposable income data from S&P Global Market Intelligence’s EconoSim database.

Governments to continue facing higher, albeit uneven, interest expense

Governments are likely to take the biggest hit. Despite an expected easing in interest rates, the global interest expense-to-revenue ratio is forecast to be 17% higher in 2030 than in pre-COVID 2019. The household sector is projected to experience the least change in its interest expense-to-revenue ratio, partly due to an assumed 1% increase in leverage ratios over the 2023–2030 period. The corporate sector is in the middle. We expect governments to bear most costs due to the climate transition, digital transformation and aging, which leads to worse ratios in our cost of transition scenario.