Introduction
Worldwide, both governments and companies have committed to achieving net-zero emissions of greenhouse gases. But, what would it really take to fulfill this ambition?
McKinsey offers a detailed look at the economic and societal impact of a very complicated question “Net-zero transition – what are the costs and what are the benefits” in a report released January 2022.
According to McKinsey, accomplishing this goal will require a significant economic transformation that would impact all sectors and countries, either directly or indirectly.
In this report, McKinsey examines the changes in demand, capital spending, costs, and employment for the key sectors responsible for 85% of global emissions, and evaluates the economic consequences for 69 countries, up until 2050.
This article summarizes McKinsey’s key findings in their report “Net-zero transition – what are the costs and what are the benefits” released January 2022.
Six characteristics define the net-zero transition
Governments and companies are increasingly committing to climate action. Yet significant challenges stand in the way, not least the scale of economic transformation that a net-zero transition would entail and the difficulty of balancing the substantial short-term risks of poorly prepared or uncoordinated action with the longer-term risks of insufficient or delayed action.
According to McKinsey, the analysis is not a projection or a prediction and does not claim to be exhaustive; it is the simulation of one hypothetical, orderly path toward 1.5°C using the Net Zero 2050 scenario from the Network for Greening the Financial System (NGFS). It provides an order-of-magnitude estimate of the economic costs and societal adjustments associated with net-zero transition.
Six features characterize the shifts in energy and land-use systems, economic sectors, and countries in the net-zero transition, according to their analysis. They are the following – It would be universal, significant, and front-loaded, with uneven effects on sectors, geographies, and communities, even as it creates growth opportunities.
The transformation of the global economy needed to achieve net-zero emissions by 2050 would be universal and significant, requiring $9.2 trillion in annual average spending on physical assets, $3.5 trillion more than today.
To put it in comparable terms, that increase is equivalent to half of global corporate profits and one-quarter of total tax revenue in 2020.
Accounting for expected increases in spending, as incomes and populations grow, as well as for currently legislated transition policies, the required increase in spending would be lower, but still about $1 trillion. Spending would be front-loaded — the next decade will be decisive — and the impact uneven across countries and sectors.
The transition is also exposed to risks, including that of energy supply volatility. At the same time, it is rich in opportunity. The transition would prevent the buildup of physical climate risks and reduce the odds of initiating the most catastrophic impacts of climate change.
It would also bring growth opportunities, as decarbonization creates efficiencies and opens markets for low-emissions products and services. Finally, technological innovation could reduce capital costs for net-zero technologies faster than expected.
The net-zero challenge: Accelerating decarbonization worldwide
To stabilize the climate and limit physical climate risks, climate science tells us that it is necessary to reduce the addition of greenhouse gases to the atmosphere to net zero.
Net-zero emissions can be achieved only through a universal transformation of seven energy and land-use systems. with a focus to accelerate decarbonization.
The seven energy and land-use systems that account for global emissions—power, industry, mobility, buildings, agriculture, forestry and other land use, and waste—will all need to be transformed to achieve net-zero emissions.
One system—forestry and other land use—also acts as a natural sink for carbon dioxide (CO2) and would need to increase its rate of emissions absorption.
Effective actions to accelerate decarbonization include
- Shifting the energy mix away from fossil fuels and toward zero-emissions electricity and other low-emissions energy sources such as hydrogen;
- Adapting industrial and agricultural processes;
- Increasing energy efficiency and managing demand for energy;
- Utilizing the circular economy; consuming fewer emissions-intensive goods;
- Deploying carbon capture, utilization, and storage technology; and
- Enhancing sinks of both long-lived and short-lived greenhouse gases.
The economic transformation: What would change in the net-zero transition
On the basis of this scenario, we estimate that global spending on physical assets in the transition would amount to about $275 trillion between 2021 and 2050, or about 7.5 percent of GDP annually on average. The biggest increase as a share of GDP would be between 2026 and 2030.
