The second part of my summary or part-reproduction of the McKinsey report “The Net-zero transition: what it will cost, what it can bring”

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

Within this report, 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 second post, significant parts of their summary, their “in brief,” to amplify this work and show their summary of costs and outcomes. The first post is here. On both, 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 our 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 our attempts to describe as accurately as we can the challenges that lie ahead are seen as what they are: a call for more thoughtful and more decisive action, urgency, and resolve.

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

This research aims to highlight the nature and magnitude of the economic transformation that a net-zero transition would require.

McKinsey finds that the transition would be universal, significant, and front-loaded, with uneven effects on sectors, geographies, and communities, even as it creates growth opportunities:

Capital spending on physical assets for energy and land-use systems in the net-zero transition between 2021 and 2050 would amount to about $275 trillion, or $9.2 trillion per year on average, an annual increase of as much as $3.5 trillion from today. 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. An additional $1 trillion of today’s annual spending would, moreover, need to be reallocated from high-emissions to low-emissions assets. Accounting for expected increases in spending, as incomes and populations grow, as well as for currently legislated transition policies, the required increase in spending would be lower, but still about $1 trillion. The spending would be front-loaded, rising from 6.8 per cent of GDP today to as much as 8.8 per cent of GDP between 2026 and 2030 before falling. While these spending requirements are large and financing has yet to be established, many investments have positive return profiles (even independent of their role in avoiding rising physical risks) and should not be seen as merely costs. Technological innovation could reduce capital costs for net-zero technologies faster than expected.

In this scenario, the global average delivered cost of electricity would increase in the near term but then fall back from that peak, although this would vary across regions. As the power sector builds renewables and transmission and distribution capacity, the fully loaded unit cost of electricity production, accounting for operating costs, capital costs, and depreciation of new and existing assets, in this scenario could rise about 25 per cent from 2020 until 2040 and still be about 20 per cent 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 transition could result in a gain of about 200 million and a loss of about 185 million direct and indirect jobs globally by 2050. This includes demand for jobs in operations and in the construction of physical assets. Demand for jobs in the fossil fuel extraction and production and fossil-based power sectors could be reduced by about nine million and four million direct jobs, respectively, as a result of the transition, while demand for about eight million direct jobs would be created in renewable power, hydrogen, and biofuels by 2050. While important, 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.

While the transition would create opportunities, sectors with high-emissions products or operations—which generate about 20 per cent of global GDP—would face substantial effects on demand, production costs, and employment. In the NGFS Net Zero 2050 scenario, coal production for energy use would nearly end by 2050, and oil and gas production volumes would be about 55 per cent and 70 per cent lower, respectively, than today. Process changes would increase production costs in other sectors, with steel and cement facing increases by 2050 of about 30 and 45 per cent, respectively, in the scenario modelled here. Conversely, some markets for low-carbon products and support services would expand. For example, demand for electricity in 2050 could more than double from today.

Poorer countries and those reliant on fossil fuels are most exposed to the shifts in a net-zero transition, although they have growth prospects as well. These countries are more susceptible to changes in output, capital stock, and employment because exposed sectors make up relatively large parts of their economies. Exposed geographies including sub-Saharan Africa and India would need to invest 1.5 times or more than advanced economies as a share of GDP today to support economic development and build low-carbon infrastructure. The effects within developed economies could be uneven, too; for instance, more than 10 per cent of jobs in 44 US counties are in fossil fuel extraction and refining, fossil fuel-based power, and automotive manufacturing. At the same time, all countries will have growth prospects, from endowments of natural capital such as sunshine and forests, and through their technological and human resources.

Consumers may face additional up-front capital costs and have to spend more in the near term on electricity if cost increases are passed through, and lower-income households everywhere are naturally more at risk. Consumer spending habits may also be affected by decarbonization efforts, including the need to replace goods that burn fossil fuel, like transportation vehicles and home heating systems, and potentially modify diets to reduce high-emissions products like beef and lamb. The up-front capital spending for the net-zero transition could yield lower operating costs over time for consumers. For example, the total cost of ownership for EVs is expected to be lower than ICE cars in most regions by 2025.

Economic shifts could be substantially higher under a disorderly transition, in particular, because of higher-order effects not considered here. The economic and social costs of a delayed or abrupt transition would raise the risk of asset stranding, worker dislocations, and a backlash that delays the transition. Even under a relatively gradual transition, 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.

For all the accompanying costs and risks, the economic adjustments needed to reach net-zero would come with opportunities and prevent further build-up of physical risks. Incremental capital spending on physical assets creates growth opportunities, in connection with new low-emissions products, support services, and their supply chains. Most importantly, reaching net-zero emissions and limiting warming to 1.5°C would reduce the odds of initiating the most catastrophic impacts of climate change, including limiting the risk of biotic feedback loops and preserving our ability to halt additional warming.

Government and business would need to act together with singular unity, resolve, and ingenuity, and extend their planning and investment horizons even as they take immediate actions to manage risks and capture opportunities. Businesses would need to define, execute, and evolve decarbonization and offsetting plans for scope 1 and 2 emissions and potentially expand those plans to include scope 3 emissions, depending on the nature of their operations, and the materiality, feasibility, and need of doing so. Over time, they would need to adjust their business models as conditions change and opportunities arise; integrate climate-related factors into decision-making processes for strategy, finance, and capital planning, among others; and consider leading action with others in their industry or ecosystem of investors, supply chains, customers, and regulators.

Financial institutions in particular have a pivotal role to play in supporting large-scale capital reallocation, even as they manage their own risks and opportunities. Governments and multilateral institutions could use existing and new policy, regulatory, and fiscal tools to establish incentives, support vulnerable stakeholders, and foster collective action.

The pace and scale of the transition mean that many of today’s institutions would need to be revamped and new ones created to disseminate best practices, establish standards and tracking mechanisms, drive capital deployment at scale, manage uneven impacts, and support further coordination of efforts.

To summarize

The goal of their research is to provide stakeholders with an in-depth understanding of the nature and magnitude of the economic and societal adjustments a net-zero transition would entail. Our hope is that this analysis provides leaders with the tools to collectively secure a more orderly transition to net-zero by 2050. The findings serve as a clear call for more thoughtful and decisive action, taken with the utmost urgency.

The key issue is whether the world can muster the requisite boldness and resolve to broaden its response during the upcoming decade that will in all likelihood decide the nature of the transition.

The first post here provides the scenario taken and its limitations to get to these results outlined above.

The report “The net-zero transition: what it would cost, what it could bring” is joint research by McKinsey Sustainability, McKinsey’s Global Energy and Materials Practice, McKinsey’s Advanced Industries Practice, and the McKinsey Global Institute.

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

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