McKinsey: $9trn needed annually to deliver global net-zero transition

A new report looking at the potential disruption caused by the ongoing net-zero transition has claimed that delivering climate-aligned decarbonisation across countries could deliver a net gain in jobs, if corporates, investors and governments can raise efforts over a decade that will "decide the nature of the transition".

McKinsey: $9trn needed annually to deliver global net-zero transition

The warnings arrive a little over two months out from COP28 in Dubai

The research from McKinsey was published today (25 January) and examined the sectors that are accountable for 85% of all emissions across 69 nations. The report examines how demand, spending and jobs would change in order to reach net-zero.

Research from the consultancy found that the world will face unparalleled changes as countries forge ahead with timebound commitments to reach net-zero emissions by 2050 at the latest, in line with climate science.

The report claims that, between 2021 and 2050, capital expenditure on assets for energy and land-use systems tailored towards net-zero would reach $275trn and around $9.2trn annually, almost three times greater than the current annual spend. An additional 1trn on today’s annual spending would also need to be relocated from high-emitting sectors to new low-carbon assets. McKinsey starts that this increase is equivalent to half of the recorded profits from corporates globally in 2020.

This spending, the report claims, would need to be front-loaded to deliver drastic levels of decarbonisation. It would need to rise from 6.8% of GDP today to 8.8% between 2026 and 2030, as which point it starts to fall. While these spending requirements are large, McKinsey believes they will have “favourable return profiles”.

“The rewards of the net-zero transition would far exceed the mere avoidance of the substantial, and possibly catastrophic, dislocations that would result from unabated climate change, or the considerable benefits they entail in natural capital conservation. Besides the immediate economic opportunities they create, they open up clear possibilities to solve global challenges in both physical and governance-related terms. These include the potential for a long-term decline in energy costs that would help solve many other resource issues and lead to a palpably more prosperous global economy,” the report states.

“More importantly, they presage decisive solutions to age-old global economic and political challenges as the result of the unprecedented pace and scale of global collaboration that such a transition would have required. And while the immediate tasks ahead may seem daunting, human ingenuity can ultimately solve the net-zero equation, just as it has solved other seemingly intractable problems over the past 10,000 years. 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.”

On the road to net-zero, McKinsey states that electricity production costs would increase in the near-term, but as new renewables capacity and transition mechanisms come online it would eventually fall. Indeed, when accounting for operating and capital costs, and depreciation, the cost of electricity could increase by 25% up to 2040 and still be about 20% higher than current levels in 2050.

Just transition

Key to reducing these costs is reallocating spending and job opportunities from high-emitting sectors to low-carbon markets.

The report states that high-emission products and operations currently generate around 20% of global GDP and this would need to be realigned with net-zero. The transition, the report states, could result “in a gain of about 200 million and a loss of about 185 million direct and indirect jobs globally by 2050”.

Renewables will create demand for around eight million direct jobs by 2050, but trends like automation will also open up more job opportunities. The report does state that “displaced” workers will need support through training and reskilling.

There will also be some imbalances based on geographical location. McKinsey states that 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. Even developed countries that rely on fossil fuel extraction would face uneven disruption.

Additionally, consumers may face additional up-front capital costs in the near-term which could disproportionately impact lower-income households.

Earlier in the year, McKinsey, which is one of the world’s largest consultancies, proclaimed that global fossil fuel demand could peak by 2027.

According to the report, global energy demand is not likely to reach pre-Covid-19 levels for at least another year – four years at most. The demand for electricity and gas will rebound more rapidly than oil, a sector which was already reckoning with the prospect of degrowth due to tightening climate legislation.

Moreover, aggregate fossil fuel demand is likely to peak in 2027. McKinsey’s previous iterations of the report had flagged dates in the 2030s, but this version is the first since Covid-19 was declared a pandemic by the WHO.

In the latest report, McKinsey argues that oil and gas production volumes will be around 55% and 70% lower than today’s levels.

Matt Mace

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