January 2022 Copyright c McKinsey & Company

In a very extensive report, “the Net-zero transition in what it will cost and what it can bring,” running to 224 pages.

This report is produced by McKinsey Global Institute in collaboration with McKinsey Sustainability and McKinsey’s Global Energy & Materials and Advanced Industries Practices and published in January 2022.

McKinsey outlines the Net-zero transition in one scenario-based analysis that provides sobering but terrific value to thinking through all that is required in the net-zero transition being attempted.

I have taken here in this post parts of their preface, executive summary and in a second post their “in brief” to amplify this work and provide the outcomes. I have not added any views, thoughts, or comments. The only change I made was replacing “we” when referring to themselves in this report with “McKinsey”.McKinsey, by producing this report, nonetheless hope that this scenario-based analysis will help decision-makers refine their understanding of the nature and the magnitude of the changes the net-zero transition would entail and the scale of response needed to manage it. They also hope that their attempts to describe as accurately as they can the challenges that lie ahead are seen as what they are: a call for more thoughtful and more decisive action, urgency, and resolve.

Their preface to the work

More than 10,000 years of continuous and accelerating progress have brought human civilization to the point of threatening the very condition that made that progress possible: the stability of the earth’s climate. The physical manifestations of a changing climate are increasingly visible across the globe, as are their socioeconomic impacts. Both will continue to grow, most likely in a nonlinear way, until the world transitions to a net-zero economy, and unless it adapts to a changing climate in the meantime. No wonder, then, that an ever-greater number of governments and companies are committing to accelerate climate action.

We are faced with today’s reality of greenhouse gas emissions continuing unabated and are not counterbalanced by removals, nor is the world prepared to complete the net-zero transition. Indeed, even if all net-zero commitments and national climate pledges were fulfilled, research suggests that warming would not be held to 1.5°C above preindustrial levels, increasing the odds of initiating the most catastrophic impacts of climate change, including the risk of biotic feedback loops. Moreover, most of these commitments have yet to be backed by detailed plans or executed. Nor would execution be easy: solving the net-zero equation cannot be divorced from pursuing economic development and inclusive growth.

None of these challenges should come as a surprise.

Achieving net-zero would mean a fundamental transformation of the world economy, as it would require significant changes to the seven energy and land-use systems that produce the world’s emissions: power, industry, mobility, buildings, agriculture, forestry and other land use, and waste.

This means addressing dozens of complex questions, including what is the appropriate mix of technologies that need to be deployed to achieve emissions reductions while staying within a carbon budget, limiting costs, and delivering required standards of performance?

What levels of spending on physical assets would the transition require? Who would pay for the transition? How would the transition affect companies’ markets and operations? What would it spell for workers and consumers? What opportunities and risks would it create for companies and countries? And how could consumers be encouraged to make changes to consumption and spending habits that will be necessary to ensure the transition?

In this report, McKinsey attempt to answer some of these questions, namely, those pertaining to the economic and societal adjustments. McKinsey provides estimates of the economic changes that would take place in a net-zero transition consistent with 1.5°C of warming.

This report is a first-order analysis of a hypothetical 1.5°C scenario. As such, it has several limitations.

First, it is not clear whether a 1.5°C scenario is achievable in the first place, nor what pathway the world would take to achieve it if it were. Indeed, some believe that 1.5°C is already out of reach, given the current trajectory of emissions and their potential to activate climatic feedback loops, as well as prevailing challenges with revamping energy and land-use systems. This research does not take a position on such questions. Instead, it seeks to demonstrate the economic shifts that would need to take place if the goal of 1.5 degrees is to be attained through a relatively orderly transition between now and 2050.

Second, this report is by nature and necessity limited in its scope. In particular, it does not focus on such issues as technology breakthroughs, physical constraints related to scaleup capacity and the availability of natural resources, delayed-transition costs, the role of adaptation, or other imponderables or uncertainties, nor have we yet modelled the full range of economic outcomes likely under a net-zero transition. As a result, it is likely that real outcomes will diverge from these estimates, particularly if the net-zero transition takes a more disorderly path or restricting warming to 1.5°C proves unachievable. Spending requirements could be higher, for example, due to the additional investment needed to maintain flexibility and redundancy in energy systems or heightened physical risks and commensurate adaptation costs.

Third, this report does not explore the critical question of who pays for the transition. What is clear is that the transition will require collective and global action, particularly as the burdens of the transition would not be evenly felt. The prevailing notion of enlightened self-interest alone is unlikely to be sufficient to help achieve net zero, and the transition would challenge traditional orthodoxies and require unity, resolve, and ingenuity from leaders.

McKinsey, by producing this report, nonetheless hope that the scenario-based analysis will help decision-makers refine their understanding of the nature and the magnitude of the changes the net-zero transition would entail and the scale of response needed to manage it. We also hope that McKinsey’s attempts to describe as accurately as they can the challenges that lie ahead are seen as what they are: a call for more thoughtful and more decisive action, urgency, and resolve.

Six characteristics of the net-zero transition emerge from the McKinsey scenario-based research:

First, the transition would be universal. Indeed, net-zero emissions can be achieved if and only if all energy and land-use systems that contribute to emissions are decarbonized, as these contributions are significant in all cases. All economic sectors and all countries would need to participate.

Second, the scale of the required economic transformation would be significant. In particular, we estimate that the cumulative capital spending on physical assets for the net-zero transition between 2021 and 2050 would be about $275 trillion. This means that spending would need to rise from about $5.7 trillion today to an annual average of $9.2 trillion through 2050, an increase of $3.5 trillion.

Third, these effects would be front-loaded: spending would need to rise to almost 9 per cent of GDP between 2026 and 2030 from about 7 per cent today before falling. Likewise, we estimate that the delivered cost of electricity (across generation, transmission, distribution, and storage, including operating costs, capital costs, and depreciation of existing and new assets) would rise by about 25 per cent between 2020 and 2040 in the scenario modelled here, before falling from that peak, although this would vary across regions.

Fourth, the transition would be felt unevenly among sectors, geographies, and communities, resulting in greater challenges for some constituencies than others.

Fifth, the transition is laden with short-term risks, even as the transition will help manage long-term physical risks. If poorly managed, it could increase energy prices, with implications for energy access and affordability, especially for lower-income households and regions. It would also have knock-on effects on the economy more broadly. If not well managed, there is a risk that the transition itself would be derailed.

Sixth is that, despite the challenges with making economic and societal adjustments, the transition would give rise to growth opportunities across sectors and geographies—and, critically, it would help avoid the build-up of physical risks.

In my second post, I summarize the costs and what the net-zero transition will bring, based on their scenario.

The net-zero transition: What it would cost, what it could bring by McKinsey

January 2022 Copyright c McKinsey & Company www.mckinsey.com