I have been providing extracts from the recent McKinsey report in two posts recently,

My first post was  explaining their scenario limitations with the message “we 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.”

Then the second post was to re-produce and show their summary of costs and outcomes.

I did not make any personal comments in these two posts, I found the report difficult to comprehend and have been hoping someone far more qualified could provide a view to add or to challenge this report view

I personally found the costs absolutely staggering. I find the disruption frightening. So, we face significant electricity price increases and uncertainties of continuity of supply, very limited job gains over job destructions, whole industries and supply chains wiped out, steel and cement price increases of 30 to 45%, investment inequality even more.

The way McKinsey has phrased this does need deeper clarity. The point is they highlight the effect of the additional $3.5 trillion, their view of the additional amounts we need to spend on achieving Net-zero, not the predicted total spend of $9.2 trillion needed each year. To put this increase in comparative terms, the $3.5 trillion is approximately equivalent, in 2020, to half of global corporate profits, one-quarter of total tax revenue, and 7 per cent of household spending. YIKES! That is of a magnitude that is way beyond me to comprehend. For Real?

Seriously, do any of the energy experts here in Energy Central contributors recognize this as the future conversation in the boardrooms or public institutions? Now if we have a disorderly transition it gets worse.

Today I was reading a reply to this McKinsey report by Karl Burkart, Managing Director One Earth, formerly DiCaprio Foundation Dir. Science & Technology.

I reproduce this here as it challenges the work of McKinsey significantly and gives me a better framing of my concerns and shock.

No McKinsey, it will not cost $9 trillion per year to solve climate change.

1. The real cost of the energy transition is lost in the headline.
Top line, the report puts the total cost of a net zero aligned global energy transition at $275 trillion over 30 years, $3.5T more per year than we spend today. But deeper inside the report, we find that this is a misrepresentation. Business as Usual (BAU) would cost $250 trillion. So based on McKinsey’s own analysis, the real incremental cost is less than $1T per year in additional investments. And to be clear, this is before counting the rapidly rising costs of climate-related disasters (floods, fire, famine) and deaths.

2. The model does not account for rapidly accelerating innovation in clean energy.
The McKinsey analysis uses a model by Network for Greening the Financial System (NGFS), and like most Integrated Assessment Models, it assumes the continuity of our current fossil-fuel dependent energy system, despite a “cambrian explosion” of innovation in the clean energy sector. In reality, rapidly falling costs of clean technologies combined with the existential threat of the climate crisis will drive further innovation and economies of scale. A recent model published by Oxford’s Institute of New Economic Thinking (INET) offers a more realistic approach to modeling anticipated disruptions in the energy system, finding savings from the clean energy transition in the range of $14–26 trillion (PDF).

3. Like other conventional models, this one vastly underestimates the growth of solar and wind deployment.
Like a lot of mainstream energy modeling, this one is almost comical in its estimations of the pace of renewable energy adoption. For example, NGFS assumes 20 PWh of solar in 2050. This is half the level that the leading (and quite conservative) energy research firm Rystad forecasts. According to NGFS, the growth rate of solar would have to slow down from today’s level — from about 25% annual growth today to around 10% in annual growth. This one modeling decision makes a huge difference. Low growth in solar means you would need more carbon capture and storage (CCS) to remove fossil fuel emissions, and this significantly raises the total transition price tag.

4. Like other conventional models, this one vastly overestimates the costs of solar and wind deployment.
Despite the continued drop in renewable energy costs, McKinsey still seems to think that delivered electricity costs from renewables in 2050 will be 25% higher than they are today! Their justification for adding a huge premium on solar and wind is to account for higher grid integration costs, based on the assumption that there will be no innovation in the transmission or storage of intermittent renewables. This argument is old and has been largely debunked. For example, it was recently determined that the U.S. electricity grid can handle as much as 80% renewables with almost no enhancements. Getting to 100% will require additional upgrades but these are already underway — high voltage lines, smart grid technologies, sophisticated utility storage systems, computer-optimized load balancing, wind and solar shedding, distributed urban solar arrays, and many other strategies make getting to 100% renewable power entirely feasible.

5. The report fails to disclose pricing models for key renewable technologies.
Given that renewable energy deployment of solar, wind, geothermal, and green hydrogen is the world’s primary instrument of change in the transition to net zero emissions by mid-century, it certainly would be helpful if McKinsey disclosed how they have chosen to model the cost of deployment over time in their analysis. It’s likely they are not incorporating any benefits of scale or policy incentives that will reduce future deployment costs, even though all evidence points to declining, not increasing, costs. Oxford’s INET paper projects a continuation in the trend of declining costs, as do other models: IRENA, BloombergNEF, ETC, APCAG.

