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2023-12-18
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An aordable, reliable,

competitive path to

net zero

November 2023

Authors

Mekala Krishnan

Humayun Tai

Daniel Pacthod

Sven Smit

Tomas Nauclér

Blake Houghton

Jesse Nosinger

Dirk Simon

Editor

Benjamin Plotinsky

Contents

At a glance 2

There has been meaningful

momentum toward net zero 4

Nevertheless, the world is not on

track to reach net zero by 2050 5

A poorly executed transition could

compromise affordability, reliability,

and competitiveness—and slow

progress toward net zero 9

A well-managed transition would

follow seven principles 14

An illustration shows how following

those principles could accelerate

the world’s current trajectory 36

Embracing a change of mindset

can help the world move closer to

its net-zero goals 41

Technical appendix 43

Acknowledgments 46

Cover image: Sam Falconer

All interior images: © Getty Images

McKinsey & Company.

Condential and proprietary. Any

use of this material without specic

permission of McKinsey & Company

is strictly prohibited.

An aordable, reliable, competitive path to net zero

—Though there has been meaningful momentum, the world is not on track to achieve the goal

enshrined in the Paris Agreement of limiting warming to well below 2°C or ideally 1.5°C. To

meet that goal, countries and companies have committed to reaching net-zero emissions of CO2

and reducing emissions of other greenhouse gases. But there has not been enough progress.

The share of primary energy produced by renewable sources, for example, has risen slowly, from

8 percent in 2010 to 12 percent in 2021. If emissions stay on their current trajectory, estimates

from various sources suggest, net zero would not arrive even by the end of the century.

—A successful net-zero transition will require achieving not one objective but four

interdependent ones: emissions reduction, aordability, reliability, and industrial

competitiveness. A poorly executed transition could make energy, materials, and other

products less aordable, compromising economic empowerment. It could also make the supply

of energy and materials less secure and resilient, and it could render some countries and

companies less competitive. If that happened, progress toward net zero itself could stall.

—Our research has found practical ways to address those objectives simultaneously. Seven

principles can help stakeholders successfully navigate the next phase of the transition. For

example, deploying lower-cost solutions and driving down the cost of more expensive ones could

bolster aordability. Managing existing and emerging energy systems in parallel could make

access to energy more reliable. Seeking opportunities by using comparative advantage as a

guide could help countries bolster their competitiveness.

—Following those principles could substantially improve the world’s current trajectory.

We examined the potential implications of applying two principles: deploying more lower-cost

solutions and using R&D and other measures to double the expected rate of cost declines. Our

illustrative analyses found that doing so could substantially improve the current trajectory of

emissions and help limit warming to what the Paris Agreement envisions. Capital spending on

low-emissions technologies would potentially be one and a half to two times as large as it is

now—as opposed to about three times, as might be the case if the two principles were applied

less extensively.

—Embracing a change of mindset can help the world move closer to net zero. In addition to

global commitments to reach net zero in the future, stakeholders should commit to making more

and more progress every year and doing so in a way that addresses all four objectives.