Demand would be substantially affected. For example, manufacturing of internal combustion engine cars would eventually cease as sales of alternatives (for example, battery-electric and fuel cell-electric vehicles) increase from 5 percent of new-car sales in 2020 to virtually 100 percent by 2050.
Power demand in 2050 would be more than double what it is today, while production of hydrogen and biofuels would increase more than tenfold. The transition could lead to a reallocation of labor, with about 200 million direct and indirect jobs gained and 185 million lost by 2050—shifts that are notable less for their size than for their concentrated, uneven, and re-allocative nature.
Sectors are unevenly exposed in the net-zero transition
All sectors of the economy are exposed to a net-zero transition, but some are more exposed than others. The sectors with the highest degree of exposure are those which directly emit significant quantities of greenhouse gases (for example, the coal and gas power sector) and those which sell products that emit greenhouse gases (such as the fossil fuel sector and the automotive sector). Approximately 20 percent of global GDP is in these sectors.
A further 10 percent of GDP is in sectors with high-emissions supply chains, such as construction.
Each of the most exposed parts of the economy will be differentially affected. The total cost of ownership of EVs could be lower than ICE cars by about 2025 in most regions, even as costs for steel and cement production could rise.
Job gains would be largely associated with the transition to low-emissions forms of production, such as renewable power generation. Job losses would particularly affect workers in fossil fuel–intensive or otherwise emissions-intensive sectors.
How the net-zero transition would play out in countries and regions
All 69 countries McKinsey looked at in depth face some exposure to the transition. Lower-income and fossil fuel resource-producing countries would need to spend more relative to GDP to build a low-emissions economy and support economic development.
The world’s largest economies—the United States, China, the European Union, Japan, and the United Kingdom—would account for about half of global spending on physical assets and would spend about 6 percent of their combined GDP from 2021 to 2050.
In developing regions, spending on energy and land would represent a substantially larger share of national GDP: about 10 percent in sub-Saharan Africa, India and some other Asian countries, and Latin America.
To decarbonize, lower-income countries and fossil fuel resource producers would spend more on physical assets as a share of their GDP than other countries—in the case of sub-Saharan Africa, Latin America, India and other Asian nations, about 1.5 times or more as much as advanced economies to support economic development and build low-carbon infrastructure.
Developing countries also have relatively greater shares of their jobs, GDP, and capital stock in sectors that would be most exposed; examples include India, Bangladesh, Kenya, and Nigeria. And countries like India would also face heightened physical risk from climate change.
The effects within developed economies could be uneven, too; for instance, more than 10 percent of jobs in 44 US counties are in fossil fuel extraction and refining, fossil fuel–based power, and automotive manufacturing.
At the same time, all countries will have growth prospects, from endowments of natural capital such as sunshine and forests, and through their technological and human resources.
Managing the net-zero transition: Actions for stakeholders
Stakeholders would need to act with unity, resolve, and ingenuity, and toward equitable long-term outcomes to support the economic transformation a net-zero transition entails.
The findings of this research serve as a clear call for more thoughtful and decisive action, taken with the utmost urgency, to secure a more orderly transition to net zero by 2050.
Economies and societies would need to make significant adjustments in the net-zero transition. Many of these can be best supported through coordinated action by governments, businesses, and enabling institutions.
The economic transformation required to achieve net-zero emissions by 2050 will be massive in scale and complex in execution, yet the costs and dislocations that would arise from a more disorderly transition would likely be far greater, and the transition would prevent the further buildup of physical risks.
It is important not to view the transition as only onerous; the required economic transformation will not only create immediate economic opportunities but also open up the prospect of a fundamentally transformed global economy with lower energy costs, and numerous other benefits—for example, improved health outcomes and enhanced conservation of natural capital.
While the immediate tasks ahead may seem daunting, human ingenuity can ultimately solve the net-zero equation, just as it has solved other seemingly intractable problems over the past 10,000 years. The key issue is whether the world can muster the requisite boldness and resolve to broaden its response during the upcoming decade that will in all likelihood decide the nature of the transition.
Source: McKinsey January 2022
