As global climate commitments ramp up, countries and companies are grappling with the transformation of the global economy required to reach net-zero emissions of greenhouse gases by 2050. A new report from McKinsey & Company provides a more extensive view than other studies to date of the nature and magnitude of the economic changes needed to achieve that goal. The report, The net-zero transition: What it would cost, what it could bring, takes a look at the implications for demand, capital spending, production costs, and jobs in sectors that produce 85 percent of overall emissions, with an in-depth analysis of 69 countries.
“The net-zero transition will amount to a massive economic transformation. Actions by individual companies and governments, along with coordinated support for more vulnerable sectors, countries, and communities, could facilitate the economic and societal adjustments that will be required,” said Mekala Krishnan, a partner at the McKinsey Global Institute and lead author of the report.
The report assesses the transition along two dimensions: sectors and geographies. The analysis takes as its starting point and pathway to net-zero emissions the hypothetical Net Zero 2050 scenario from the Network for Greening the Financial System (NGFS). Findings include:
- The transition would be universal. All economic sectors and countries would be affected as the energy and land-use systems that underpin economies everywhere and generate emissions are overhauled.
- The scale of economic transformation would be significant. Capital spending on physical assets would total around $275 trillion through 2050—approximately $9.2 trillion per year – or an increase of $3.5 trillion on the annual spending today, as high-emissions activities are ramped down and low-emissions activities ramped up. For example, today 65 percent of energy and land spending goes to high-emissions products. In the future 70 percent would go to low-emissions products and enabling infrastructure, reversing today’s trend.
- Extensive labor reallocations may be needed, with about 200 million direct and indirect jobs gained and 185 million lost by 2050 from the net-zero transition.
- The changes would be front-loaded. The next decade will be decisive. Spending would rise to 8.8 percent of GDP between 2026 and 2030, from 6.8 percent today, before falling. Additionally, electricity production costs would increase in the near-term but then fall back from their peak.
- The impact of the transition would be felt unevenly across sectors, countries, and communities. Most exposed would besectors with high-emissions products or operations; lower-income countries and those with large fossil fuel resources; and communities whose local economies depend on exposed sectors. The most exposed sectors currently account for about 20 percent of global GDP. Another 10 percent of GDP is in sectors whose supply chains have high emissions, such as construction. Low-income households everywhere may be most affected by most costly electricity in the near term and up-front capital costs they may need to incur for low-emissions products like new heaters or electric cars.
- Despite the scale of the adjustments needed, the costs and dislocations from rising physical risks or a disorderly transition would likely be far greater. The transition comes with risks, including of energy shortages and price increases if it is not well managed. If it is delayed or abrupt, the transition would raise the risk of asset stranding and worker dislocations. However, the outcomes would be far worse if no action is taken: reaching net-zero emissions and limiting warming to 1.5°C would prevent the most catastrophic impacts of climate change, including limiting the risk of feedback loops and preserving our ability to halt additional warming.
- An orderly transition offers growth opportunities and lasting benefits beyond decarbonization. While the impacts will be unevenly distributed, a well-coordinated transition would pay dividends including the potential for a long-term decline in energy costs, improved health outcomes, and natural capital conservation. Areas for growth could be more efficient operations from decarbonization and the creation of new markets for low-emissions goods.
“A more orderly transition would not only avoid the worst impacts of a changing climate, but could have enormous benefits. Energy costs could decline in the longer term, and other costs with them. And the unity of intent and action it will require bodes well for solving other global problems. At the same time, the short-term risks of a poorly-thought transition cannot be ignored,” said Hamid Samandari, a McKinsey Senior Partner.
Achieving the net-zero transition will depend on the engagement of businesses, governments, institutions and individuals around the globe, requiring a wholesale shift in mindset, including preparing for uncertainty and near term risks, acting with greater resolve, unity, and ingenuity, and extending planning and investment horizons.
Stakeholders would also need to accelerate current efforts to decarbonize, capture opportunities, and adapt to physical risk.
“The economic transition to achieve net-zero will be complex and challenging, but it is necessary,” said Dickon Pinner, Senior Partner at McKinsey and co-leader of McKinsey Sustainability. “The question now is whether the world can act boldly and broaden the response and investment needed in the upcoming decade.”