At a glance

2An aordable, reliable, competitive path to net zero

/48

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Anaffordable,reliable,competitivepathtonetzeroAuthorsMekalaKrishnanHumayunTaiDanielPacthodSvenSmitTomasNauclérBlakeHoughtonJesseNoffsingerDirkSimonEditorBenjaminPlotinskyNovember2023ContentsAtaglance2Therehasbeenmeaningfulmomentumtowardnetzero4Nevertheless,theworldisnotontracktoreachnetzeroby20505Apoorlyexecutedtransitioncouldcompromiseaffordability,reliability,andcompetitiveness—andslowprogresstowardnetzero9Awell-managedtransitionwouldfollowsevenprinciples14Anillustrationshowshowfollowingthoseprinciplescouldacceleratetheworld’scurrenttrajectory36Embracingachangeofmindsetcanhelptheworldmoveclosertoitsnet-zerogoals41Coverimage:SamFalconerTechnicalappendix43Allinteriorimages:©GettyImagesAcknowledgments46Copyright©2023McKinsey&Company.Allrightsreserved.Confidentialandproprietary.AnyuseofthismaterialwithoutspecificpermissionofMcKinsey&Companyisstrictlyprohibited.Anaffordable,reliable,competitivepathtonetzeroAtaglance—Thoughtherehasbeenmeaningfulmomentum,theworldisnotontracktoachievethegoalenshrinedintheParisAgreementoflimitingwarmingtowellbelow2°Corideally1.5°C.Tomeetthatgoal,countriesandcompanieshavecommittedtoreachingnet-zeroemissionsofCO2andreducingemissionsofothergreenhousegases.Buttherehasnotbeenenoughprogress.Theshareofprimaryenergyproducedbyrenewablesources,forexample,hasrisenslowly,from8percentin2010to12percentin2021.Ifemissionsstayontheircurrenttrajectory,estimatesfromvarioussourcessuggest,netzerowouldnotarriveevenbytheendofthecentury.—Asuccessfulnet-zerotransitionwillrequireachievingnotoneobjectivebutfourinterdependentones:emissionsreduction,affordability,reliability,andindustrialcompetitiveness.Apoorlyexecutedtransitioncouldmakeenergy,materials,andotherproductslessaffordable,compromisingeconomicempowerment.Itcouldalsomakethesupplyofenergyandmaterialslesssecureandresilient,anditcouldrendersomecountriesandcompanieslesscompetitive.Ifthathappened,progresstowardnetzeroitselfcouldstall.—Ourresearchhasfoundpracticalwaystoaddressthoseobjectivessimultaneously.Sevenprinciplescanhelpstakeholderssuccessfullynavigatethenextphaseofthetransition.Forexample,deployinglower-costsolutionsanddrivingdownthecostofmoreexpensiveonescouldbolsteraffordability.Managingexistingandemergingenergysystemsinparallelcouldmakeaccesstoenergymorereliable.Seekingopportunitiesbyusingcomparativeadvantageasaguidecouldhelpcountriesbolstertheircompetitiveness.—Followingthoseprinciplescouldsubstantiallyimprovetheworld’scurrenttrajectory.Weexaminedthepotentialimplicationsofapplyingtwoprinciples:deployingmorelower-costsolutionsandusingR&Dandothermeasurestodoubletheexpectedrateofcostdeclines.OurillustrativeanalysesfoundthatdoingsocouldsubstantiallyimprovethecurrenttrajectoryofemissionsandhelplimitwarmingtowhattheParisAgreementenvisions.Capitalspendingonlow-emissionstechnologieswouldpotentiallybeoneandahalftotwotimesaslargeasitisnow—asopposedtoaboutthreetimes,asmightbethecaseifthetwoprincipleswereappliedlessextensively.—Embracingachangeofmindsetcanhelptheworldmoveclosertonetzero.Inadditiontoglobalcommitmentstoreachnetzerointhefuture,stakeholdersshouldcommittomakingmoreandmoreprogresseveryyearanddoingsoinawaythataddressesallfourobjectives.Anaffordable,reliable,competitivepathtonetzero2IntroductionToday,theworldisundertakingthenet-zerotransition,anambitiousefforttoreachnet-zeroemissionsofCO2andreduceemissionsofothergreenhousegases(GHGs).ThegoalofthetransitionisoutlinedintheParisAgreementadoptedattheUnitedNationsin2015:tolimitglobalwarmingabovepreindustriallevelstowellbelow2.0°C,andideallyto1.5°C.Doingsowouldreducetheoddsofinitiatingthemostcatastrophicimpactsofclimatechange.1AccordingtotheIntergovernmentalPanelonClimateChange(IPCC),limitingwarmingto1.5°CwouldrequirereducingGHGemissionsby43percentbetween2019and2030andcuttingnetemissionsofCO2tozerobyaround2050.2ButtheefforttomeetthegoalsoftheParisAgreementisnotcurrentlyontrack,asarecentreportfromtheUnitedNationsshows.3Manypublicandprivateactors,aspiringtomeetthosegoals,areworkingtousherinthetransition’snextphase,oneinwhichmorecapitalflowstowardthetransitionandthedeploymentofnecessarytechnologiesexpandssubstantially.Often,thetransitionisenvisionedasasinglegreatchallenge:reducingemissionsfromenergy,materials,andland-useandothersystems.Inpractice,itconsistsoffourobjectives:emissionsreduction,affordability,reliability,andindustrialcompetitiveness.4Ifachievingthefirstofthoseobjectivesriskscompromisingtheotherthree,momentumtowardnetzerocouldbederailed.Inthisreport,weoutlineprinciplesthatcanguidestakeholdersinaddressingallfourobjectivessimultaneously—andevenhelpacceleratetheprogressofthetransition.51SeeGlobalwarmingof1.5°C,IntergovernmentalPanelonClimateChange(IPCC),2018.2Climatechange2022:Mitigationofclimatechange,IPCC,2022.3SeeTechnicaldialogueofthefirstglobalstocktake:Synthesisreportbytheco-facilitatorsonthetechnicaldialogue,UnitedNationsFrameworkConventiononClimateChange,September2023.4Affordabilityisaparticularlyimportantpriority.RecentresearchfromtheMcKinseyGlobalInstitute(MGI)hasfoundthat4.7billionpeoplearenotyeteconomicallyempowered—thatis,theycannotmeetessentialneedsandbegintoachievefinancialsecurity.Fordetails,includingmoreaboutthatdefinitionofeconomicempowerment,seeFrompovertytoempowerment:Raisingthebarforsustainableandinclusivegrowth,McKinseyGlobalInstitute,September2023.5Thisresearchfocusesonthenet-zerotransition.Adaptationtoclimatechangeisanotherimportantpartoftheclimateagenda.ThesubjectisoutsidethescopeofthisreportbutwillbeexploredinupcomingresearchbyMGI.Anaffordable,reliable,competitivepathtonetzero3TherehasbeenmeaningfulmomentumtowardnetzeroTheworldhasmadeheadwayinreducingemissions.Today,net-zerocommitmentshavebeenmadebymorethan8,000companiesandbycountriesrepresenting90percentofglobalGDP;also,150countrieshavepledgedtoreducemethaneemissions.6Climatepolicyandlegislationhavebecomeincreasinglyambitious.Andcallsaregrowingtokeepthetransitionfromdisproportionatelyaffectingthedevelopingworldandvulnerablecommunities.7Thegoodnewsisnotlimitedtocommitmentsandlaws;solid,measurableprogressisbeingmadeaswell.Innovationhasmademanynewtechnologiesmoreviable.Forexample,solarpowerandwindpoweraccountformorethan10percentofelectricitygenerationand75percentofnewelectricity-generatingcapacity.8Electricvehicles(EVs)makeupabout15percentofnewvehiclesales,andtherangeoftheaverageEVhasincreasednearlythreetimesduringthepastdecade.9Large-scaleplantsarebeingbuiltforsuchnewertechnologiesaslow-emissionssteelproductionandcarboncapture,utilization,andstorage(CCUS).Businessesarestartingtoreallocateresourcesfromhigh-emissionstolow-emissionsproducts.10Climate-relatedventurecapitalinvestmentsreached$70billionin2022,almostdoublethe2021amount.11Theglobalfinancialsectorisstrengtheningitsresponsetoclimatechange;annualglobalinvestmentintransitiontechnologieshasdoubled,from$660billionin2015tomorethan$1trilliontoday.12Andnewmarketinstruments,suchasadvancemarketcommitments,areemergingtospurinnovation.136“Racetozerocampaign,”UnitedNationsFrameworkConventiononClimateChange,2023;”Dataexplorer,”NetZeroTracker,2023;“Globalmethanepledge:Frommomenttomomentum,”USDepartmentofState,November2022.7Forexample,see“UNCTADurgeschannellingnet-zerofinancetosupporttheenergytransitionindevelopingeconomies,”UnitedNationsConferenceonTradeandDevelopment,October17,2023.8“Growthinrenewablesachieveddespiteenergycrisis,”InternationalRenewableEnergyAgency,March2023;and“Renewables,”InternationalEnergyAgency,July2023.9“Electricvehicles,”InternationalEnergyAgency,July2023;andGlobalEVoutlook2022,InternationalEnergyAgency,May2022.10RobBland,AnnaGranskog,andTomasNauclér,“Acceleratingtowardnetzero:Thegreenbusinessbuildingopportunity,”McKinsey&Company,June2022.11“Defyinggravity,2022climatetechVCfundingtotals$70.1B,up89%on2021,”HolonIQ,January3,2023.12Globallandscapeofrenewableenergyfinance2023,InternationalRenewableEnergyAgencyandClimatePolicyInitiative,2023.13Forexample,FrontierClimatehasalreadyhelpedputinplaceprepurchaseagreementsforCO2removalsthatwill,oncethetechnologiesaredeveloped,removemorethan200,000tonsofCO2emissions.Anaffordable,reliable,competitivepathtonetzero4Nevertheless,theworldisnotontracktoreachnetzeroby2050Despiteallthatgoodnews,numerousestimates,includingarecentonefromtheUnitedNations,showthatemissionsarenotontracktoreachnetzeroemissionsofCO2by2050—which,mostestimatessuggest,wouldbeneededtolimitwarmingto1.5°C.14Weexamined23“currentpolicy”scenariosfromtheIPCC,McKinsey’sGlobalenergyperspective2023,theNetworkforGreeningtheFinancialSystem(NGFS),andtheInternationalEnergyAgency(IEA).15InnoneofthescenariosdoglobalemissionsofCO2reachnetzero,evenbytheendofthecentury(Exhibit1).IntheIPCCscenarios,themedianlevelofwarmingbytheendofthecenturyis2.9°C,andinthemorerecentMcKinsey,NGFS,andIEAscenarios,itis2.3°C,2.8°C,and2.4°C,respectively.1614Technicaldialogueofthefirstglobalstocktake:Synthesisreportbytheco-facilitatorsonthetechnicaldialogue,UnitedNationsFrameworkConventiononClimateChange,September2023.TheIPCChasfoundthattolimitglobalwarmingto1.5°Cwithnoorlimitedovershoot(withagreaterthan50percentprobability),GHGemissionswouldhavetobereducedby43percentby2030andcarbondioxideemissionsbyabout100percentby2050inrelationtomodeled2019emissionslevels.(Eachofthosevaluesisthemedianoftheestimatesinvariousscenarios.)SeeClimatechange2022:Mitigationofclimatechange,IPCC,2022.15See“AR6ScenarioExplorerandDatabasehostedbyIIASA,”InternationalInstituteforAppliedSystemsAnalysis,2022;Globalenergyperspective2023,McKinsey&Company,October2023;NGFSclimatescenariosforcentralbanksandsupervisors—PhaseIV,NetworkforGreeningtheFinancialSystem,November2023;andWorldenergyoutlook2023,InternationalEnergyAgency,October2023.16TheIPCCscenariosrepresentpoliciesasof2020.TheMcKinsey,NGFS,andIEAscenariosrepresentmorerecentpolicies.OtherresearchbytheIPCC,reportingthemedianofwarmingoutcomesin29scenarios,hasfoundthatwarmingbytheendofthecenturycouldreach3.2°Cabovepreindustriallevels.SeeClimatechange2023synthesisreport,IPCC,2023.Anaffordable,reliable,competitivepathtonetzero5Exhibit1Awiderangeofscenariosshowsthatiftheworldstaysonitscurrenttrajectory,netzerowillnotarriveduringthiscentury.GlobalCO₂emissionsbyscenario,¹metricgigatonsProjectedwarmingabovepreindustriallevels,ºC1.52.0to<2.52.5to<3.03.03.590ActualProjected80Rangeofcurrentpolicy70scenarios60IEAStatedPolicies(Worldenergy50outlook2023)40NGFSCurrent30Policies(PhaseIV)20McKinsey10Net-zeroGEPCurrentTrajectoryscenarios(Globalenergyperspective2023)0NGFSNetZero–10202020302040205020602070208020902100(PhaseIV)2010IEANet-ZeroEmissionsby2050(Worldenergyoutlook2023)Note:Eachlineinthechart,otherthanIEANet-ZeroEmissionsby2050(Worldenergyoutlook2023)andNGFSNetZero(PhaseIV),correspondstoacurrentpolicyscenario—thatis,ascenariothattriestoshowwhatwillhappenunderpoliciesimplementedasof2020orlaterandwithexpectedimprovementsinlow-emissionstechnologies.Unlabeledlinesrepresentscenariosidentifiedas“implementedpolicies”intheIntergovernmentalPanelonClimateChange’sSixthAssessmentReport.IntheIEAscenarios,weaddedemissionsfromagriculture,forestry,andotherlanduse,usingtheIEA’sstatedassumptionsforeachofthosescenarios.¹NetemissionsofCO₂fromenergy,materials,land-use,andothersystems.Source:PubliclyavailabledatafromInternationalEnergyAgency(IEA),NetworkforGreeningtheFinancialSystem(NGFS)PhaseIV,and“AR6ScenarioExplorerandDatabasehostedbyIIASA,”InternationalInstituteforAppliedSystemsAnalysis,2022;McKinsey’sGlobalenergyperspective2023(GEP);McKinseyanalysisMcKinsey&CompanyOnereasonthenet-zerotransitionhasbeenslowerthanhopedisitsunprecedentedcomplexity.Itcallsfortransformingnotonlyenergysystemsbutalsomaterials,land-use,andothersystems—inshort,theglobaleconomy—anddoingsoinacoordinatedandintegratedway(Exhibit2).17TosuccessfullymeettheglobalgoalsenshrinedintheParisAgreementwillrequireavastincreaseintotalcapitalspenteachyear,from$5.7trillionspentonlow-andhigh-emissionstechnologies17SeeThenet-zerotransition:Whatitwouldcost,whatitcouldbring,McKinseyGlobalInstitute,January2022.Anaffordable,reliable,competitivepathtonetzero6Exhibit2Thetransitioncallsfortransformingtheenergy,materials,land-use,andothersystemsthatemitgreenhousegases.Waste4Forestryandotherlanduse8rsystemsEnergyandIndustryothema32AgricultureLand-usesystems12andterialsBuildingsShareof5globalannualCO₂eemissions,2019,¹%Transportation15Power24Note:Industryincludesemissionsfromindustrialprocessesforcement,chemicals,metals,andmining,aswellasoilandgasprocessessuchasupstreamprocesses,refining,andpipelinetransportation.Powerincludesemissionsfromelectricitygenerationandheatgeneration.Transportationincludesemissionsfromroadvehicles,rail,aviation,andmaritimetransportation.Buildingsincludesemissionsfromcookingandheatingincommercialandresidentialbuildings.Agricultureincludescropresidues,entericfermentation,fishing,manure,on-farmenergyuse,rice,andsyntheticfertilizers.Forestryandotherlanduseincludesemissionsfromdrainedorganicsoils,netforestconversion(theanthropogenicconversionofsittingforestlandtootherlandusesorviceversa),firesinorganicsoils,andfiresinhumidtropicalforests.Itdoesnotincludeemissionsfromotherforestfires(inunmanagedlands),whichrepresentroughly0.2metricgigatonofGHGemissions.Italsodoesnotincludenegativeemissionsfromexistingforestland,whichrepresentaCO₂sinkofapproximately2.6metricgigatons.Wasteincludesemissionsfromthebiologicaltreatmentofsolidwaste,solidwastedisposal,wastewatertreatmentanddischarge,andtheincinerationoropenburningofwaste.