McKinsey: Net-zero transition will cost $275 trillion globally by 2050

The net-zero transition will cost $275 trillion globally by 2050 as low-emission activities are ramped up and high-emissions activities decrease, according to a new report from consultancy McKinsey & Company.

The increase in capital spending on physical assets for energy and land-use equates to an average $9.2tn per year or an increase of $3.5tn on today’s annual spending, McKinsey found in its latest study: The net-zero transition: What it would cost, what it could bring.

The transition will also lead to extensive labour reallocations, with about 200 million direct and indirect jobs added to the labour market by 2050, making up for the 185 million positions lost over the same period, the report found, which assessed sectors that produce 85 per cent of overall emissions, with a detailed assessment of 69 countries.

“The net-zero transition will amount to a massive economic transformation,” said Mekala Krishnan, a partner at the McKinsey Global Institute and lead author of the report.

“Actions by individual companies and governments, along with coordinated support for more vulnerable sectors, countries, and communities, would facilitate the economic and societal adjustments that will be required.”

The $3.5tn increase in spending is equivalent to half of global corporate profits in 2020, one-quarter of total tax revenue or 7 per cent of household spending in the same year, according to McKinsey.

While today 65 per cent of energy and land spending goes to high-emissions products, in the future this trend would reverse with 70 per cent going to low-emissions products and enabling infrastructure.

“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 $1tn,” McKinsey added.

The spending shift would also be front-loaded, the report found, rising to 8.8 per cent of global gross domestic product today to as much as 6.8 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 and should not simply be viewed as costs, McKinsey said,

“Moreover, technological innovation could reduce capital costs for net-zero technologies faster than expected," the company added.

While the effects of the transition will be felt globally and sector-wide, the impact will be uneven with the sectors most exposed set to be those working with high-emissions products or operations.

Lower-income countries and those with large fossil fuel resources will also be heavily hit, along with communities whose local economies depend on exposed sectors.

The most exposed sectors currently account for about 20 per cent of global GDP, with another 10 per cent of GDP is in sectors whose supply chains have high emissions, such as construction.

Meanwhile, low-income households across the globe would be disproportionately affected, due to upfront costs associated with buying new heaters or electric cars.

Last week, research company Wood Mackenzie warned that an accelerated energy transition to mitigate climate risk could shave $75tn off global GDP between 2022 and 2050 as countries push to meet their climate commitments.

The global economy is set to double in size in real terms, rising to $169tn by mid-century from the current $85.6tn, Wood Mackenzie said, adding that it expects temperatures to reach 2.5-2.7°C above pre-industrial levels by mid-century.

The energy transition must accelerate to cap levels at the 1.5°C agreed in the Paris Climate Accord, but while measures to lower temperature will boost global GDP, on aggregate, by 1.6 per cent by 2050, the actions required could slash output by 3.6 per cent, leading to a net drop of about 2 per cent by 2050.

McKinsey said that a poorly managed transition comes with risks, such as energy supply shortages and price increases, particularly if the shift to net zero is delayed or abrupt, which could lead to "asset stranding and worker dislocations".

A well-co-ordinated transition. on the other hand. could deliver long-term rewards, such as a decline in energy costs, improved health outcomes, and natural capital conservation.

Areas for growth would be more efficient operations from decarbonisation and the creation of new markets for low emissions goods, but most importantly, reaching net-zero emissions and limiting warming to 1.5°C " would prevent the most catastrophic impacts of climate change".

“A more orderly transition would not only avoid the worst impacts of climate change, but also have enormous benefits such as lower energy and production costs in the longer run,” said Hamid Samandari, a McKinsey senior partner.

“And the unity of intent and action it will require bodes well for solving other global problems. At the same time, the short-term risks of a poorly-thought transition must be reckoned with.”

Ultimately, the net-zero transition will depend on the engagement of businesses, governments, institutions and individuals across the globe, McKinsey said, with “a wholesale shift in mindset” required.

“The question now is whether the world can act boldly and broaden the response and investment needed in the upcoming decade," said Dickon Pinner, senior partner at McKinsey and co-leader of McKinsey Sustainability.