The Cost of Getting to Net-Zero

The latest IPCC report makes it abundantly clear that now is the time for action if we are to limit warming to around 1.5°C. This option requires peaking emissions before 2025 and halving it by 2030.

“Without immediate and deep emissions reductions across all sectors, limiting global warming to 1.5°C is beyond reach”, the report states.

The Intergovernmental Panel on Climate Change (IPCC), the United Nations body for assessing the science on climate change and the world’s foremost authority on the subject, says that limiting global warming to 1.5°C implies reaching net zero CO2 emission globally around 2050 and deep reduction in emissions in all GHG gases afterwards.

But what will it cost for governments and companies to reach the net-zero, and what will it take to fulfil this goal?

The report from McKinsey & Company, “The net-zero transition: What it would cost, what it could bring,” presents the economic costs of transitioning to net-zero on governments and businesses.

The data presented in this report is based on research findings conducted by the McKinsey Global Institute (MGI), the world’s leading private-sector think tank. 

Below are some excerpts:

“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.”

The report estimates the transition’s economic effect on demand, capital allocation, costs, and jobs to 2050 globally across the energy and land-use systems that produce about 85 percent of overall emissions and assess economic shifts for 69 countries.

Analysis of the report is not projective nor exhaustive but rather a simulation of a hypothetical order path towards net-zero by 2050. It finds that the transition would be “universal, significant, and front-loaded, with uneven effects on sectors, geographies, and communities” and will create the following opportunities:

• “Capital spending on physical assets for energy and land-use systems in the net-zero transition between 2021 and 2050 would amount to about $275 trillion, or $9.2 trillion per year on average, an annual increase of as much as $3.5 trillion from today.”

“To put into context, the $3.5 trillion is approximately equivalent to half of global corporate profits, one-quarter of total tax revenue, and 7 percent of household spending in 2020.”

• The cost of electricity will increase in the near term but will then fall back, although this would vary across regions. “As the power sector builds renewables and transmission and distribution capacity, the fully loaded unit cost of electricity production, accounting for operating costs, capital costs, and depreciation of new and existing assets, in this scenario could rise about 25 percent from 2020 until 2040 and still be about 20 percent higher in 2050 on average globally.”

• “The transition could result in a gain of about 200 million and a loss of about 185 million direct and indirect jobs globally by 2050.” Job gains will come from operations and construction of physical assets, and job losses will come from the fossil fuel-related works – around four to nine million direct job losses because of the transition. While eight million will be created in renewable power.

• “While the transition would create opportunities, sectors with high-emissions products or operations—which generate about 20 percent of global GDP—would face substantial effects on demand, production costs, and employment.”

• “Poorer countries and those reliant on fossil fuels are most exposed to the shifts in a net-zero transition, although they also have growth prospects. Countries in sub-Saharan Africa and India will need to invest 1.5 times more than advanced economies as a share of GDP today to support economic development and build low-carbon infrastructure.”

• “Consumers may face additional up-front capital costs and have to spend more in the near term on electricity if cost increases are passed through, and lower-income households everywhere are naturally more at risk.” Consumers may need to replace emission-intensive goods and appliances and modify diets, but this upfront higher cost will decrease over time for consumers. For example, the cost of owning an ICE car in most regions by 2025 will be more expensive than owning an EV.

• “Economic shifts could be substantially higher under a disorderly transition, in particular because of higher-order effects not considered here. The economic and social costs of a delayed or abrupt transition would raise the risk of asset stranding, worker dislocations, and a backlash that delays the transition. Even under a relatively gradual transition, if the ramp down of high-emissions activities is not carefully managed in parallel with the ramp-up of low-emissions ones, supply may not be able to scale up sufficiently, making shortages and price increases or volatility a feature. Much therefore depends on how the transition is managed.”

• “For all the accompanying costs and risks, the economic adjustments needed to reach net-zero would come with opportunities and prevent further build-up of physical risks. Incremental capital spending on physical assets creates growth opportunities, in connection with new low-emissions products, support services, and their supply chains. Most importantly, reaching net-zero emissions and limiting warming to 1.5°C would reduce the odds of initiating the most catastrophic impacts of climate change, including limiting the risk of biotic feedback loops and preserving our ability to halt additional warming.”

• “Government and business would need to act together with singular unity, resolve, and ingenuity, and extend their planning and investment horizons even as they take immediate actions to manage risks and capture opportunities.”

The report says that “The goal of this research is to provide stakeholders with an in-depth understanding of the nature and magnitude of the economic and societal adjustments a net zero transition would entail. Our hope is that this analysis provides leaders with the tools to collectively secure a more orderly transition to net-zero by 2050. The findings serve as a clear call for more thoughtful and decisive action, taken with the utmost urgency.”

Read the full report by clicking the link provided in the “Source” below.