¹CO₂e,orcarbondioxideequivalent,includesnotonlycarbondioxidebutalsoothergreenhousegases.CO₂eiscalculatedwithameasurecalledglobalwarmingpotential,whichindicateshowmuchenergytheemissionsofonetonofagreenhousegaswillabsorbinrelationtotheemissionsofonetonofCO₂overagivenperiod—inthiscase,100years.Source:FoodandAgricultureOrganizationoftheUnitedNations,“FAOStat”;McKinseyEMITdatabase(2021);McKinseyanalysisMcKinsey&CompanyAnaffordable,reliable,competitivepathtonetzero7todaytoasmuchas$9.2trillion,onaverage,spentoverthenextthreedecades.18Duringthatperiod,thelow-emissionspartofthatspendingwouldneedtogrowfromapproximately$1.5trillionperyearnowtoabout$7.0trillion,onaverage.19Theproblemisnotjustthescaleofspendingonlow-emissionstechnologiesbutalsowhatitwouldfund.Ourpastresearchhasfoundthatpartlybecausemanylow-emissionstechnologieswillnotbecostcompetitiveby2030undercurrentpolicyframeworks,only50percentofthecapitalspendingonthosetechnologiesneededbythentoeventuallyachievenetzerocouldoccurwithoutadditionalsocietalcommitment.20Examplesofsuchcommitmentincludenewpublicspending(whichmaybedifficult)andadditionalpolicymeasures,suchascarbonprices.Furthermore,thetransitionwouldrebuildinaboutthreedecadesefficientsystemsthattookcenturiestobuild,carryingoutamassivephysicaltransformation.Considerthatmostproposedpathwaystonetzeroenvisionmakingthepowersystemthreetimeslargerthanitisnowandelectrifyingmanyendusesofenergy,suchastransportationandheating.Yeteventhoughsolarpower,windpower,andotherrenewablesourcesofenergyarebecomingmuchmorecommon,theshareofprimaryenergythattheyproducehasrisenonlyslowly,from8percentin2010to12percentin2021.21Finally,thetransitionwouldrequireactionstobetakennowinexchangeforbenefits—inparticular,avoidedphysicaldamagefromclimatechange—thatwouldmostlyappearinfuturedecades.22Andthecostsofthoseactions,intermsofspendingandtransformationtoday,wouldnotbeborneevenlybyallstakeholders.18Evenafterexpectedincreasesinspendingresultingfromcurrentpoliciesandincomegrowthareaccountedfor,thenecessaryincreaseintotalhigh-andlow-emissionsspendingwouldbelargeat$1trillion.The$9.2trillionestimateisbasedonanet-zeroscenariofromtheNetworkforGreeningtheFinancialSystem(NGFS)thatlimitswarmingby2100to1.5°Cabovepreindustriallevels.Inquantifyinginvestment,weincludewhatistypicallyconsideredinvestmentinnationalaccounts,suchasinvestmentinsolarandwindpowercapacity,aswellassomespendingonwhataretypicallyconsideredconsumerdurables,suchaselectricvehicles.Theinvestmentnumberstakeintoconsiderationenergy,materials,andland-usesystemsthataccountforroughly85percentofoverallCO₂emissionstoday.Theseestimatesarehigherthanothersintheliteraturebecausewehaveincludedspendingonhigh-emissionstechnologies,agriculture,andotherlanduseandhavealsotakenanexpansiveviewofthespendingrequiredinend-usesectors.Ouranalysisdistinguisheshigh-emissionsassetsandtechnologiesfromlow-emissionsones.Low-emissionsassetsemitrelativelylowamountsofGHGsbutarenotnecessarilycarbonneutral.Examplesoflow-emissionsassetsaresolarandwindfarmsandelectricvehicles.Insomecases,wealsoincludeenablinginfrastructure,suchasthetransmissionanddistributioninfrastructureneededforrenewablepowerorthecharginginfrastructureneededforelectricvehicles.Examplesofhigh-emissionsassetsarefossilfuel–basedpowerandvehicleswithinternalcombustionengines.IntheNGFS’sscenario,somespendingonhigh-emissionsassetscontinues,particularlyintheearlyyearsofthetransition.Formoredetails,seeThenet-zerotransition:Whatitwouldcost,whatitcouldbring,McKinseyGlobalInstitute,January2022.19RecentresearchfromMGIestimatedthespendingneededonlow-emissionstechnologiesat$55trillioncumulativelyfrom2021to2030,anincreaseof$41trillionovertheamountthatwouldresultifspendingin2020tookplaceineveryyearfrom2021through2030.The$55trillionestimateworksoutto$5.5trillionannually,onaverage,andthat$5.5trillionestimatediffersfromthe$7.0trillioncitedherebecauseitcoversadifferentperiodandappliesinascenarioofhighGDPgrowth.Forfurtherdetails,seeFrompovertytoempowerment:Raisingthebarforsustainableandinclusivegrowth,McKinseyGlobalInstitute,September2023.20Frompovertytoempowerment:Raisingthebarforsustainableandinclusivegrowth,McKinseyGlobalInstitute,September2023.That50percentincludesbothacontinuationoftoday’sspendinglevelsandincreasedspendinglikelyundercurrentpolicyframeworks.21“International,”USEnergyInformationAdministration,2023.Primaryenergyreferstothetotalamountofenergythatisavailableinnaturalresourcesbeforeanyconversionortransformationtakesplace.Thepercentagecontributionsthatdifferentenergysourcesmaketototalprimaryenergymaybedifferentfromthepercentagecontributionsthatthosesourcesmaketoenergyconsumedbyendusersbecausedifferentusesleadtodifferentamountsofconversionloss.22Otherpotentialbenefitsincludeimprovedairquality,waterquality,andbiodiversity.See“Costsandbenefitsofanet-zerotargetfortheUK,”inNetzero:TheUK’scontributiontostoppingglobalwarming,CommitteeonClimateChange,May2019.Anaffordable,reliable,competitivepathtonetzero8Apoorlyexecutedtransitioncouldcompromiseaffordability,reliability,andcompetitiveness—andslowprogresstowardnetzeroThenet-zerotransitionistoooftenregardedasasingularproblem.Infact,itisfourconnectedchallenges(Exhibit3).ReducingemissionsofGHGsisindeedattheheartofthetransition.23Butifthetransitionispoorlyexecuted,itcouldcompromisethreeotherimportantobjectives:affordability,reliability,andindustrialcompetitiveness.Thoseobjectivesenhanceeconomicwell-beingontheirown;moreover,compromisingthemwouldmaketheemissionsreductionsthemselveslesslikelytoendure.24Thatoutcomeisnotinevitable.Ifthenet-zerotransitionismanagedwell,therearemanywaysinwhichitcouldfurtheraffordability,reliability,andindustrialcompetitivenessovertime.Themostobviousisthattheworldwouldhavetospendlessonadaptingtoclimatechangeandwithstandingthedamageitcauses.25Also,providedthatcostdeclinescontinueatexpectedratesandthatmanufacturingcapacityisscaledupeffectively,moreandmorelow-emissionstechnologiescouldsoonbecomecostcompetitivewithtraditionaltechnologiesinvariousmarketsonatotal-cost-23Thisreportfocusesonnetzero,butothersustainabilityobjectivesexist,suchasimprovingthequalityofairandwaterandmanagingnature-relatedrisks.Similarly,thereportdoesnotconsideradaptationactionstomanagerisingphysicalrisksposedbyclimatechange,whichisanotherimportantpartoftheclimateagenda.24Otherresearchershavealsohighlightedpotentialtensionsbetweenthetransitionandotherobjectives,suchasaddressingclimatechange,affordability,availability,security,equity,environmentaljustice,andemployment.See,forinstance,Worldenergytrilemmaindex2022,WorldEnergyCouncil,2022;HaiyingLiuetal.,“Rolesoftrilemmaintheworldenergysectorandtransitiontowardssustainableenergy:Astudyofeconomicgrowthandtheenvironment,”EnergyPolicy,volume170,November2022;andA.G.Olabi,“Energyquadrilemmaandthefutureofrenewableenergy,”Energy,volume108,August2016.25TheNetworkforGreeningtheFinancialSystemestimatesthatglobalGDPin2100couldbeupto18percentlowerinascenarioinwhichcurrentpoliciescontinuethaninabaselineinwhichtherewerenophysicalrisksfromclimatechangeorrisksposedbythetransition.Italsoestimatesthatinascenarioinwhichwarmingwas1.5°Cabovepreindustriallevels,GDPin2100wouldbe3percentlowerthaninthatbaseline.SeeNGFSClimateScenariosforcentralbanksandsupervisors,NetworkforGreeningtheFinancialSystem,September2022.Thatanalysisleadstotwoconclusions.First,overtime,thetransitionwillleadtohigherGDPthaninascenariowithhighphysicalrisks.Second,thetransitionwillleadtoslightlylowerGDPthaninthebaselinescenario.SeeClimatechange2022:Mitigationofclimatechange.ContributionofWorkingGroupIIItotheSixthAssessmentReportoftheIntergovernmentalPanelonClimateChange,IPCC,2022.Anaffordable,reliable,competitivepathtonetzero9Exhibit3Asuccessfulnet-zerotransitionwillrequireachievingnotoneobjectivebutfourinterdependentones.InteractionsexistacrossobjectivesEmissionsreductionAordabilityReducingemissionsofEnsuringthatenergy,materials,greenhousegases¹andotherproductsremainaordableandcostcompetitivewithtraditionalalternativesIndustrialReliabilitycompetitivenessEnsuringthatenergy,Ensuringthatindividualmaterials,andotherproductscountries,regions,aresuppliedsecurelyduringandcompaniesremainthetransitionandthatenergycompetitiveandbenetfromsystemsareresilientopportunitiesduringthetransition¹Thisreportfocusesonthenet-zerotransition,butothersustainabilityobjectivesexist,suchasimprovingthequalityofairandwaterandmanagingnature-relatedrisks.Similarly,thereportdoesnotconsideradaptationactionstomanagerisingphysicalrisksposedbyclimatechange,whichisanotherimportantpartoftheclimateagenda.Source:McKinseyanalysisMcKinsey&Companyof-ownershipbasis.26Energysecuritycouldbenefitaswellinsomeways,becausethetransitioncouldleadtomoredomesticgenerationofelectricity(forexample,fromsolarandwind)andlessdependenceonimportedenergy.Andtherewillbemanyopportunitiestocompetetoprovidematerials,manufacturedgoods,andservices—indeed,wholenewindustries—forthetransition.Butitisneverthelessthecasethatapoorlyexecutedtransitioncouldimpairaffordability,reliability,andindustrialcompetitiveness.Startwithaffordability.AspreviousworkbyMcKinseyhaspointedout,boththenet-zerotransitionandeconomicempowermentareurgentandsimultaneousgoals.27Butthereareseveralwaysthatthenet-zerotransition,ifnotexecutedwell,couldmakeenergy,materials,andotherproductslessaffordablethantraditionalalternatives.28Eventhoughwindandsolargenerateelectricitymorecheaplythanfossilfuelsdo,theywillrequireadditionalspendingastheirshareintheoverallgenerationmixrises—forstorage;other“firmingcapacity,”whichiselectricitythatcanbeusedattimeswhensolarandwindarenotprovidingenoughenergy;andgridinfrastructure.Ifthecostsoftechnologies,suchasbatteries,donotdeclineasexpected,orifgridsarenotdesignedthoughtfully,thedeliveredcostofelectricitycouldrise.Formaterials,decarbonizingtheproductionofsteel,aluminum,andcementcouldincreaseproductioncostsby26See,forexample,Thefutureofheatpumps,InternationalEnergyAgency,December2022.Technologies’relativecost-competitivenessalsodependsonotherfactors,suchashowenergypricesandinterestratesevolve.27Frompovertytoempowerment:Raisingthebarforsustainableandinclusivegrowth,McKinseyGlobalInstitute,September2023.28Thisdiscussiondoesnotaccountforanyrolethatacarbonpricemightplay.Anaffordable,reliable,competitivepathtonetzero1015percentormoreby2050.29Ifcostsofenergyandotherproductsweretorise,economicgrowthcouldsuffer,posingaparticularproblemfordevelopingcountries.30Andaswementionedabove,thescaleofspendingneededforthetransitioncouldstretchpublicfinances.31Apoorlyexecutedtransitioncouldalsocompromisethereliablesupplyofenergyandtheresiliencyofenergysystems,anditcouldaffecttheinputsneededforthetransitionitself.Forexample,whensolarandwindpowerarelow—suchasatnightoronwindlessdays—poorlydesignedenergysystemsmightnotprovideregionswithenoughstorage,firmingcapacity,orotherwaystomeetdemandreliably.Also,thetransitionwillrequiremanyphysicalinputs:materialsandmanufacturedgoods,water,land,infrastructure,andlabor.Ifthetransitionisnotwellexecuted,especiallyinthenearterm,thesupplyofthoseinputscouldbeinsufficientforwhatisneeded,leadingtoshortagesandslowingthegrowthofnewenergysystems.PastMcKinseyresearchhasfoundthatshortagesofmanymineralsusedinmakingEVbatteries,windturbines,andotherlow-emissionstechnologiescouldbeginbefore2030,causedbyrapidlygrowingdemandfromthetransitionandthelongtimeittakestobringnewminesonline(fiveto15years,insomecases).32Theshortagescouldalsohavepriceimplications;researchestimatesthatiftheyarenotaddressed,thepriceofnickel,cobalt,andlithiumcouldincreasebyseveralhundredpercentfrom2020levelsinanet-zeroscenariooverthenextdecade.33Furthermore,thesupplyofrawmaterialsisoftenconcentrated,creatingpotentialriskfromsupplychaindisruptions.Threecountriesorfeweraccountfortheextractionof80percentormoreofseveralcriticalminerals.Refiningisoftenevenmoreconcentrated.34Andlongapprovaltimescanslowdeployment;intheUnitedStates,thetypicalelectricalpowerprojectrequestingconnectiontothegridtookanaverageoffiveyearsin2022.35Forindividualcountriesandcompanies,thetransitioncouldalsothreatencompetitivenessifitisnotwellconceived.Ofcourse,affordabilityandcompetitivenessaretightlyinterlinked;forexample,ifonecountry’semissions-reductioninitiativespushedupproductioncosts,itsproductscouldbecomelesscompetitiveinglobalmarkets.36Somecountriesorregionscouldbeespeciallyvulnerabletotheeffectsofrisingproductioncosts.Asia,forexample,iswheremuchoftheworld’smanufacturingtakesplace,soifproductiontherebecamemoreexpensive,itmightbedisproportionatelyaffected.37Butthereareotherwaysthatcompetitivenesscouldbeharmed.Duringthetransition,somelegacyindustriesandnaturalendowmentscouldloserelevance,affectingjobsandcommunities.38Withoutrobustplanning,workersmayfindithardtomovetonewjobsandbuildnewskills.Andasmanycountriesadoptassertiveindustrialpolicyforclimatetechnologies,theyruntherisk,iftheydonotdesignthatpolicycarefully,ofaffectingbusinesses’incentivestoinnovateandproduceefficiently,hurtingproductivity.29Makingnet-zerosteelpossible,MissionPossiblePartnership,September2022;Makingnet-zeroaluminumpossible,MissionPossiblePartnership,April2023;MissionPossiblesectoralfocus:Cement,EnergyTransitionsCommission,January2019.30Inthisreport,weusetheterm“developingcountries”tomeanthosethattheWorldBankclassifiesaslow-ormiddle-income.31SeealsoFrompovertytoempowerment:Raisingthebarforsustainableandinclusivegrowth,McKinseyGlobalInstitute,September2023.32Thenet-zeromaterialstransition:Implicationsforglobalsupplychains,McKinsey&Company,July2023.33NicoValckx,AndreaPescatori,andLukasBoer,“Metalsmaybecomethenewoilinnet-zeroemissionsscenario,”VoxEU,November5,2021.34Mineralcommoditysummaries2023,USGeologicalSurvey,January2023.35JosephRandetal.,“Queuedup:Characteristicsofpowerplantsseekingtransmissioninterconnectionasoftheendof2022,”LawrenceBerkeleyNationalLaboratory,April2023.36Researchershaveexaminedtheimpactofenvironmentalregulationoncompetitivenessasmeasuredbysuchfactorsastrade,industrylocation,andproductivity.Theyfindthatsuchmeasureshaveledtostatisticallysignificantadverseimpacts,butsmallones.Theyadd,however,thatmoreresearchisneededtounderstandwhytheimpactshavebeensmall,andtheyconjecturethatonereasonmightbethatenvironmentalpolicyhasbeenstrategicallysettolimittheimpactoncompetitiveness.SeeAntoineDechezleprêtreandMisatoSato,“Theimpactsofenvironmentalregulationsoncompetitiveness,”ReviewofEnvironmentalEconomicsandPolicy,volume11,number2,summer2017.37Formoredetails,seeAsiaonthecuspofanewera,McKinseyGlobalInstitute,September2023.38Ourpastresearchhasshownthatjoblossesduringthenet-zerotransitionwouldbeconcentratedincertainsectorsandregions.Forinstance,morethan10percentofjobsin44UScountiesareinfossilfuelextractionandrefining,fossilfuel–basedpower,andautomotivemanufacturing.Forfurtherdetails,seeThenet-zerotransition:Whatitwouldcost,whatitcouldbring,McKinseyGlobalInstitute,January2022.Anaffordable,reliable,competitivepathtonetzero11Affordability,reliability,andindustrialcompetitivenessareindependentlyimportantobjectives.Butifthetransitionriskscompromisingthem,aseparateproblemcouldresult:aderailingofmomentumtowardnetzero(Exhibit4).Affordabilitymaybethemostimportantobjectiveinthatrespect.Citizensmaybelesswillingtoembracethetransitionifenergybecomeslessaffordable.Someconsumersandcompaniesmaynotwanttoswitchtolow-emissionsproductsiftheyareunfamiliarormoreexpensive.Conversely,themorecostcompetitivethetechnologiesneededfornetzerobecomeinrelationtotraditional,establishedalternatives,theeasieritwillbetofundandbuildthem.Butreliabilityandcompetitivenessmattertoo.Ifthetransitionweretochallengethesecuresupplyofenergyandmaterials,ortheavailabilityofjobsandeconomicopportunity,itcouldbehardertosustainmomentumtowardnetzero.If,however,emissionscanbereducedwhileaffordability,reliability,andindustrialcompetitivenessareadvanced,thetransition’smomentumcouldbeboosted.Forexample,ifmorelow-emissionstechnologiesbecomecostcompetitive,capitalwillbelikeliertoflowtothem.Andifinvestinginthetransitioncreatesmoreopportunitiesforcountriesandcompaniestocompete,theycouldbemorelikelytoembracethetransition.Asuccessfulnet-zerotransitionwillthereforerequireachievingnotoneobjectivebutfourinterdependentones.Anaffordable,reliable,competitivepathtonetzero12Exhibit4Emissionsreductioncouldderailorboostitsownmomentum,dependingonhowitaectsaordability,reliability,andindustrialcompetitiveness.DerailedmomentumBoostedmomentumEmissionsreductionEmissionsreductionCompromisingComplementaryeectseectsAordabilityReliabilityIndustrialAordabilityReliabilityIndustrialcompetitivenesscompetitivenessSource:McKinseyanalysisMcKinsey&CompanyAnaffordable,reliable,competitivepathtonetzero13Awell-managedtransitionwouldfollowsevenprinciplesHowcantheworldreduceemissionsinlinewiththeParisAgreementanddosowhilemaintaining—andpotentiallyimproving—affordability,reliability,andindustrialcompetitiveness?Tostartansweringthatquestion,wehaveidentifiedsevenprinciplesthatdescribehowdecision-makersshouldapproachthisnextphaseofthenet-zerotransition(Exhibit5).Thefirstthreeofthoseprinciplesshowhowtheworldcanundertakeactionsnowtoreducethespendingneededforagivenamountofabatementandthusmakethetransitionmoreaffordable.Thenexttwoshowhowtoredesignphysicalandfinancialsystemsinwaysthatcanprotectaffordabilityandreliabilityovertime.Andthelasttwoshowhowpreparingforrisksandopportunitiescanfurtherallthreeobjectives.Theprinciplesdonotprovideone-size-fits-allanswerstoallthequestionsthatstakeholderswillconfront.Rather,theyprovideaframeworkthatcanguidestakeholdersastheynavigatethenextphaseofthetransition.AllocatingspendingeffectivelyOurfirstthreeprinciplesinvolvewaystoallocatespendingonthenet-zerotransitionaseffectivelyaspossible.DeployinginexpensivesolutionsnowwouldresultinfasterabatementofGHGemissionsnow.Drivingdownthecostofexpensivesolutionswouldmakethemreadytodeploywhenthetimecomes.Andbuildingeffectivefinancialmechanismswouldhelpmovecapitalwhereitisneededtofundthetransition.Laterinthisreport,wedescribeanexperimentthatweperformedtoexplorethepossibleresultsofapplyingthefirsttwoprinciples.Doingso,wefind,mightbeabletoimprovetheworld’scurrentemissionstrajectoryandhelplimitwarmingtowhattheParisAgreementenvisions.Capitalspendingonlow-emissionstechnologieswouldpotentiallybeoneandahalftotwotimesaslargeasitisAnaffordable,reliable,competitivepathtonetzero14Exhibit5Sevenprinciplescouldhelptheworldreduceemissionswhileprotectingaordability,reliability,andindustrialcompetitiveness.71CompeteforopportunitiesCreateincentivestodeploycreatedbythetransition,lower-costsolutionsusingcomparativeadvantageasaguideportunitiesAllocating2NavigatingrisksandopDrivedowncostsofexpensivemssolutionsdingeectively6spen3ManageexistingReBuildeectiveandemergingenergynancialmechanismssystemsinparalleltodrivecapitalwhereitisneededdesigningphysicalandenergysyste5Revampenergymarkets4andplanningapproachesforanelectriedworldAnticipateandremovebottlenecksformaterials,Source:McKinseyanalysisland,infrastructure,andlaborMcKinsey&Companynow—asopposedtoaboutthreetimes,asmightbethecaseifthetwoprincipleswereappliedlessextensively.Suchanapproachmaythereforewarrantcloserexaminationandmoreexploration.Principle1:Createincentivestodeploylower-costsolutions.Theworldcurrentlyemitsabout55metricgigatonsofCO2eperyear,aquantitythatwillkeepgrowingifactionisnottaken.39TheIPCCestimatesthatby2030,solutionsthatarerelativelycheap—thatis,costinglessthan$20permetrictonofCO2eabated—couldpotentiallybeabatingasmuchas19metricgigatonsperyear(Exhibit6).40Investmentinsomeofthosesolutionshasbeguntoflowinrecentyears.Oneexampleissolarandwindpower,whoseinitialdeploymentcanoftenbecarriedoutwithoutfurtherspendingon39SeeEmissionsgapreport2023:Brokenrecord,UnitedNationsEnvironmentProgramme,November2023,andEmissionsgapreport2022:Theclosingwindow—Climatecrisiscallsforrapidtransformationofsocieties,UnitedNationsEnvironmentProgramme,October2022.CO2e,orcarbondioxideequivalent,includesnotonlycarbondioxidebutalsootherGHGs.CO2eiscalculatedwithameasurecalledglobalwarmingpotential,whichindicateshowmuchenergytheemissionsofonetonofaGHGwillabsorbinrelationtotheemissionsofonetonofCO2overagivenperiod—inthiscase,100years.40The19-metric-gigatoncalculationisbasedonestimatesfromtheIPCC.Costisdefinedasthenetlifetimediscountedmonetarycostofthesolution(includingbothcapitalandoperatingcosts)relativetothecostofthetechnologythatisthetraditionalalternativetothesolution.TheIPCCacknowledgesuncertaintyassociatedwiththemagnitudeofabatementpotential;italsonotesthatabatementpotentialsareassessedindependentlyforeachsolution,sotheyarenotnecessarilyadditive.Anaffordable,reliable,competitivepathtonetzero15Exhibit6By2030,solutionsthatarerelativelylow-costhavethepotentialtoabate19gigatonsofCO₂eperyear.PotentialcontributiontonetCO₂ereductionin2030,bysolution,¹metricgigatonsCapitalCurrentcapitalspendingspendingasashareLessexpensivetoreduceMoreexpensiveAbatementcostonphysicalofannual2021–30abatementcost(<$20per(>$20)²dataunavailableassets,2020,³metrictonofCO₂eabated)²$billionspendinginillustrativenet-zeroscenarios,³%Solarpower⁴,⁵3.4Total:5.01754060CO₂abatement3.311.720<20inagricultureandlanduseWindpower⁴,⁵3.13.91502040Transportationeciency2.32.37040602.3n/an/a⁸andmodalshift⁶1.7<5<201.3Non-CO₂abatement1.623540603.2254060inwasteandindustry⁷2.812040602.810Methaneabatementincoal,1.4<20oil,andgasoperationsEnergyeciency1.3inbuildings⁶Energyeciency,materialseciency,1.1enhancedrecyclinginindustry⁹Otherlow-emissionspowercapacity0.7(suchasnuclearandgeothermal)⁴Ninitargoruicsuoltxuidreeaannddlmanedthuasnee¹⁰a,¹b¹atement0.4Biofuels0.20.7n/an/a⁸Bdeuciladribngoneizleactitorincmaetiaosnuarensd¹⁰o,¹t²h,¹³er0.21.83104060Industrialelectrication0.02.120<20Carboncaptureinpower0.01.0<5<20andindustryElectricvehicles¹⁰,¹²0.00.8125<20Note:Thesolutionsareorderedfromthehighesttolowestmagnitudeoflow-costabatement.Capitalspendingonphysicalassetsin2020isroundedtothenearest$5billion.Somesolutionswithlittleornoabatementpotentialhavebeenexcluded.Insomeinstances,2020spendingvaluesmaybeestimatesandnotactuals.TheIPCCacknowledgesuncertaintyassociatedwiththemagnitudeofabatementpotential;italsonotesthatabatementpotentialsareassessedindependentlyforeachsolution,sotheyarenotnecessarilyadditive.¹CO₂e,orcarbondioxideequivalent,includesnotonlycarbondioxidebutalsoothergreenhousegases.CO₂eiscalculatedwithameasurecalledglobalwarmingpotential,whichindicateshowmuchenergytheemissionsofonetonofagreenhousegaswillabsorbinrelationtotheemissionsofonetonofCO₂overagivenperiod—inthiscase,100years.Forfulldetailsaboutthelistedsolutions,seeClimatechange2022:Mitigationofclimatechange.ContributionofWorkingGroupIIItotheSixthAssessmentReportoftheIntergovernmentalPanelonClimateChange,IntergovernmentalPanelonClimateChange,gureSPM.7,2022.²Abatementcostsshownarenetlifetimecosts,includingcapitalandoperatingcosts,ofavoidedgreenhousegasemissions.Costsarecalculatedinrelationtoareferencetechnology.³The2021–30spendingrequiredisbasedonvarious1.5ºCscenarios.Itincludesspendingonphysicalassets,notoperatingspending.Capitalspendingincludesbothwhatareconsideredinvestmentsinnationalaccountsandsomespendingonconsumerdurables.⁴Abatementcostsforpowerarebasedonthelevelizedcostofelectricityanddonotincludethecostofsystemintegration(suchastransmissionanddistributioncapacity),sotheymayunderstatetotalcosts.⁵Capitalspendingforsolarandwindpowerincludesspendingforbatteriesandexcludesspendingfortransmissionanddistribution.⁶Abatementpotentialincludesbehavioralchanges,suchaslowerthermostatsettingsinwinterandhigheroccupancyinvehicles.⁷Abatementpotentialincludesuorinatedgases,methane,andnitrogenatedgases.⁸Thisspendingisnotshownforbiofuelsbecausesourcesassignitawiderangeofvalues;itisnotshownfornon-CO₂emissionsfromwasteandindustrybecauseofalackofrobustdata.⁹Abatementpotentialincludesfeedstockdecarbonizationandprocesschange.¹⁰TheIntergovernmentalPanelonClimateChangedoesnotprovidecostdatafordemandshiftsinagricultureandlanduse,somecategoriesofdecarbonizingbuildings,ortheuseofelectricvehicles.¹¹Abatementpotentialincludesdietshiftandreducedfoodwaste.¹²Capitalspendingonelectricvehiclesalsoincludesspendingoninfrastructure;capitalspendingonbuildingelectricationincludesspendingonresidentialandcommercialheatpumpsanddistrictheating.¹³Solutionsincludeecientheating,ventilation,andairconditioning,whichcouldleadtoadditionaleciencyimprovements.Source:ClimatePolicyInitiative;IntergovernmentalPanelonClimateChange;InternationalEnergyAgency;NetworkforGreeningtheFinancialSystem;McKinseyanalysisMcKinsey&CompanyAnaffordable,reliable,competitivepathtonetzero16expandinggridsorbuildingstoragecapacity.41Butinvestmentinlower-costsolutionsremainslowerthanwhatisneededoverthenextdecadetobeconsistentwitha1.5°Ctrajectory.Stakeholdershaveawiderangeofsuchsolutionstoconsider.Forexample,implementingenergy-efficiencymeasuresandshiftingbehaviortoreduceratesofenergyconsumption—byusingenergy-efficientappliances,makingchangestoindustrialprocessestominimizetheuseofenergyandmaterials,improvingefficiencyintransportation,increasingtheoccupancyofpassengervehicles,andtakingothermeasures—collectivelyhavethepotentialtoabate4.8metricgigatonsofCO2e.42ReducingGHGsotherthanCO2,particularlymethane,insuchactivitiesascoalmining,oilandnaturalgasoperations,andsolidwasteoperationscouldabateabout3.0metricgigatons.AddressingemissionsofCO2,nitrousoxide,andmethanefromagricultureandlanduse—forexample,byhaltingdeforestationandimprovingforestmanagement—couldabate3.7metricgigatons.43Somelower-costsolutionsare“transition”solutions—thatis,temporaryonesthatdonotcompletelyeliminateemissionsbuthelpreducethematrelativelylowcostuntilalternativesbecomeviableovertime.Transitionsolutionsbeingdiscussedbydecision-makersincludeshiftingfromcoaltogastogenerateelectricity,increasingtheshareofscrapsteelusedinexistingsteelmakingprocesses,andusinghybridheatingsystemsthathavebothanelectricheatpumpandagasfurnacetoheathomes.44Suchsolutionscouldofferapragmaticwayforward.Theynonethelesswillneedtobecarefullyimplemented:stakeholdershavetomakelifetimeassessmentsoftheiremissionsandcosts(includingtheriskofstrandedassets)andoftheemissionsandcostsoflow-emissionsalternatives,tomakesurethatthetransitionsolutionswouldtrulyhelpreduceemissions,maintainaffordability,andnotincreaselong-termcosts.45Deployinglower-costsolutionswouldhavefourkeybenefits.First,itwouldallowanygivenamountofcapitalspentonlow-emissionstechnologiestohavealargeimpactonabatement.Second,itwouldmakeprogressinreducingemissionswhileothersolutionswerescaledupandcamedown41ThemarginalabatementcostsshowninExhibit6forwindandsolarpowerarebasedonlevelizedcostsonlyanddonotincludesystemintegrationcosts,suchasbatterycostsandcostsassociatedwithtransmissionanddistribution.42Theseassessmentsofabatementpotentialmaynotconsiderthe“reboundeffect”ofenergyefficiency,inwhichconsumersusemoreenergy,notless,astechnologybecomesmoreefficient.Estimatesofreboundeffectsvarysignificantly,buttheliteratureagreesthattheyareprobablywellbelow100percent,sothatimprovingenergyefficiencystillleadstooverallsavingsinenergy.SeeKennethGillingham,DavidRapson,andGernotWagner,“Thereboundeffectandenergyefficiencypolicy,”ReviewofEnvironmentalEconomicsandPolicy,volume10,number1,winter2016;andPaulE.Brockwayetal.,“Energyefficiencyandeconomy-widereboundeffects:Areviewoftheevidenceanditsimplications,”RenewableandSustainableEnergyReviews,volume141,May2021.Also,empiricalevidencesuggeststhatrealizedcostsavingsmaybesubstantiallylowerthanmodeledonesforspecificenergy-efficiencyprograms,particularlythoserelatedtoretrofittinghomes.Sostakeholdersseekingtoimproveenergyefficiencyshouldcarefullyassesswhichmeasureswillactuallyresultinsavings.SeeMeredithFowlie,MichaelGreenstone,andCatherineD.Wolfram,“Doenergyefficiencyinvestmentsdeliver?EvidencefromtheWeatherizationAssistanceProgram,”BeckerFriedmanInstituteforEconomics,workingpapernumber2621817