McKinsey report: the road to net zero

“The net-zero transition: What it would cost, what it could bring” – McKinsey has released a new publication. In it, the management consultancy defines the steps that governments and companies need to take now to achieve net-zero greenhouse gas emissions.

In January 2022, the management consultancy McKinsey published a report entitled “The net zero transition: What it would cost, what it could bring”. The report looks at the economic transformation needed to achieve net zero emissions. It also looks at the direct and indirect effects that this transition would have on all countries and all sectors of the economy.

The McKinsey experts analyze 69 countries and the sectors that cause around 85 percent of CO₂ emissions. Their study does not claim to be exhaustive. Rather, it is a simulation of a possible, relatively orderly path to a 1.5-degree target. They use the Net Zero 2050 scenario from the Network for Greening the Financial System.

The report is available for free download on the McKinsey website.

McKinsey estimates that the necessary changes in the global economy will be significant. At a global level, around USD 9.2 trillion in spending on fixed assets will be required to achieve net zero emissions by 2050. This represents an increase of USD 3.5 trillion over current spending levels.

If increases in spending due to income and population growth and the further development of national net zero policies are taken into account, the required increase would still be around USD 1 trillion per year. This spending would need to be “front-loaded” according to McKinsey, meaning that the next decade is critical and requires the most investment to reach net zero in 28 years.

The report examines the uneven impact of financing net zero in 2050 across countries and sectors. It also highlights risks such as energy supply volatility. The key message, however, is that there is a wealth of opportunities to reduce the risk of the most catastrophic impacts of climate change.

The McKinsey experts analyze seven energy and land use systems that together are responsible for most global emissions:

According to their calculations, these systems need to be transformed to achieve net zero by 2050. Recommended actions include moving away from fossil fuels and switching to zero-emission electricity; adapting industrial and agricultural processes; increasing energy efficiency and managing energy demand; adopting a circular economy; reducing consumption of carbon-intensive goods; deploying carbon capture and storage technologies; and strengthening greenhouse gas sinks.

McKinsey report describes economic transformation

In the net-zero transition scenario, the McKinsey report shows that global spending on relevant fixed assets would total USD 275 trillion between 2021 and 2050. This corresponds to around 7.5% of annual global GDP, with the largest increase expected between 2026 and 2030.

However, the experts assure us that demand will also change significantly. For example, the demand for battery and fuel cell electric vehicles would increase from 5% of car sales in 2020 to 100% in 2050.

While the demand for electricity will double, the production of clean alternatives such as hydrogen and biofuels would increase more than tenfold. The experts also predict a redistribution of jobs, with more new jobs being created than old ones lost.

The McKinsey report identifies the sectors where the most drastic changes are needed to achieve net zero by 2050. Sectors such as coal and gas-fired power plants and the automotive sector, which produce the largest amounts of greenhouse gases, account for around 20 percent of global GDP.

Another significant share of global GDP, around 10 percent, is accounted for by sectors with emissions-intensive supply chains, such as construction. The McKinsey report details what job gains, job losses and reallocations would mean for each of these emissions-intensive sectors.

The uneven impact of decarbonization

The decarbonization of the economy looks different in every country. McKinsey notes in its report that low-income countries and fossil fuel producers would have to spend more on fixed assets for the net-zero transition than other countries.

This unequal effect would particularly affect countries such as India, Bangladesh, Kenya and Nigeria. In these countries, a larger share of jobs, gross domestic product and capital stock is located in CO₂-intensive sectors that would be most affected by decarbonization measures. At the same time, these countries are exposed to increased physical risk from climate change.

The report highlights the uneven impacts and risks, but also points to the growth prospects that a net-zero transition brings for all countries. This includes a focus on existing natural capital such as sunshine and forests, but also a focus on technological and human resources.

Ultimately, the McKinsey report recommends measures for all stakeholders affected by a net-zero transition by 2050. The experts make a clear call for deliberate and decisive action, while emphasizing the extreme urgency of the transition to net zero energy consumption by 2050.

These three categories of action are highlighted in the McKinsey report:

While the economic transition to net-zero energy by 2050 will be “massive in scale and complex in execution,” McKinsey also points out that the costs and complications that would result from a disorderly transition would be much greater and riskier.

The message is clear: the longer the net-zero transition takes, the more expensive it will be. McKinsey outlines a bold but necessary path that, despite its costs and challenges, holds much hope and potential.

Also interesting: Read about the German government’s climate adaptation funding here.