Thu, Mar 17, 2022 page9

• The anatomy of the net-zero transition

  The transition will spark profound economic and societal shifts, but reducing the risk of catastrophic events outweighs all downsides

  • By Mekala Krishnan
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  As 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 emissions.

  However, what will it take to get there? In a new McKinsey Global Institute report, my coauthors and I aim to answer this question.

  Using the net-zero 2050 scenario by the Network for Greening the Financial System (NGFS), we simulated a relatively orderly transition that would limit the rise in global temperatures to 1.5°C, relative to preindustrial levels. While this is not a prediction or a projection, our scenario-based analysis provides an understanding of the nature and the magnitude of the changes the net-zero transition would entail, and the scale of the response needed to manage it.

  We find that achieving this target would involve profound economic and societal shifts — affecting countries, companies and communities. Ultimately, we found that a successful transition would have six key characteristics.

  First, the transition would be universal.

  Every country and economic sector contributes to greenhouse gas emissions, directly or indirectly. Getting to net-zero thus means that transformation has to happen everywhere, and given the interdependence of energy and land-use systems, coordination would be essential.

  The adoption of electric vehicles (EVs), for example, would 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 US$275 trillion in capital spending on physical assets by 2050 — an average of US$9.2 trillion per year.

  That is US$3.5 trillion per year more than is currently being invested. Expected increases in spending as incomes and populations grow, and transition policies that are already legislated, narrows the gap, but the required rise in annual spending would still be about US$1 trillion.

  Meanwhile, some existing spending would need to be reallocated from high to low-emissions assets.

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

  The third key characteristic of the net-zero transition 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 of GDP between 2026 and 2030, and then decline.

  More broadly, action to arrest the buildup of greenhouse gases in the atmosphere and mitigate physical climate risks would need to be taken this decade.

  Fourth, the effects of the net-zero transition would be felt unevenly. The sectors with the highest degree of exposure — because they emit significant quantities of greenhouse gases (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 of GDP.

  At the country level, developing economies would have to devote a larger share of GDP than rich countries — almost 11 percent in India, compared with 4 to 5 percent in the EU and the US — to support economic development and build low-emissions assets. Deploying this capital could prove challenging for many developing countries. Their economies also tend to be more concentrated in the most exposed sectors, subjecting them to greater economic shifts.

  Similarly, within countries, the communities that rely heavily on the most exposed sectors would face the highest costs. In the US, 44 counties rely on coal, oil, gas, fossil fuel-based power and automotive manufacturing for more than 10 percent of employment.

  Lower-income households would struggle more than their wealthier counterparts to cope with any cost increases that are passed through to consumers — although in some cases, such as mobility, upfront capital spending by consumers could yield lower operating costs over time.

  The net-zero transition’s fifth characteristic is that it is exposed to short-term risks, including worker dislocation and stranded assets.

  We estimate that in the power sector, US$2.1 trillion of assets could be retired or underutilized between now and 2050, 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, and new markets for low-emissions goods would become increasingly lucrative.

  Companies can also gain by supporting the production of these 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. To strengthen their positions in the net-zero economy, they can leverage their natural capital (such as sunshine, wind and land that can be reforested) and invest in technological, and human and physical capital.

  We also cannot forget the most important benefit of all: Preventing the further buildup of physical risks that could trigger the most catastrophic effects of climate change.

  Policymakers and business leaders should be integrating these insights into all their decisions as they seek to pursue an orderly, timely and smooth net-zero transition.

  This includes a recognition that abrupt, poorly planned changes would increase risks as surely as delays would. Given the universal nature of the transition, it must be tackled in a newfound spirit of cooperation.

  Many questions remain unanswered, including who pays, and how much, for what, but with the proliferation of net-zero pledges, the search for solutions has more momentum than ever.

  Mekala Krishnan is a partner at the McKinsey Global Institute.

  Copyright: Project Syndicate
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