,January2018.43Apartiallistofmoredetailedlower-costsolutionsincludesreplacinglow-efficiencylightingwithhigh-efficiencylighting,improvingtheefficiencyofkilnsincementproduction,installingsmartenergyandgasmonitoringsystems,floodingabandonedminestotrapmethane,capturinglandfillgastouseforpower,optimizingfertilizerapplication,andimprovingricecultivationpractices.44SeeDeborahGordonetal.,“Evaluatingnetlife-cyclegreenhousegasemissionsintensitiesfromgasandcoalatvaryingmethaneleakagerates,”EnvironmentalResearchLetters,volume18,number8,July2023;JamieBrick,DumitruDediu,andJesseNoffsinger,“Theroleofnaturalgasinthemovetocleaner,morereliablepower,”McKinsey&Company,September2023;AjiteshAnand,ToralfHagenbruch,AnoopMuppalla,andBenediktZeumer,“Tacklingthechallengeofdecarbonizingsteelmaking,”McKinsey&Company,May2021;andGustavBolin,AnnHewitt,BlakeHoughton,CharlieJersey,andEvanPolymeneas,“Buildingdecarbonization:Howelectricheatpumpscouldhelpreduceemissionstodayandgoingforward,”McKinsey&Company,July2022.A“coal-to-gas”shiftforgeneratingelectricitycouldinvolveeitherreplacingexistingcoal-firedplantswithgas-firedonesorprioritizinggaswhenbuildingnewfossilfuel–poweredplants.Mosttransitionscenariosanticipatealargerroleforgaspowerinthefuturebecauseitcouldprovidefuturefirmingcapacity;ithasthepotentialtocutCO2emissionsinhalf(providedthatemissionsassociatedwiththeproductionofgasarealsoreduced);anditcouldeventuallyberetrofittedwithcarboncaptureandstorageorhydrogentofurtherreduceemissions(providedthatinnovationbringsthosetechnologiestomaturity).45Forexample,someresearcherssuggestthatthebenefitsofacoal-to-gasshiftmaybeoverstatedbecausemethaneemissionsfromgasoperationsmaybeunderstated.Otherssuggestthatashiftwouldlocklargesharesoffossilfuelcapacityintothefutureenergygrid.SeeStefanSchwietzkeetal.,“Upwardrevisionofglobalfossilfuelmethaneemissionsbasedonisotopedatabase,”Nature,volume538,October2016;andRobertW.Howarth,“Abridgetonowhere:Methaneemissionsandthegreenhousegasfootprintofnaturalgas,”EnergyScienceandEngineering,volume2,number2,June2014.Anaffordable,reliable,competitivepathtonetzero17incost.46Third,manyofthesemeasures,suchasthoseimprovingenergyefficiency,arecheaperthantraditionalalternativesovertheirlifetimes;implementingthemcouldthusimproveoverallaffordability.Fourth,someofthesolutionswouldreducemethaneemissions—whicharehighlypotentinthenearterm—andcouldmakeamajorcontributiontoreducingwarmingoverthenexttento20years.47Therefore,asstakeholdersconsiderscalingupfuturespendingforthenextphaseofthetransition,theyshouldaskthemselveswhatopportunitiesexisttoacceleratethedeploymentoflower-costsolutions.Variousobstaclesstandintheway,however.Someofthesolutionswouldneedtobeexecutedatanenormousscaletohaveameaningfulimpactonemissions;improvingenergyefficiencyinmillionsofhomesisagoodexample.Otherscallforchangestodailyroutinesorlifestyles,suchasalteringmodesoftravel.Stillothers,particularlythetransitionsolutions,maybeperceivedastemporaryfixesandthereforeineffective.Butprovidingincentivescanhelp.Changingbuildingstandardsfornewconstructioncanleadtogainsinenergyefficiency,ascansettingfuel-efficiencystandardsforvehicles.48Offeringrebatesortaxincentivestopeopleorsectorscanreducetheamountofenergytheyuse.Preservingforestsbyprovidingfinancialincentivestoprotectthemorbydesignatingandenforcingprotectedareascanhelppreventdeforestation.Andinadditiontoincentives,manysolutionswouldneedfinancing,aswediscussinprinciple3.Principle2:Drivedowncostsofexpensivesolutions.Atthesametime,manyofthetechnologiesthattheworldneedstoreachnetzeroarenotyetcostcompetitive.TheIPCCestimatesthatby2030,morethan20metricgigatonsofGHGscouldcostmorethan$20permetrictontoabate,and14metricgigatonscouldcostmorethan$50permetricton.49Anotherwaytothinkaboutthecostoftechnologiesistoconsidertheirmaturity,becauseimmaturetechnologiesarebydefinitionnotyetfullyviableandthereforenotcostcompetitive.Variousanalysessuggestthat10to20percentoftheemissionsreductionsneededby2050couldcomefromtechnologiesthatarealreadycommerciallymature(Exhibit7).50Butattheotherendofthe46Forexample,itwilltaketimetofullyscaleuplow-emissionssourcesofelectricity.Inthemeantime,lower-costsolutionslikeimprovingenergyefficiencycanreducedemandforenergyandthereforereduceemissions.47Insomeinstances,however,itmaybeappropriatetoalsofocusonhigher-costsolutionsinthenearterm.Oneexample,aswediscussinprinciple2,iswhendeployingthemwouldreducecostsviathelearningthathappensascompaniesstarttobuildanddeployaproductorviaeconomiesofscale.Asecondexampleiswhentheyhaveparticularlylargeadjustmentcosts,includingcostsandtimeassociatedwithdevelopingsupplychainsorbuildingthenecessaryskillsintheworkforce;inthosecases,deployingthesolutionsearlyandincrementallyovertimecanhelpminimizetheadjustmentcostsandremovebottlenecks.Theseideasaresimilartothosewedescribeinprinciple4.SeeAdrienVogt-Schilb,GuyMeunier,andStéphaneHallegatte,“Whenstartingwiththemostexpensiveoptionmakessense:Optimaltiming,costandsectoralallocationofabatementinvestment,”JournalofEnvironmentalEconomicsandManagement,volume88,March2018.Aswestatedabove,deployinglower-costsolutionscaninfactgohandinhandwiththeseothermeasuresandallowforsimultaneous,targetedeffortstodrivedowncostsofexpensivesolutionsandremovebottlenecks.48M.Tyleretal.,Impactsofmodelbuildingenergycodes—Interimupdate,PacificNorthwestNationalLaboratory,July2021;andAntonioM.Bentoetal.,“Estimatingthecostsandbenefitsoffuel-economystandards,”EnvironmentalandEnergyPolicyandtheEconomy,volume1,2020.49Climatechange2023synthesisreport,IPCC,2023.50Thestagesmentionedinthisdiscussion(theconcept,prototype,anddemonstrationstages,theearlymarketstage,andcommercialmaturity)aregroupingsbasedontechnologyreadinesslevels(TRLs)fromtheInternationalEnergyAgency.Therangesmentioned(forexample,the10to20percentofemissionsreductionsthatcouldcomefromcommerciallymaturetechnologies)arebasedonseveralanalyses,includingtheInternationalEnergyAgency’sNetZeroEmissionsby2050ScenarioandforthcomingMcKinseyresearch.SeeNetzeroroadmap:Aglobalpathwaytokeepthe1.5°Cgoalinreach,InternationalEnergyAgency,September2023.Thesharesoftechnologiesatvariousstagesofmaturitycoulddifferindifferentpartsoftheworldbecauseoftechnologies’differentcostprofiles,localadoptionrates,andotherfactors.Weexcludedbehavioralchange(whichhasasmallcontributiontoemissionsreduction)fromtheIEA’sanalysisandroundedtheresultingsharestothenearest5percent.ThoughTRLscanbeaneffectiveframeworkforunderstandingthematurityofindividualtechnologies,theydonotconsiderotherfactorsrelevanttocommercialization.Suchfactorsinclude,forexample,thetechnology’spotentialtoperformaswellastraditionalalternativesinarangeofuses,thematurityofthesupplychainandotherinputsneededforthetechnology,andthematurityofsupportingsystemsthatthetechnologywoulddependon(suchasbatteriesforfull-scaleintermittentrenewableenergygeneration).Mostofthelower-costsolutionsdescribedinprinciple1areeitherinthecommerciallymaturecategoryorarenottechnological(forexample,alteringmodesoftravel).Afewexceptionsareintheearlymarketstagebutclosetocommercialmaturity.Anaffordable,reliable,competitivepathtonetzero18Exhibit7Manytechnologiesneededtoreduceemissionstonetzeroarenotyetcommerciallymature.ShareofCO₂emissionsreductionsfromtechnologiesneededtoreachnetzeroby2050,¹%0102030405060708090100Concept,prototype,Earlymarketstage,²Commerciallymature,²ordemonstrationstage,²~4510–2035–45Representativetechnologies:Representativetechnologies:Representativetechnologies:•Air-sourceheatpumps•Geothermalpower•Onshorewindpower•Hydropower•Concept(05%):Nuclearfusion;•Passengerbattery-electricvehicles•ConventionalLEDlightinglithium-airbatteries•Lithium-ionbatterystorage•Inductioncooking•Hydrogenfuelcellelectricvehicles•Largenuclearplants•Prototype(1520%):Hydrogen•Alkalinewaterelectrolyzersaviation;concreterecycling•Demonstration(~20%):Smallmodularnuclearreactors(SMRs);naturalgaspowerwithcarboncapture,utilization,andstorageOnerepresentativetechnology’sevolutionthrougheachstage:solarphotovoltaicmodules,priceperwatt,³$FirstresidenceFirstpowerFirstGlobalGlobalrunningonlystationwithoverdistributedcapacityinvestmentonsolarpower1megawattgridexceedsexceedsbuiltofcapacity1gigawatt$100B20.800.201063014865419701975198019851990199520002005201020152020DemonstrationEarlymarketCommercialstagestagematurity(insomemarkets)¹Reductionsrelativeto2022emissions;technologyreadinesslevels(TRLs)asof2022.²ThesecategoriesarebasedonTRLsfromtheInternationalEnergyAgency.Whatwecalltheconcept,prototype,anddemonstrationstagescorrespondtoTRLs1through8;theearlymarketstagecorrespondstoTRLs9and10;andcommercialmaturitycorrespondstoTRL11.Weexcludedbehavioralchange(whichhasasmallcontributiontoemissionsreduction)fromtheIEA’sanalysisandroundedtheresultingsharestothenearest5%.AlthoughTRLscanbeaneectiveframework,theydonotconsidereveryfactorthatisrelevanttocommercialization.³Pricesandmaturityrefertothoseofthesolarphotovoltaicmodulesanddonotincludesystemcosts.Source:InternationalEnergyAgency;ETPCleanEnergyTechnologyGuide,“EvolutionofsolarPVmodulecostbydatasource,1970–2020,”andWorldenergyoutlook2023;USDepartmentofEnergy;McKinseyPlatformforClimateTechnologies;McKinseyanalysisMcKinsey&CompanyAnaffordable,reliable,competitivepathtonetzero19maturityspectrum,35to45percentcouldcomefromtechnologiesthatarestillintheconcept,prototype,ordemonstrationstage.Examplesoftechnologiesinthosestagesincludelithium-airbatteries,hydrogenaviation,andsmallmodularnuclearreactors,respectively.Insomecases,technologiesneedtoovercomefundamentalscientificorengineeringchallenges.Inothers,theywouldneedtogrowmuchcheapertobecomecostcompetitivewithtraditionaltechnologies.Theremaining40to50percentoftheemissionsreductionsneededby2050areexpectedtocomefromtechnologiesthatarecurrentlyintheearlymarketstage(forexample,lithium-ionenergystorage,onshorewindpower,andpassengerbatteryEVs).51Thesetechnologieshavebeenproventoworkandarecommerciallyavailable,buttheymaynotyetbefullyscaleduporcostcompetitivewithtraditionaltechnologies.Theymayalsofaceintegrationchallengesorunresolvedtechnologicaldifficultiesinspecificuses.Improvingthematurityoftechnologiesandbringingtheircostsdownwillneedthreemutuallyreinforcingmechanisms:first,R&D;second,“learning-by-doing”(thelearningthathappensascompaniesthatarestartingtobuildanddeployaproductenhanceitstechnologicalperformance,improvemanufacturingprocesses,buildsupplychains,anddevelopappropriatebusinessmodels);andthird,theeconomiesofscalethatemergewhendeploymentbecomeswidespread.52Thosethreemechanismsoftenworktogethertodrivedowncosts.Intheearlystages,R&Disamajorfactor.Astechnologiesstarttogrow,learning-by-doingcanplayalargerroleandalsoprovidereal-worldfeedbacktoguideadditionalR&Defforts.Inlaterstages,economiesofscalebeginplayingagreaterroleasincreasingthesizeofproductionplantsspreadsfixedcostsovermoreproducedunits(thoughinlaterstages,too,R&Dandlearning-by-doingcanstillimprovetechnologiesanddrivedowncosts).From1980to2001,R&Dandlearning-by-doingaccountedforasmuchas65percentofthecostdeclineofsolarpanels,economiesofscalefor20percent,andotherfactorsfortheremainder.From2001to2012,R&Dandlearning-by-doingrepresented50percentofthecostdecline,andeconomiesofscaleaccountedforabout45percent.53Variousmeasurescanhelpimprovetheviabilityoftechnologiesandreducetheircost.Thepublicsectorcanplayakeyrolebyconveningstakeholdersinvarioussectors,collaboratingwiththemtoestablishcross-sectordecarbonizationroadmaps,directlyfundingR&D,orprovidingincentivesorsubsidiesforcompaniestoengageinit.Intheenergysector,investingmoreinR&Dissurelywarranted;asashareofGDP,ithasremainedflatsincetheearly1990sandis60percentlowerthanitwasatitshistoricalpeak.5451WhatwecalltheearlymarketstagecorrespondstotheIEA’sTRLs9and10.TRL9,“commercialoperationinrelevantenvironment,”referstotechnologiesthatarecommerciallyavailablebutneedimprovementtostaycompetitive,suchashydrogenfuelcellelectricvehiclesandalkalinewaterelectrolyzers.TRL10,“integrationneededatscale,”referstotechnologiesthatarecommercialandcompetitivebutneedfurtherintegrationefforts,suchasair-sourceheatpumpsandlithium-ionbatteriesforenergystorage.Sometechnologiesthathavereachedcommercialmaturityinsomelocationsarestillintheearlymarketstageinothers.SeeETPcleanenergytechnologyguide,InternationalEnergyAgency,September2023.52Otherfactorscanalsodrivechangesintechnologycostsovertime.Forexample,thecostofsilicon,animportantdriverofthecostofsolarphotovoltaicmodules,declinedbetween1980and2001becauseofdevelopmentsinthesemiconductorindustry.SeeGoksinKavlaketal.,“Evaluatingthecausesofcostreductioninphotovoltaicmodules,”EnergyPolicy,volume123,December2018.53Between1980and2001,economiesofscaleaccountedfor20percentofcostdeclinesforsolarphotovoltaicmodules,whileotherfactorsaccountedfor15percent.Between2001and2012,R&D,learning-by-doing,andotherfactorsrepresented43,7,and5percentofcostdeclinesforsolarphotovoltaicmodules,respectively.Theimpactoflearning-by-doingonitsownwasrelativelysmall.Market-stimulatingpoliciesplayedasignificantroleindrivingcostsdownbyunlockingprivateR&D,economiesofscale,andlearning-by-doing;thesetogethercontributedanestimated60percentofthecostdeclineforsolarphotovoltaicmodulesbetween1980and2012.SeeGoksinKavlaketal.,“Evaluatingthecausesofcostreductioninphotovoltaicmodules,”EnergyPolicy,volume123,December2018.54Worldenergyinvestment2022,InternationalEnergyAgency,2022.Thatcalculationisofinvestmentin31IEAmembercountries,anditincludesR&Dinenergyefficiency,fossilfuels,CCUS,renewableenergy,nuclearfissionandfusion,hydrogenandfuelcells,otherpowerandstoragetechnologies,andothertechnologies.Anaffordable,reliable,competitivepathtonetzero20Fortechnologiesthatshowpromise,abroaderapproachmaybecalledfor,oneinwhichmarket-stimulatingmechanisms,aswellasactionsbyventurecapitalfirmsandotherorganizations,provideincentivesforprivateR&Dandforearlydeployment.Thosemeasurescanpushtheprivatesectortobuildnewbusinessesandscaleuptechnologies.55Onewaytodosoistoguaranteefuturedemandinordertoencouragecompaniestodevelopandscaleupnewtechnologies.Anotherapproachwouldestablishinnovationclustersorhubswhereacademicresearchers,venturecapitalfirms,andcompaniescouldworktogethertodevelopandscaleuptechnologies.Evencommerciallymaturetechnologiesmayneedhelpiftheyarestillseenasriskyorifmovingtothemfromoldertechnologiescausesconsumerstoincurswitchingcosts.Onewaytoacceleratetheirdeploymentistodrivefinancialflowstothem;seeournextprincipleformore.Inimplementingallthesemeasures,itwillbeimportanttoencouragecollaborationamongsectorsindifferentcountries.Suchcollaborationbringsabroaderpooloftalentandideastobearonproblemsandpromotesthewideapplicabilityoftechnologies.OneexampleistheRenewableEnergyTechnologyActionPlatform,acollaborationbetweenIndiaandtheUnitedStatesthataimstoenableknowledgesharingaboutgreenhydrogen,windenergy,long-durationenergystorage,andotheremergingtechnologies.56Forcompanieslookingtosystematicallydrivedowncosts,acrucialstepissettingambitiousgoalsthatcanhelpfocustheirattentionandefforts.ConsiderTesla’smasterplan,whichhassetanambitiousagendatoreducebatterycostsby56percentbetween2020and2025.57Andsocietyandindustryneedtobefocusedonreducingthecostnotjustofindividualtechnologiesbutofentiresystems.Principle3:Buildeffectivefinancialmechanismstodrivecapitalwhereitisneeded.Financialmarketsandinstitutionsarekeyactorsineffectivelyallocatingcapital.Theydosobychannelingmoneyefficientlyfromprovidersofcapitaltoinvestments.Butthosemarketsandinstitutionsfacetwochallengesinfacilitatingacapitalreallocationaslargeandcomplexasthenet-zerotransition.First,low-emissionstechnologiesarestillnascentinsomesectorsandnotyetcostcompetitiveinothers,andtheirrisk-returnprofilesdifferfromthoseoftraditionalalternatives.Providersofcapitalmaythereforehaveahardtimeevaluatingtheirviabilityandriskandmaybehesitanttolendtothemorinvestinthem.Second,consumersandcompaniesmayhavealimitedappetitetomovetothesenewtechnologies,whichcanaffectdemandforclimatefinance.Innovation,aswenotedearlier,canplayanimportantrolebyensuringthatlow-emissionsalternativescontinuetobecomecostcompetitive.Butanumberofadditionalsolutionscouldhelpacceleratethenecessaryreallocationofcapital.Thosesolutionswouldreducetheriskof55Thereissomedebateaboutwhethergovernments,intryingtolowerthecostoflow-emissionstechnologies,shouldfocusonR&Dorondrivingdeployment.Aswediscussedabove,theimportanceofthetwoinloweringcostsvariesdependingonthestageofthetechnology.Fortechnologiesinearlierstages,directincentivesforR&Dmaymattermore;forthoseinlaterstages,R&D,learning-by-doing,andeconomiesofscalecanallplayaroleandreinforceoneanother.Thereisarelateddebateabouthowmuchtofocusonimprovingtechnologiesandhowmuchtofocusondeployingexistingtechnologies(forexample,throughadoptionsubsidiesorthroughenactingacarbontaxonhigh-emittingassets).Researchsuggeststhatthetwoagendasneedtoworkinparallel.Forexample,adoptionsubsidiescanhelpincreasetheuseoflow-emissionstechnologies,butovertimetheywillbeexpensiveunlessthecostandperformanceofthosetechnologiesimprove.Andcarbontaxestendtobemosteffectivewhenviableandcost-competitivelow-emissionstechnologiesalreadyexist;insuchcases,thetaxesdiscouragetheuseofhigh-emissionstechnologiesandencourageaswitchtothelow-emissionsones.SeeDaronAcemogluetal.,“Theenvironmentanddirectedtechnicalchange,”AmericanEconomicReview,volume102,number1,February2012.56“RenewableenergytechnologyactionplatformunderUS–Indiastrategiccleanenergypartnership,”MinistryofNewandRenewableEnergy,GovernmentofIndia,August2023.57“Batterydaypresentation,”Tesla,September2020.Anaffordable,reliable,competitivepathtonetzero21investments,bettermatchcapitalproviderswiththeinvestmentneedsthataremostsuitableforthem,orunlockdemandforclimatefinance.Oneofthesolutionsisdevelopingandscalingupvoluntarycarbonmarketsinthenearterm.Theywouldneedtobelarge,transparent,verifiable,andenvironmentallyrobust.58Ifdesignedwell,theycouldparticularlyencouragetheflowofcapitaltodevelopingcountriesandtomeasuresthatcouldotherwisebehardtofinance,suchasavoidingdeforestation.Anotherpossiblesolutionismandatorymarketsandcarbonprices.Thisapproachwouldrequirecompaniestopayfortheiremissionsandgivethemanincentivetoinvestinprojectsthatreduceemissions.59Anotheropportunityisexpandingandrevampingexistingsourcesofcapital,suchasprojectfinance.Indevelopedmarkets,environmental,social,andgovernanceindexes,climateindexes,greenbonds,andsustainability-linkedloanshavealsogainedpopularity.However,concernsaregrowingthattheseinstrumentsarenotworkingwell.Improvingthefunctioningofsuchinstruments—forexample,bycraftingbetterstandardsorformulatingbetterwaysofverifyingthatthestandardsareactuallymet—canhelpincreasetheireffectiveness.Entirelynewassetclassesandfundscouldbebuiltaswell.Industrialventurecapitalfunds,whichtendtoplayanactiveroleinatechnology’searlystages,andgrowthinfrastructurefunds,whichcanbeinstrumentalinbringingamaturetechnologytoscale,couldbedevelopedtodrivecapitaltoclimatesolutions.Special-purposevehicles,whichmanagefinancialresourcesforaclearlydefinedpurposeandperiod,couldhelpcompaniescontinuefundinghigh-emittingassetsthatremainnecessaryinthenearterm—butforaspecifiedperiodandwithaclearplanforwindingthemdown.Sustainablelandandforestryfundscouldhelppreserveforests,and“brown-to-green”fundscouldhelpcarbon-intensivecompaniesdecarbonize.Scalingupblendedfinancecouldalsohelpincreasecapitalflows.Blendedfinancecombinespublicandprivatecapital,reducingtheriskfacedbyprivatecapitalproviders.Philanthropiccapitalcanplayapartaswell.Becausepubliccapitalisoftenlimited,itisimportantthatitbecarefullychanneledintoareaswheretheneedismostacute,suchassupportingthetransitioninlower-incomeorlower-middle-incomecountries.Forexample,thosecountriesmaybeinvestinginraisingenergyaccess,butdoingsowithlow-emissionstechnologiescouldincurhighcapitalcosts.Variousreformsarealsobeingconsideredtoensurethatblendedfinance,grantfunding,andloansonconcessionaltermsareusedtotheirfullpotential,suchasincreasingthefundingavailableviamultilateralinstitutionsandadjustingthetermsonwhichitcanbeprovided.60Also,implementingblended-financeprojectscanbeslow;toaddressthatproblem,financialinstitutionsandmultilateralinstitutionscoulddevelop“off-the-shelf”guidanceongeneralfinancingstructuresandframeworksthatcouldthenbetailoredtodifferentneeds.Companiescanusethevarioussourcesofcapitaldiscussedabove,suchasprojectfinanceorbrown-to-greenfunds.Buttheycouldalsoreallocatetheirowncapitalresourcesfromhigh-to58Voluntarycarbonmarketswouldincludemarketsforavoidancecredits(forexample,topreventforestsfrombeingcutdown)andforremovalcredits(forexample,forplantingforestsordirectaircapture).Forfurtherdetails,seeFinalreport,TaskforceonScalingVoluntaryCarbonMarkets,January2021.59Onewaycarbonpricescanbeimplementedisintheformofacarbontaxonemittingpartsoftheeconomy.Estimatessuggestthattheapplicationofsuchataxcouldresultinincreasedpricesofenergyandotherproductsforendconsumers,creatingaffordabilityconcerns.However,theextentoftheaffordabilityimpactforconsumersdependsonthemagnitudeofthecarbontaxappliedandonhowtherevenuegeneratedfromthetax,ifany,isrecycledbackintotheeconomy.SeeFiscalmonitor:Howtomitigateclimatechange,InternationalMonetaryFund,October2019.Moreover,aswediscussedearlier,usingR&Dandothermeasurestodevelopanddrivedownthecostsoflow-emissionstechnologiescanworkhandinhandwithcarbontaxesandreducechallengestoaffordability.60Bymultilateralinstitutions,wemeanthosethatarefundedbythegovernmentsofmorethanonecountry.SeeScalingupblendedfinanceindevelopingcountries,OECD,2022;andStrengtheningmultilateraldevelopmentbanks:Thetripleagenda,IndependentExpertGroupcommissionedbyIndianG-20Presidency,2023.Anaffordable,reliable,competitivepathtonetzero22low-emissionsbusinesses.Thatofteninvolvesmakinglargecapitalinvestmentsortransforminglargephysicalassets.Thestepisnotastraightforwardone,anditwillrequirecreatingincentivesforcompaniestomaketheinvestments.Long-termpurchaseagreements,forexample,providecompanieswithaguaranteedsourceofrevenueoveranextendedperiod,givingthemanincentivetoinvestinnewtechnologies.Allthesesolutionswouldneedtobesupportedbymoretransparencyandabetterunderstandingofthepotentialdemand,costs,andrisksofspecificnewtechnologiesandprojects.Climate-relateddisclosurescouldhelp,andsocouldeffortsbycompaniesandfinancialinstitutionstobuildcapabilitiestobetterassessnewrisk-returnprofilesandidentifynewopportunities.RedesigningphysicalandenergysystemsThenet-zerotransitioncallsforfar-rangingchangestomanyexistingsystems.Someofthosesystemsprovidethephysicalinputsnecessarytobuildlow-emissionsassets;othersprovideenergy.Ifnotperformedwell,thechangescouldcompromiseaffordability,reliability,andthepaceofemissionsreduction.Thenextthreeprinciplesshowhowtomakethechangeseffectively.Principle4:Anticipateandremovebottlenecksformaterials,land,infrastructure,andlabor.Thetransitionwillcallforincreasesinthesupplyofcertainminerals,suchaslithiumandnickel,andofmanufacturedgoods,suchaswindturbinesandelectrolyzers.Itwillrequiresubstantialamountsofwaterformining,hydrogenproduction,andotheruses.Itwillalsorequireagreatdealoflandforsolarpanels,windfarms,transmissioninfrastructure,forests,andcropsthatcouldbeturnedintobiofuels.Infrastructure,suchasEVchargingnetworks,electricalgrids,andhydrogenpipelines,willneedtobescaledup.Andagreatdealoflaborwillbeneededtobuildandoperatenewphysicalassets.Thepotentialsupplyofthoseinputswillgenerallynotbealimitation.Forexample,enoughmineralreservesexisttomeetthedemandexpectedunderthenet-zerotransition.Butvariousbottleneckscouldlimitaccess,especiallyinthenearterm.Thisisnotanunprecedentedproblem;bottleneckshavethreatenedhigh-emissionssupplychainsinthepast,andtheyhavebeenmanagedeffectively.Butifthebottlenecksthreateningthetransitionarenotalsomanagedeffectively,materialshortagesandpricespikescouldresult,impairingaffordability,reliability,andthepaceofthetransition.Longleadtimesareoftenaproblem.Forexample,thetimethatelapsesbetweeninitialexplorationandstartingtooperateanewmineistypicallyfiveto15years.61Partlyforthatreason,shortagesofcopper,lithium,nickel,rareearthmetals,andcobalt—materialsusedheavilyinEVbatteries,windturbines,andotherlow-emissionstechnologies—couldbeginbefore2030.62Similarly,itcantakethreeto12yearsforanewelectricitytransmissionordistributionprojecttobeplanned,receivethenecessarypermits,bebuilt,andbecomeactive.63IntheUnitedStates,gettinganewnuclearreactorapprovedcantakeuptofiveyearsofcomplexsafetyreviews,environmentalassessments,andpublichearings,andbuildingitcantakefiveyearsormore.64Anotherpotentialbottleneckisconcentration.Forexample,Chinaproducesmorethan70percentoftheworld’ssilica-basedsolarphotovoltaicmodulesandtwo-thirdsofbatterycells.65While61Thenet-zeromaterialstransition:Implicationsforglobalsupplychains,McKinsey&Company,July2023;andMaterialandresourcerequirementsfortheenergytransition,EnergyTransitionsCommission,July2023.62PatriciaBingoto,MichelFoucart,MariaGusakova,ThomasHundertmark,andMichelVanHoey,“Thenet-zeromaterialstransition:Implicationsforglobalsupplychains,”McKinsey&Company,July2023.63AverageleadtimestobuildnewelectricitygridassetsinEuropeandtheUnitedStates,2010–2021,InternationalEnergyAgency,January2023.64“Nuclearexplained:USnuclearindustry,”USEnergyInformationAdministration,August24,2023.65Energytechnologyperspectives,InternationalEnergyAgency,March2023.Anaffordable,reliable,competitivepathtonetzero23concentrationcanbringefficiencygains,itcancreatesupply-chainbottlenecksifsupplyfromthefewsourcesisaffected—say,bynaturaldisastersortraderestrictions.Amultitudeofconstraintscanaffectthesupplyofland.Thoseconstraintsdonotincludetheamountoflandavailableintheworld,buttheydoincludethenaturalendowmentsofagivenregion(suchassunniness,windiness,andforests),competingprioritiesforland(forexample,agriculture),localregulations,andpublicsentiment.Asforlabor,theavailabilityofnecessaryskillsisapotentialchallenge.Nuclearpowercouldfaceshortagesofworkerswiththerequiredexpertisebecausemanyarenowreachingretirementage.66Similarchallengescouldexistforotherjobsrelatedtothemanufactureandinstallationoflow-emissionstechnologies.67Stakeholdersshouldthereforeconductanalysesofwherebottleneckscouldemergeandtakemeasurestoremovethem.Somewaysofdoingsowouldincreasethesupplyofinputs.Long-termsupplycontracts,suchasthosethatareformingbetweenautomanufacturersandmineralsproducerstoprovidelithiumusedforbatterytechnologies,helpindividualmanufacturerssecuresupplyofkeyinputsoverlongperiodswhilesupportingthescale-upofcapacityfornewmaterials.68Andworkforceretrainingprogramscouldincreasethesupplyofworkerswiththenecessaryskillsquickly.Forexample,teachingtechnicianswhoalreadyinstallheating,ventilation,andair-conditioningsystemshowtoinstallheatpumpscouldbeafastwayofbuildingacapableworkforce.Othermeasureswouldreducethedemandforinputs.Examplesincluderecyclingmaterials,developingnewbatterychemistriesthatrelylessonrawmaterialsthatareinshortsupply,andreplacingdatedwindturbinesinexistingwindmillswithnewer,moreefficientones,thusreducingtheamountoflandneededforagivensupplyofelectricity.Principle5:Revampenergymarketsandplanningapproachesforanelectrifiedworld.Electricitywillplayalargerandlargerroleasthetransitiontakeshold.Inanet-zeroworld,electricitysystemscouldprovideaboutthreetimesasmuchenergyastheydotoday,andtheshareofallelectricitythatwasgeneratedbywindandsolarpowercouldgrow.69Almosttwiceasmanytransmissionanddistributionlineswouldneedtobeconstructedasexisttoday.70Inanumberofways,currentmarketsandplanningapproachesforthegenerationofelectricitymaynolongerbesuitedforthatexpansionandmaynolongerfunctionwellonceithappens.71Fourchallengesstandout.Thefirstisthatcompaniesmaynothaveincentivestobuildandoperateallthenecessarygenerationcapacity.Manymarketscurrentlyusemarginalcosts(whicharetypicallydrivenbythecostofusingafuel,suchasgasorcoal)tosetelectricityprices,andthosepricesserveasincentivestobuildcapacity.Butthatarrangementwillnotworkinasysteminwhichgenerationassetshavenomarginalcostsorlowones—examplesarewindandsolarpower—becausetheresultingelectricitypriceswouldbeverylowandvolatile,andgeneratorswouldreceivealmostnopaymentsforthepowertheysupplied,onaverage(Exhibit8).66“Nuclearindustrycensusrevealspositivesignsofgrowthalongsideworkforcechallenges,”NuclearIndustryAssociation,January25,2022.67Worldenergyemployment2023,InternationalEnergyAgency,November2023.68“LGEnergySolutionandToyotasignlong-termbatterysupplyagreementtopowerelectricvehiclesintheU.S.,”Toyota,October4,2023.69Worldenergytransitionsoutlook2023:1.5°Cpathway,InternationalRenewableEnergyAgency,June2023.70Energytechnologyperspectives,InternationalEnergyAgency,March2023.71Thoughthisdiscussionfocusesonelectricity,otherenergymarketswillalsoneedtoshiftordevelop,includingthosefornaturalgasandhydrogen.Wefocusonelectricitybecauseitwillundergoanespeciallydramatictransformationandwillrequireespeciallyinnovativesolutions.Anaffordable,reliable,competitivepathtonetzero24Exhibit8Windandsolarpowergeneration,whichhaveverylowmarginalcoststooperate,couldbecomemajorpartsoftheenergymixinthefuture.ProjectedchangeindistributionandcostofUSenergysources2021Short-runmarginalcostpermegawatt-hour,$Shareof1,200-gigawatttotalcapacity,%Gaspeaking¹11Typicalrangeofclearingprice42ofelectricity,²illustrativeGas3227Coal181930gigawattsNuclear89ofadditional0capacityatanHydropower70averagemarginal0costof$0.50perSolar110megawatt-hourcouldcomefromOnshorewind12energystorage.