Even the IEA, which has historically been extremely conservative about the role of renewable energy, is now jumping on the bandwagon in their new Net Zero by 2050 roadmap. When the Paris Agreement was signed in 2015, the IEA thought the cost of solar electricity in 2040 would still be higher than that of electricity from fossil fuels, and expected deployment of only a cumulative 360 GW of solar by 2020. Just five years later, BloombergNEF finds that 90% of new electricity generation from renewables was cheaper than from fossil fuels, and 710 GW of solar was deployed. Battery prices have fallen even faster, halving from 2015–2020 and sparking a four-fold increase in deployment. McKinsey should be transparent about how and why they are modeling renewable costs in light of these developments.

6. McKinsey seems to have forgotten about fossil fuel rents.
This is surprising given McKinsey’s expansive knowledge about extractive industries and expertise from decades advising the fossil fuel industry. Our current fossil fuel system involves paying rent to fossil fuel producers beyond operating expenses and capital expenditures (CAPEX). Today, these rents amount to about $2T per year. These costs are not captured if you only model CAPEX. Adding rental costs, even with the McKinsey model, you would basically spend $1T on clean energy to save $2T on fossil fuel rents. And it’s likely rents will go up, increasing net savings from a renewable energy transition. For example, in the U.S. there is now a big push to eliminate the huge discounts on rents currently provided (they’re still at 1980s levels), thereby increasing the cost of fossil fuel extraction and the ROI for renewable energy investments.

7. The report is pessimistic in nature, highlighting the downside of the transition away from fossil fuels.
The McKinsey report seem overly focused on the loss of revenues for countries that are heavily reliant upon the fossil fuel industry for their GDP. It’s true that a lot of governments (and investors) highly exposed to the fossil fuel industry will be big losers over the coming years. But they have a choice. Transitioning to renewables will provide a huge economic advantage to the countries that move the quickest. These will come in the form of a large net increase in long-term jobs, far less volatility in energy markets, fast and cheap energy access for rural areas that currently lack grid connectivity, less oil spills and contaminated water from fracking operations, less deaths from poor air quality, a safer and healthier climate with less risk of environmental disasters, and on and on. All thing considered, countries have a lot more to gain than to lose, and many are now waking up to the large net benefits a renewable energy transition will deliver.

Kingsmill Bond, now at Rocky Mountain Institute, says it well: “There is now a new logic to the energy transition — the pursuit of gain. The shift of energy from scarce to abundant; from concentrated to distributed; from decreasing to increasing returns; from extraction by the lucky to manufacturing by the diligent; and from generating rents for a few to bringing prosperity for the many”.

8. The NGFS model used by McKinsey is not actually net zero by 2050.
A final point to make is that the model used as the basis for the McKinsey report does not actually deliver net zero by 2050:

It shows an 82% drop in actual CO2 emissions to roughly 7 GtCO2 per year in 2050 with 5 GtCO2 in carbon dioxide removal. In Glasgow, the Science Based Targets Initiative (SBTi) released a long-awaited standard for net zero emissions on the heels of the IPCC’s Sixth Assessment Report, calling for a 90–95% reduction in actual CO2 emissions by 2050, with the balance of emissions “neutralized” through carbon dioxide removal. The above NGFS model is +2 GtCO2 in 2050. It sounds like a small amount, but if we are to have at least a 50% chance of limiting global temperature rise to 1.5°C, there is almost no leeway room. The other issue is how those negative emissions are achieved. The NGFS model achieves its carbon removal using the controversial technology called Bioenergy with Carbon Capture and Storage (BECCS). A lot has been published on the limits of this technology to scale. At best, BECCS delivers carbon neutral energy, not carbon-negative energy. It would also require a huge amount of logging to reach anything like 5 GtCO2 per year. And those trees are needed for other services like timber and pulp, not to mention their role in global carbon sequestration.

As it turns out, shifting more quickly to 100% renewable energy will be a cheaper and more efficient way to get to actual net zero emissions by 2050, accompanied by carbon removal from reforestation and ecosystem restoration. One Earth has supported the work of a team of engineers and scientists who have estimated that a rapid, optimized energy transition will cost in the ballpark of about $1.5T per year. Why don’t we all start focusing on transition models that honestly seek to solve the problem of the climate crisis, rather than the problem of preserving profits for fossil fuel companies in a world that no longer wants the products they have on offer?

Written by Karl Burkart, Managing Director One Earth, formerly DiCaprio Foundation Dir. Science & Technology.