Anatomy of the net-zero transition

BOSTON — Now that addressing climate change has become a top priority worldwide, economic policymakers and corporate strategists alike are embracing sustainability goals — most notably, “net-zero” greenhouse gas (GHG) emissions. A new McKinsey Global Institute report indicates how we can get there.

Using the Network for Greening the Financial System’s Net Zero 2050 (NGFS) scenario, we simulated a relatively orderly transition that would limit the rise in global temperatures to 1.5 degrees Celsius, relative to pre-industrial levels. Achieving this target involves profound economic and societal shifts that affect countries, companies, and communities. Ultimately, a successful transition would have six key characteristics.

First, the transition would be universal. Every country and economic sector contributes to GHG emissions, directly or indirectly, so transformation has to happen everywhere. And, given the interdependence of energy and land-use systems, coordination will be essential. The adoption of electric vehicles (EVs), for example, will lead to significant emissions reductions only if the electricity used to power them comes from low-emissions sources.

Second, a successful net-zero transition would entail significant economic shifts. We estimate that getting to net zero would require $275 trillion in capital spending on physical assets by 2050—an average of $9.2 trillion per year. Expected increases in spending as incomes and populations grow, and transition policies that are already legislated, narrow the gap, but the required rise in annual spending would still be about $1 trillion.

The labor market, too, would undergo a major adjustment: Under the NGFS scenario, about 200 million jobs would be created and 185 million lost by 2050. Worker reskilling and redeployment would thus be crucial.

The third key characteristic is that policies—and the associated investments—must be front-loaded. Under the NGFS scenario, spending would increase from 6.8 percent of GDP today to about 9 percent between 2026 and 2030, and then decline. Action to arrest the buildup of GHGs in the atmosphere also need to be taken this decade.

Fourth, the effects of the net-zero transition will be felt unevenly. The sectors with the highest degree of exposure—because they emit significant quantities of GHGs (for example, coal and gas power) or sell products that do (such as petroleum products)—account for about 20 percent of global GDP. Sectors with high-emissions supply chains, such as construction, account for a further 10 percent.

At the country level, developing economies would have to devote a larger share of GDP than rich countries—almost 11 percent in India, compared to 4 to 5 percent in the European Union and the United States—to support economic development and build low-emissions assets.

The net-zero transition’s fifth characteristic is that it is exposed to short-term risks, including worker dislocation and stranded assets. And if the deployment of low-emissions technologies does not keep pace with the decommissioning of high-emission technologies, there could be shortages and price spikes, potentially eroding support for the transition.

At the same time, the net-zero transition holds major opportunities—the sixth key characteristic. For companies, decarbonization could make existing processes and products more cost-effective, while new markets for low-emissions goods will become increasingly lucrative.

Companies can also gain by supporting the production of lower-emissions products—for example, by providing mineral inputs (such as lithium for batteries), physical capital (including solar panels), or infrastructure (like EV charging stations). Support and technical services, such as forest management, engineering and design, financing, risk management, and emissions measurement and tracking solutions, would also be needed.

Countries can benefit, too, by leveraging their natural capital (like sunshine, wind, and land that can be reforested) and investing in technological, human, and physical capital. The most important benefit of all? Preventing the physical risks that could trigger the most catastrophic effects of climate change.

Policymakers and business leaders should integrate these insights into their decisions as they seek to pursue an orderly, timely, and smooth net-zero transition. While many questions remain unanswered, including who pays, how much, and for what, the proliferation of net-zero pledges proves that the search for solutions has more momentum than ever.

—Project Syndicate

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Mekala Krishnan is a partner at the McKinsey Global Institute.