³Oshorewind<12050AchievedCommitmentsscenario⁴Shareof3,900-gigawattShort-runmarginalcosttotalcapacity,%permegawatt-hour,$Hydrogen7Forhydrogen,Gaspeaking¹941expensiveGas:3(>$100)energy26willberequiredNuclear:409whenthesystemHydropower:2isinfulluse.⁵Solar460Onshorewind250280gigawattsOshorewind:30Decreaseofadditionalinaveragecapacitywithclearingpriceverylowmarginalofelectricity,costscouldcomeillustrative²fromstorage.³¹Gaspeakingreferstogas-redplantsthatrunonlywhendemandishigh.²Therangeshowsclearingpricesduringmosthours.³Storageincludespumped-hydroandlithium-ionlong-durationenergystorage.Storagecouldincreasetheutilizationpotentialofwindandsolarpoweranddisplacesomefossilfuelproduction.⁴BasedontheUSAchievedCommitmentsscenariopublishedinGlobalenergyperspective2023,McKinsey&Company,October2023.⁵Thischartexcludeshydrogen’sshort-runmarginalcostof$150–$200permegawatt-hourin2050.Source:PubliclyavailabledatafromUSEnergyInformationAdministrationandUSNationalRenewableEnergyLaboratory;McKinseyanalysisMcKinsey&CompanyAnaffordable,reliable,competitivepathtonetzero25Thesecondchallengeisthatwindandsolarpowerareintermittent.Thatis,theyprovideelectricityonlywhenthewindisblowingorthesunisshining.Therefore,plannersandmarketdesignersneedtoensurethattherightplansandmarketsignalsexisttodriveinvestmentinassets,suchasenergystorageandgasplants,thatcansupportwindandsolarpower.Third,inanelectrifiedworld,itmaybehardertotimesupplytomatchdemand.72Demandforelectricitymaybeespeciallyhighinthewinterinplaceswherepeoplereplacefossilfuel–basedheatingsystemswithelectricones.ItmayalsobeespeciallyhighatnightifpeoplecontinuetoadoptEVsandtochargethemovernight.Sosystemswillneedtobedesignedtomanagedifferentdemandatdifferenttimesoftheyearanddifferenttimesofday.Moreover,solarpanelsgeneratelesspowerinthewinterandnoneatnight,complicatingtheproblemiftheybecomealargerpartoftheenergymix.Fourth,becauseoftheincreaseinwindandsolargenerationandthechangingclimate,plannersandmarketdesignersmustnowaccommodateweathervolatility.Forexample,asTexasdiscoveredduringaseverefreezein2021,somepowerplantsandnaturalgasfacilitiesarenotwinterized;thatis,theystopworkingorsufferdiminishingperformanceinextremecold.73Anumberofstepscouldstartaddressingthesechallengesinbothregulatedandderegulatedmarketsforelectricity.Tobuildlow-emissionsassetsaffordably,powercompaniesinregulatedmarketscouldeithertakeonthejobthemselves,reducingcoststhroughinternalefficiencyimprovements,orissuecompetitivebidsforothercompaniestodoit.Inderegulatedmarkets,auctionsforsupplyagreementswillprobablystillbecritical.Inbothkindsofmarkets,solarandwindpower(orotherformsofcapital-intensivepower)needtobeabletocompeteonalevelplayingfieldwithgenerationtechnologiesthathaverelativelylowcapitalcostsbuthighfuelcosts.Tohelpkeepsupplyalignedwithdemand,asystemdependingonsolarandwindpowerwillalsoneedtobuildagreatdealofflexiblecapacity—thatis,capacitythatcanprovideelectricitywhenwindandsolarcannot.74(Flexiblecapacityissometimescalledresourceadequacy,dependingonthelocationandthelengthoftimethatthecapacitycovers.)Someofthatflexiblecapacitywouldsupportwindandsolaroverthecourseofaday;forexample,batteriescouldstoresolarpowerduringthedayandreleaseitintheevening.Inregulatedmarkets,aprocurementauthoritycouldrequiregeneratorstomakeavailableacertainamountofsuchcapacity.Inderegulatedmarkets,itcouldbeattainedbyrequiringassetstocompeteagainsteachothertoprovideit.Otherkindsofflexiblecapacitywouldsupportelectricitymarketsformorethanadayinordertocounteractseasonalandextremeevents.Forexample,itmaybenecessarytomaintaingenerationplants,whichcouldrunonfossilfuelstodaybuteventuallyberetrofittedwithcarboncaptureorshifttousinglow-emissionsfuels.Theywouldbeusedmuchlessthantheyaretoday,soincentiveswouldbeneededforcompaniestomaintainandrunthem,aswellasthenecessarysupportinfrastructure,suchasgaspipelines.7572Conversely,lowerdependenceonfuelinputswillreducetheriskof“commodityshocks,”inwhichafuelcommoditysuddenlybecomesscarce.Suchshockscansignificantlyincreasethepriceofelectricitygeneration,andtheycanalsoeliminateaccesstothecommodityentirely,jeopardizingthereliabilityofelectricity.Forexample,in2002,BangladeshcouldnotobtainsuppliesofnaturalgasthathadbeenreroutedtoEuropeasaresultoftheshortageofgasthere,andwidespreadoutagesresulted.73GarrettGolding,“Texaselectricalgridremainsvulnerabletoextremeweatherevents,”FederalReserveBankofDallas,January24,2023.74Notethatflexiblecapacitydoesnotnecessarilycallforfossilfuels;renewableresourcesoftenprovidesomecapacityduringcriticaltimes.Similarly,fossilfuelsarenotasurebetatsuchtimes,asTexas’sexperiencein2021demonstrates.75Runninggaspowerplantstoprovideonlybackupcapacitywillentailnumerousshifts.Forexample,gaspipelines,eveniftheycarryless,mayneedevenmoreinvestment,includinginvestmentinexpandingthesizeofpipessothattheycanprovideadequatesupplytogeneratorsatcriticalmoments.GasgeneratorsthatwilleventuallyshifttoCCUSorhydrogenwillalsoneedinvestment.Anaffordable,reliable,competitivepathtonetzero26Compensationmechanismswouldhavetochangetogivecompaniesincentivestoprovidethiskindofcapacity.Inregulatedmarkets,plannerscoulddeterminetheamountofcapacityneededandallowcompaniestobuildormaintainmoreassetstocovertheneed,compensatingthemwitharegulatedreturnonthoseassets.Inderegulatedmarkets,othercompensationmechanisms,suchasapricepaidpergigawattofflexiblecapacity,wouldprovideincentivesforcompaniestobuildormaintainassetswellinadvanceoftheneed,becausepowercapacitycannotbebuiltovernight.Acceptablesystemriskswouldalsoneedtobedefined.Flexibilitywillbecriticalregardlessofthegenerationmixasmoreandmorepartsoftheeconomybecomeelectrified.Planningmechanismswillbenecessarytodeterminetheneed—forexample,whichseasonsandtypesofeventspresentthegreatestchallengesandhowmuchelectricitywillbeneededtomaintainreliability.Aparticularlyimportantplanningtoolindetermininghowmuchcapacityaresourcecanprovideduringcriticaltimesisprobabilisticmodeling,whichcanaccountforvariationsindemandforelectricityandforintermittentsupply.Anotherwaytoreconcilethetimingofsupplyanddemandistoofferconsumersandbusinessesincentivestoshifttheirdemandforelectricitytotimeswhenthereismoreavailablesupply.Forexample,EVchargingdoesnothavetohappenintheevening.Anddatacenterscanaligntheirdemandtotimesandlocationsatwhichrenewablesourcesofelectricityareoperating.76Notonlythegenerationofelectricitybutalsoitstransmissionfacesachallenge:thetransmissioncapacitynecessaryforthetransitionneedstobebuilt.Thechallengeexistsbothforlarge-scale,high-capacitylinesthatwouldcoverlongdistancesandforsmallerlinesthatwouldconnectthemtogenerators.Thereisnoshortageofcapitalseekingtobuildlarge-scaletransmissioninmanydevelopedcountries.Theproblem,rather,isplanningproceduresthatassessonlythereliabilityvalueofasingleline.Moremodernplanningprocedures—whichevaluateaportfoliooftransmissionlinesandvalueseveralbenefits,suchasresiliency,accesstocleanenergy,andeconomicdevelopment—areincreasinglybeingadopted.Suchproceduresshouldbalancecostsandbenefitsamongjurisdictionstoaccountfortheirdifferentapproaches.Anotherreasonfornotbuildingtransmissioncapacityispermitting,asthisreportdiscussedearlier.Thedistributionofelectricitylikewisefacesachallengeinthetransition.Inmanyplaces,regulationsprovideutilitieswithmostoftheirreturnsonthebasisoftheirnondepreciatedcapitalassets.Thatsystemgivestheutilitiesanincentivetodeploymorecapitalthantheyotherwisemight.Severalcountries,suchasItaly,arethereforeplanningtoshifttomodelsthatrewardtotalspending,notjustcapitalspending.Suchmodelscouldgiveutilitiesanincentivetobemorecapitalefficient,whichcouldleadtoshiftsinbehavior,suchasrepairingassets(whichdoesnotalwayscountascapitalspending)ratherthanreplacingthem(whichdoes).Anotherareathatcouldrequiremarketchangesandplanningfocusisdistributedenergyresources,suchasrooftopsolarpanels.Suchresourcescouldpotentiallyreducespendingontransmissionanddistribution,andtheycouldalsoprovidesmall-scaleflexiblecapacity.However,asuseofdistributedenergygrows,itsuserswillnaturallydependlessonutilities,requiringtheutilitiestoplancarefully.Establishingclearerstandardsforcompensatingconsumersfortheseresourceswillbevital.NavigatingrisksandopportunitiesIftheworldistoprotectaffordabilityandreliabilityduringthenet-zerotransition,itwillalsohavetonavigateriskswhilemovingfromanoldenergysystemtoanewone.Andtobecomemore76RasoulRahmani,IreneMoser,andAntonioL.Cricenti,“Inter-continentaldatacentrepowerloadbalancingforrenewableenergymaximisation,”Electronics,volume11,number10,2022.Anaffordable,reliable,competitivepathtonetzero27competitive,countriesandcompanieswillhavetoprepareforthemanyopportunitiesofferedbythetransition.Principle6:Manageexistingandemergingenergysystemsinparallel.Thenet-zerotransitionwillentailrevampinghowtheworldproducesandusesenergy.Asthathappens,theworldwillneedtoruntwoenergysystemsinparallel,smoothlyrampingdowntheold,fossilfuels–basedonewhilescalingupthenew.Doingsowellcanhelpreduceemissionstonetzerowhileensuringreliableandaffordableaccesstoenergy.Tohelpdecision-makersbetterunderstandhowtoenableasmoothtransition,westartedbyexaminingscenariosofdemandforoil,gas,andcoalfromarangeofsources,includingtheIEA,theIPCC,andMcKinsey’sGlobalenergyperspective2023(Exhibit9).77Thosescenarioshavedifferentwarmingoutcomesby2100,rangingfrom1.5°Cabovepreindustriallevelstoabout3.0°C.Foroildemand,someofthescenariosshowgrowthduringthenextfewyears,butthenthepicturechanges.Inallofthescenariosexaminedhere,demandeventuallystartstofall,andinmost,itislowerby2050thanitistoday,thoughtovaryingextents.Akeydriverofthevariationinprojecteddemandforoilisthetransportationsector—specifically,theuseofEVsandtheefficiencyoftransportation.Gasdemandisalsoexpectedtogrowinthenearterminsomeofthescenariosweexamined.Overtime,though,somescenariosshowincreasesindemandbetweennowand2050,whileothersshowdeclines.Theoverallimpactondemandwoulddependonhowvariousfactorspusheditupordown.Fasterdeclinescouldbecausedbyamorerapidincreaseintheuseofrenewableenergyforpowergeneration,growingelectrificationtoreplacetheuseofgas(particularlyinheatingsystemsinbuildings),andashiftawayfromnaturalgasinindustrialprocesses.Butsometransition-relatedsolutionscouldpushgasdemandup:usinggastoproducehydrogen,switchingfromcoaltogastogenerateelectricity,andusinggaspowertoprovidefirmingcapacityforrenewablepowergeneration.Usinggasasafeedstockforchemicalscouldalsoincreasedemand.Andforcoaldemand,allscenariosshowdeclines.ThesteepnessofthedeclinesdependsinparticularonhowdemandinIndiaandChina,theworld’sbiggestconsumersofcoal,evolves.Stakeholdersapproachingthemanagementoftwoenergysystemsinparallelshouldthereforeconsidertwoimplications.First,inscenariosinwhichwarmingiskepttothelevelsenvisionedbytheParisAgreement,theprocessofshiftingfromtheoldenergysystemtothenewmeansthatoil,gas,andcoalwillplayatleastsomepartintheenergymixinthenextfewyears.Soitisvitalthatdirectemissionsfromtheiroperationsbeassmallaspossible.Second,thesenumerousscenariosshowthatalthoughdemandforoilandgaswillbelowerin2050thanitistoday—substantiallylower,ona1.5°Ctrajectory—thedeclinewillnotbeimmediate.Intheinterim,itwillbeimportantfordemandtobemetwithenoughsupplysothataccesstoenergyisreliableandaffordable.Atthesametime,however,itwillbeabsolutelycriticaltoensurethatrelianceontheoldsystem,totheextentneeded,doesnotslowmomentumtowardthenew.77SeeWorldenergyoutlook2023,InternationalEnergyAgency,October2023;“Worldenergybalances,”InternationalEnergyAgency,August2023;“AR6ScenarioExplorerandDatabasehostedbyIIASA,”InternationalInstituteforAppliedSystemsAnalysis,2022;andGlobalenergyperspective2023,McKinsey&Company,October2023.Thescenariosareforfossilfuelsusedforenergyproductionbutalsoforotheruses.Byoildemandhere,wemeandemandforarangeofliquids,includingcrudeoil,naturalgasliquids,biofuels,coal-to-liquids,gas-to-liquids,methyltert-butylether,refinerygains,andlow-emissionsfuels.Anaffordable,reliable,competitivepathtonetzero28Exhibit9Demandforoil,gas,andcoaldeclinesby2050inmanyscenarios,buttheoutlookvarieswidely.Oilandotherliquidfossilfuels,dailyaverage,¹barrels,millionActualProjectedDemandscenariosProjectedwarmingabove100preindustriallevels,ºCMcKinseyGEP:80FadingMomentum2.03.0CurrentTrajectory2.03.0FurtherAcceleration>1.5to<2.0AchievedCommitments>1.5to<2.060IEA:StatedPolicies2.03.0AnnouncedPledges>1.5to<2.040Net-ZeroEmissionsby20501.520IPCC²:2.03.0C4Median2.03.00C3Median1.52010C2Median1.5C1Median2020203020402050Naturalgas,annual,Coal,annual,cubicmeters,trillionmetrictonsofcoalequivalent,billion5ActualProjected6ActualProjected454332211020202030204020500202020302040205020102010Note:Allnon-McKinseydatacomedirectlyfrompublicsources.Forsomescenarios,datafor2020mayvaryfromactualdatabecausetheymaycomefrommodels,includingmodelsbuiltsomeyearsago.Datamayalsovaryamongscenariosbecauseofdifferentassumptionsabouttheenergycontentoffuels,thespecificmixoffueltypeswithineachcategory,andotherfactors.Wehaveusedlinearinterpolationbetweenthepublisheddatapoints,whichareindicatedbydots.ValuesfromtheIntergovernmentalPanelonClimateChange(IPCC)wereprovidedinexajoules(EJ),whichweconvertedbyusingthefollowingconversionfactors:1EJperyear=0.517millionbarrelsofoilperday,28.9billioncubicmetersofgasperyear,and34.12metricmegatonsofcoalequivalentperyear.Wederivedthoseconversionfactorsbyusingthereported2022demandinexajoulesandthereportedvolumemeasuresinWorldenergyoutlook2023,InternationalEnergyAgency,October2023.