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Tuesday, 22 February 2022

The cost of reaching net-zero by 2050: USD 275 tn

What a net-zero transition would actually cost the world: Around USD 9.2 tn will need to be spent globally every year until 2050 if the world is to achieve net zero emissions by the middle of the century, according to a report that provides a stark reminder of the scale of the challenge ahead. In its analysis of the Net Zero 2050 scenario, McKinsey estimated that as much as USD 275 tn — equivalent to 7.5% of global GDP — will be required to be invested in physical assets over the next three decades to meet the climate target agreed at the Paris climate summit.

This would amount to nothing less than a complete transformation of how we organize the global economy, from lowering demand for high-emissions products and channeling investment into the green economy, to reorienting the world’s labor markets towards zero-emission activities.

This price tag goes beyond past estimates, which typically only account for necessary energy investments, and instead includes “additional spending categories such as assets that use energy (for example, the full cost of passenger cars and heat pumps), capital expenditures in agriculture and forestry, and some continued spend in high-emissions physical assets like fossil fuel-based vehicles and power assets.”

This isn’t all new spending though: Some of it will be reallocated from high-emissions assets such as coal-fired power plants and standard petroleum-fuelled vehicles, on which governments around the world currently spend USD 3.7 tn each year. McKinsey estimates that around a third of this will need to be redirected towards low-emissions assets.

The transition away from fossil fuels will cost the world 185 mn jobs — and create 200 mn new ones. Job gains are expected to be significant in the green economy, with the most significant change in the job market being the reallocation of jobs. Losses will be seen in jobs in emissions-intensive sectors, agriculture and food.

Demand shifts will change our physical assets: The net-zero transition will retire some physical assets and require the decarbonization / replacement of existing assets, according to the report, which also suggests that spending on physical assets is set to increase by 2050. EVs and fuel cell-electric cars are expected to increase from 5% of new car sales to almost 100% in 2050, increasing costs for consumers in the short run as they acquire new assets, but decreasing the cost of fuel in the long run. Similar shifts will happen in home heating systems and steel plants.

Goods, services and food are set to change: The analysis concludes that there will be shifts in demand for goods and services, with oil and gas production dropping by 55% and 70%, respectively, and coal for energy being almost completely phased out. The change in food systems will result in dietary shifts to low-emissions proteins like poultry. Demand for low-emission energy sources, on the other hand, is expected to double, with hydrogen and biofuel production set to grow 10 times.

Some sectors are going to come under a lot of pressure: The report estimates that companies in the steel and cement industries will see production costs increase by 30% and 45% respectively as CO2-intensive assets are phased out and capital is reallocated to cleaner sectors.

And the cost of power generation is going to up — until 2040: McKinsey expects the cost of generating, distributing and storing energy to rise 25% by 2040 compared to 2020 levels due to the investment needed to expand renewable generation and storage capacity, as well as the ongoing costs of maintaining fossil-fuel based plants. After 2040, operating costs are expected to decline, falling 60% by the middle of the century from 2020 levels.

Managing the transition in an orderly manner is key: The complex transformation required to shift to net-zero contains risks, particularly if it is disorderly. The risks include not having a clear “pathway” for the transition, accounting for necessary adjustments for a successful transition and finally, the natural constraints built into the transition. Shortages and price rises could result if the transition is mismanaged.

Delaying the transition will increase costs and risks: One of the biggest risks of delaying the transition is failing to limit warming to 1.5°C. By setting clear pathways to net-zero emissions, the risks associated with significant and abrupt policy changes are likely to be more manageable, easing job transitions and making it less likely that the transition will adversely affect vulnerable communities.


Your top green economy stories for the week:

  • Lafarge Egypt decreased its energy consumption by 10% (pdf) in 2021 and increased its use of alternative fuels to 20% of total consumption.
  • Energy services firm Baker Hughes is discussing cooperation with the government on adopting low-emission energy tech.

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