McKinsey Report Lays Out Costs, Benefits and Complexities of Achieving a Net-Zero World by 2050

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--If there were any doubt about the global cost and complexity of transitioning to a net-zero greenhouse gas world, a new report from consultants McKinsey & Company (New York, New York) spells it out: $275 trillion over the next three decades, or about $9.2 trillion annually, an increase of roughly $3.5 trillion per year over current capital spending.

In The Net-Zero Transition: What it Would Cost, What it Could Bring, McKinsey provided this context: The $3.5 trillion annual increase in capital outlays across the world would be equal to 50% of global corporate profits, or 25% of total worldwide tax revenue, or 7% of household spending. But fresh new spending for the energy and land-use systems is not all that is required: The 224-page report, released January 25, said an additional $1 trillion of today's annual operating outlays would need to be reallocated from high-emissions to low-emissions assets.

Assembling and directing the capital, as daunting as it would be, may be the easy part. Even harder would be the need for companies and governments around the world to coordinate their efforts so that initiatives taken by one sector or country are not offset by actions taken elsewhere.

McKinsey's sketch of the challenge of getting to net-zero by mid-century resemble an enormous, hugely consequential game of Jenga, where a coordinated, orderly, worldwide movement to evolve industries, systems, practices and technologies that aggravate climate change must be made without the entire global structure collapsing.

The report's first sentence spells out what is at stake: "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."

In 2015, signatories to the Paris Agreement agreed to work together to limit future emissions of greenhouse gases (GHGs) so that temperature gains would be limited to 1.5 to 2 degrees Celsius above pre-Industrial Revolution levels. Global temperatures already have risen about 1.1 degrees Celsius from pre-Industrial Revolution times. So the cost, scope and scale of actions called for in the McKinsey report is partly a function of the lateness of the hour. And, if the climate-worsened extreme weather disruptions from 2021 are any indication, the going will get progressively rougher as time goes by.

The report predicted the transition to a net-zero world could create about 200 million new jobs by 2050, more than offsetting, in aggregate, the expected loss of approximately 180 million jobs. But the impact would be felt differently in different industries and geographic areas. An estimated 9 million jobs could be lost in the fossil-fuel extraction industries, a number that includes oil and gas, as well as metals and minerals. Another 4 million jobs may disappear from the fossil-fueled power industry. However, the consulting firm estimated that 8 million direct jobs would be created in renewable power, hydrogen and biofuels by 2050.

"While important," the report's authors wrote, "the scale of workforce reallocation may be smaller than that from other trends including automation. Displaced workers will nonetheless need support, training and reskilling through the transition."

The energy transition would increase the delivered cost of electricity in the near term, but then prices would retreat, though the report noted there would be variances across regions. "As the power sector builds renewables and transmission and distribution capacity," the authors wrote, "the fully loaded unit cost of electricity production, accounting for operating costs, capital costs, and depreciation of new and existing assets ... could rise about 25% from 2020 until 2040, and still be about 20% higher in 2050 on average globally. Cost increases in the near term could be significantly higher than those estimated here, for example, if grid intermittency issues are not well managed. The delivered cost could also fall below 2020 levels over time because of the lower operating cost of renewables--provided that power producers build flexible, reliable and low-cost grids."

The McKinsey consultants emphasized that this was not a projection or a prediction and they did not claim it is comprehensive. Rather, it was the simulation of one hypothetical, relatively orderly path toward 1.5 degrees Celsius using the Net Zero 2050 scenario developed by the Network for Greening the Financial System (NGFS), "to provide an order-of-magnitude estimate of the economic transformation and societal adjustments associated with net-zero transition."

The Net-Zero Transition: What it Would Cost, What it Could Bring noted that sectors with high emissions products or operations--which generate about one-fifth of global gross domestic product (GDP)--would face "substantial effects on demand, production costs and employment." Specifically, the report said achieving net-zero by 2050 meant coal production for energy use would nearly end by mid-century, oil production volumes would drop 55% and natural gas volumes would plummet 70% from current usage levels. Process changes would increase production costs in other sectors, with steel and cement facing increases by 2050 of about 30% to 45%, respectively.

However, as the world moved to electrify, demand for electricity could more than double from today's level.

The report noted that consumers would not be spared from the cost increases and lifestyle disruptions brought about by the march to net-zero. Outlays for electricity would increase, at least in the near term, which would place an added burden on those least able to afford higher power prices. But a net-zero world also could mean less beef and lamb, and more chicken, on the dinner table, as raising beef and lamb emits more GHGs than raising chickens.

But the up-front capital costs incurred by transitioning companies could be partly offset by lower operating costs, which could benefit consumers. For example, the report noted that the total cost of ownership for electric vehicles (EVs) is expected to be lower than internal-combustion engine (ICE) vehicles in most regions by 2025.

The costs outlined by the McKinsey consultants, as significant as they are, were calculated assuming an "orderly," well-managed global transition to net-zero by 2050. In a disorderly, disjointed transition, they warned, costs and dislocations could be higher still.

"Even under a relatively gradual transition," the author wrote, "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."

The report commented that for all the costs and risks of a transition to net-zero, significant economic opportunities could be created--such as "new low-emissions products, support services and their supply chains"--as well as reducing the probability of "the most catastrophic impacts of climate change."

Swiss Re Institute, the research arm of Swiss Reinsurance Company Limited (Zurich, Switzerland) issued a report last year that laid out the potential economic consequences of taking no action to mitigate climate change. The report said if no mitigating action were taken, global temperatures could rise by more than 3 degrees Celsius and the world economy could shrink by 18% in the next 30 years. Lesser impacts of between 11% and 14% would occur if some or further mitigation actions were taken, the report said.

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