¹Includesthefollowing:forMcKinseyGEPscenarios,crudeoil,naturalgasliquids(NGLs),coal-to-liquids(CTLs),gas-to-liquids(GTLs),methyltert-butylether(MTBE),refinerygains,andlow-emissionsfuels;forIEAscenarios,crudeoil,NGLs,CTLs,GTLsandadditives,refinerygains,andlow-emissionsfuels.ForIPCCscenarios,weusedtheconversionfactordescribedabove.²EachofthefourIPCClinesshowsthemedianvalueofarangeofscenarios.IntheC1andC2scenarios,warmingby2100islimitedto1.5°Cabovepreindustriallevels,butintheC2scenario,itfirstovershootsthatlimit,whereasintheC1scenario,itdoesnot.IntheC3andC4scenarios,therearea67%anda50%likelihood,respectively,oflimitingwarmingby2100to2.0°Cabovepreindustriallevels.Source:InternationalEnergyAgency(IEA),WorldEnergyBalances;publiclyavailabledatafromIEA,Worldenergyoutlook2023;“AR6ScenarioExplorerandDatabasehostedbyIIASA,”InternationalInstituteforAppliedSystemsAnalysis,2022;McKinsey’sGlobalenergyperspective2023(GEP);McKinseyanalysisMcKinsey&CompanyAnaffordable,reliable,competitivepathtonetzero29Inadditiontostudyingdemandforoil,weexaminedexpectationsofsupply.78Specifically,welookedatthepotentialproductionofcrudeoilandnaturalgasliquidsfromexistingoilfields(accountingfortheirexpecteddepletionaswellasforfutureproductiontherethatcanbeenabledbymaintenanceandothermeasures)andfromprojectscurrentlyunderdevelopment(Exhibit10).79WefoundthatatExhibit10Theworld’sabilitytomeetfutureoilneedswithexistingresourcesvariesamongdemandscenarios.Supplyanddemandofcrudeoilandnaturalgasliquids,dailyaverage,barrels,million110Demandscenarios¹Pprreoijnedcutesdtriwaallremvienlgs,aºbCove100McKinseyGEP:FadingMomentum2.03.090CurrentTrajectory2.03.0FurtherAcceleration>1.5to<2.080AchievedCommitments>1.5to<2.070IEA:StatedPolicies2.03.060AnnouncedPledges>1.5to<2.0Net-ZeroEmissionsby20501.550IPCC²:40C4Median2.03.0C3Median2.03.030C2Median1.5C1Median1.520Supply³10Projectscurrentlyunderdevelopment0Potentialproductionfromexistingoilelds2020203020402050Note:Allnon-McKinseydatacomedirectlyfrompublicsources.Wehaveusedlinearinterpolationbetweentheavailabledatapoints,whichareindicatedbydots.ValuesfromtheIntergovernmentalPanelonClimateChange(IPCC)wereprovidedinexajoules(EJ),whichweconvertedbyusingthefollowingconversionfactor:1EJperyear=0.517millionbarrelsofoilperday.Wederivedthatconversionfactorbyusingthereported2022demandinexajoulesandthereportedvolumemeasuresinWorldenergyoutlook2023,InternationalEnergyAgency,October2023.¹ForMcKinseyGEPscenariosandIEAscenarios,includescrudeoilandnaturalgasliquids.ForIPCCscenarios,weusedtheconversionfactordescribedabove.²EachofthefourIPCClinesshowsthemedianvalueofarangeofscenarios.IntheC1andC2scenarios,warmingby2100islimitedto1.5°Cabovepreindustriallevels,butintheC2scenario,itfirstovershootsthatlimit,whereasintheC1scenario,itdoesnot.IntheC3andC4scenarios,therearea67%anda50%likelihood,respectively,oflimitingwarmingby2100to2.0°Cabovepreindustriallevels.³Includesproductionfromexistingoilfieldsandprojectsunderdevelopment.Existingoilfieldsconsistofthosethatarecurrentlyproducing;weaccountfortheirexpecteddepletionaswellasforfutureproductionthatcanbeenabledbymaintenanceandothermeasures,suchasinfilldrilling.Projectsunderdevelopmentincludethosethatareinthepost–finalinvestmentdecision(FID)stage.Theanalysisexcludesmajorpre-FIDprojectredevelopmentsandexpansions,aswellasnewinvestmentsinshaleoil,unconventionalwetgas,andassociatednaturalgasliquids.Italsoassumesthatexistingsanctionsregimescontinueandthatsomesparecapacityremainsinthesystem.Supplywasmodeledonlyuntil2040becauseuncertaintyaboutfuturesourcesofproductionmademodelingchallengingafterthatpoint.Source:InternationalEnergyAgency(IEA),WorldEnergyBalances;publiclyavailabledatafromIEA,Worldenergyoutlook2023;“AR6ScenarioExplorerandDatabasehostedbyIIASA,”InternationalInstituteforAppliedSystemsAnalysis,2022;RystadEnergy;McKinsey’sGlobalenergyperspective2023(GEP);McKinseyEnergySolutions;McKinseyanalysisMcKinsey&Company78Supplywasmodeledonlyuntil2040becauseuncertaintyaboutfuturesourcesofproductionmademodelingchallengingafterthatpoint.79Existingoilfieldsconsistofthosethatarecurrentlyproducing;weaccountfortheirexpecteddepletionaswellasforfutureproductionthatcanbeenabledbymaintenanceandothermeasures,suchasinfilldrilling.Projectsunderdevelopmentincludethosethatareinthepost–finalinvestmentdecision(FID)stage.Theanalysisexcludesmajorpre-FIDprojectredevelopmentsandexpansions,aswellasnewinvestmentsinshaleoil,unconventionalwetgas,andassociatednaturalgasliquids.Italsoassumesthatexistingsanctionsregimescontinueandthatsomesparecapacityremainsinthesystem.Anaffordable,reliable,competitivepathtonetzero30leastthrough2040,someshortfallcouldexistbetweenthatproductionandpotentialdemandforoil,evenwiththesubstantialdeclineindemandforoilexpectedona1.5°Ctrajectory.80Anddependingonhowdemandforgasevolves,newinfrastructuremaybeneeded,inparticularforpipelinesandforfacilitiesthattransformgasintoliquefiednaturalgas(LNG)andthenback.IntheUnitedStates,forexample,newpipelineinfrastructuremaybeneededinpartsofthecountrytosupplygastosupportrenewablepowersystems.Likewise,Asiahasonlymodestgasreservesofitsown,soitmayneednewfacilitiestoserviceLNGimportedfromabroad.Theseanalysespointtoanumberofsolutionsthatcouldhelpmanagetwoenergysystemseffectivelyinparallel.Firstandforemost,itwillbecriticaltoscaleupthenewenergysystemasquicklyaspossible.Thiscouldbedonebyexpandingalternativeenergysources,changingend-usesectors,andimprovingenergyefficiency,aswehavedescribedindepthelsewhereinthisreport.Butmoreisneeded.OneimportantstepistoreduceScope1and2emissionsfromfossilfueloperationstotheextentpossible.81Estimatessuggestthatsuchemissionsofmethanefromoilandgasoperationscouldbereducedby35percentatnearlynonetcost.82Methaneemissionscouldbereducedbyfixingleakyconnectionsandupdatingoperatingprocedurestoreduceventingatwells,pipes,andtanks.83Othermeasurescouldincludereducedflaring,electrificationofequipment,anduseofcarboncapture.Anotherstepisfordecision-makerstoundertakefossilfuel–relatedinvestmentsinwaysthatprovideasmuchenergyasnecessaryandpreventpricevolatilitybutalsomaintainmomentumtowardnetzeroanddonotrisklockingintheuseoffossilfuels.Increasingtheefficiencyandeffectivenessofexistingoperationstomaximizeproduction—forinstance,throughimprovedmanagementofreservoirs—isoneopportunity.Another,totheextentnewprojectsareneeded,isdeployingcapitalinamodularfashion.Thatis,ratherthaninvestinginprojectsthatrequirelarge,up-frontcapitaloutlaysinreturnforlongusefullifetimes,companiescouldidentifyopportunitiesforwhichcapitalcanbedeployedinsegments.Also,projectswithlowemissionsintensitycouldbeprioritized.Principle7:Competeforopportunitiescreatedbythetransition,usingcomparativeadvantageasaguide.Asthetransitionunfolds,andasdemandforhigh-emissionsproductsandtheircomponentsfalls,jobsandoutputinsomepartsoftheeconomymaybeharmed.84Otherpartsoftheeconomycouldgain.By2050,thetransitioncouldresultinagainofabout200millionjobsandalossofabout185millionjobsglobally.85Countrieswillneedtoconsiderhowtosupportvulnerableworkersandindustries.Butevenasthetransitionreducesdemandandaffectssomepartsoftheeconomy,itwillalsocreatenewopportunitiesforcountriesandcompaniestoparticipateinanet-zeroeconomy.Some80The1.5°CscenariosthatweexaminedarefromtheIEAandtheIPCC.81Scope1emissionscomefromsourcesthatarecontrolledorownedbyanorganization;Scope2emissionsarethose“associatedwiththepurchaseofelectricity,steam,heat,orcooling.”SeeUSEnvironmentalProtectionAgency,CenterforCorporateClimateLeadership,“Scope1andScope2inventoryguidance,”August21,2023.82Emissionsfromoilandgasoperationsinnetzerotransitions,InternationalEnergyAgency,June2023.SeealsoCurbingmethaneemissions:Howfiveindustriescancounteramajorclimatethreat,McKinsey&Company,September2021.83Methaneemissionsfromtheenergysectorarehighlyconcentratedinafewcountries,whichcouldcreatebarrierstoemissionsreductionifthosecountriesdonotactivelypursueit.AccordingtotheInternationalEnergyAgency,thefivebiggestmethaneemittersforenergy-relatedusesareChina,Russia,theUnitedStates,Iran,andIndia,whichtogetheraccountforoverhalfoftheglobaltotal.Ofthosecountries,onlytheUnitedStateshassignedtheGlobalMethanePledge.See“Methanetracker,”InternationalEnergyAgency,February2023.84Forexample,seePiaAndresetal.,“Strandednations?Transitionrisksandopportunitiestowardsacleaneconomy,”EnvironmentalResearchLetters,volume18,number4,March2023.85Thenet-zerotransition:Whatitwouldcost,whatitcouldbring,McKinseyGlobalInstitute,January2022.Anaffordable,reliable,competitivepathtonetzero31ofthoseopportunitiesaredirectonesinvolvinglow-emissionsproductsandprocesses:improvingtheenergyefficiencyofheatingsystems,buildingwindandsolarfarms,manufacturingEVs,andsoon.Thoseopportunitieswillinturncreateothers,suchasextractingandrefiningnewmaterialsneededforthetransition,craftingnewfinancingmechanisms,andbuildinginfrastructure,suchasEVchargingstations.Aswediscussedabove,manynet-zerotechnologiesarealreadycommerciallymature,whileothersareintheearlymarketstageandripeforfurtherdevelopment.Buildingandscalingupnewgreenbusinessescanboostjobs,exports,andeconomicoutput(inbothdevelopedanddevelopingcountries);theycanalsocreatevalueforcompanies.Ascountriesandcompaniesbegintoexploretheseareas,theyshouldbeguidedbytheirpotentialtogaincomparativeadvantage.Forexample,somecountriesmayhaveoutsizeaccesstosunshineorwind;thosecountriesmightchoosetoproducegreenhydrogen,whichreliesonaccesstolow-costrenewablepower,ortofollowenergy-intensivecourses,suchasrunningdatacenters.Othercountriesmayhavedepositsofmineralresourcesneededinthetransition.Othersmaybeabletotakeadvantageoftheirgeographiclocationtoparticipateinnewglobaltradenetworks,suchasthoseforlow-emissionsfuels.Inothercases,countriesandcompaniesmayhavetechnicalknow-howthatcanhelpthemmanufacturethegoodsthatthetransitionwillrequire.AgoodexampleisSouthKorea,whichhastakenadvantageofitsexpertiseinbatterymanufacturingtobecomealeaderingrid-scaleenergystorage,capturing50percentoftheglobalmarketin2018withsupportfromgovernmentinitiatives.86(Formoreonhowprioritiesduringthetransitioncouldvary,seeBox,“Customizingnet-zerostrategiesfordifferentcountries.”)Numerousmeasurescanhelpcountriescaptureopportunities.Investingineducationandtrainingprogramscouldequipworkforceswithskillsthatgreenindustriesneed.Creatingecosystemsthatenablelocalinnovationcouldencouragethedevelopmentofnewideas,products,andserviceswithinacountry.Anddesigningnewinitiativescarefullyandholistically,withaneyetowardhowtheyinteractwithoneanother,willbeimportant,becauseclimatepolicyisintertwinedwithmanyotherkindsofpolicy,includingnationalsecuritypolicy,industrialpolicy,innovationpolicy,andlabormarketpolicy.Companiestoocantakestepstopositionthemselveswellandbenefitfromopportunities.Thosestepsincludecreatingcustomerpartnershipstobuildnewmarkets,reallocatingcapitalacrosstheirportfoliostoemergingareas,andscalingupnewgreenbusinesses.Ourpastresearchhasidentifiedmanycompaniesthataredoingso.8786Korea’senergystoragesystemdevelopment:Thesynergyofpublicpullandprivatepush,WorldBankGroupKoreaOffice,January2020.87LauraCorb,AnnaGranskog,TomasNauclér,andDanielPacthod,“Fullthrottleonnetzero:Creatingvalueinthefaceofuncertainty,”McKinsey&Company,September2023.Anaffordable,reliable,competitivepathtonetzero32BoxCustomizingnet-zerostrategiesfordifferentcountriesEverycountrywillfacedifferentchallengesEmissions.Today,mostGHGemissionsthoughtheirpercapitaemissionsremainandimperativesonitsnet-zerojourney.comefromhigh-incomecountries,whichwellbelowthoseofhigh-incomecountriesAlthoughdetailedcountrystrategiesareemit34percentofthetotal,andupper-(Exhibit1).3Low-incomecountriesemitbeyondthescopeofthiswork,herewemiddle-incomecountries,whichemitlessthan5percentofthetotal.4highlightafewcharacteristicsthatcouldabout50percent.2Emissionspercapitahelpinformsuchstrategies.1havebeenrisingforthatsecondgroup,Exhibit1Thequantityandsourceofemissionsvarybycountries’income.GlobalCO₂eemissionsbycountryincomelevel,2019¹Emissionspercapita,200019,metrictonsIncomelevelHighUmpidpdelre-Lmoiwddelre-LowcouAnltlriesShareofglobal3450151=100emissions,%15CO₂eHighemissions,17248=501metricgigatonsEmissions10010breakdownUpper-bysector,%middleWasteAllBuildingscountriesAgriculture5TransportationPowerLower-IndustrymiddleLow02000201020190Note:Industryincludesemissionsfromindustrialprocessesforcement,chemicals,metals,andmining,aswellasoilandgasprocessessuchasupstreamprocesses,refining,andpipelinetransportation.Powerincludesemissionsfromelectricitygenerationandheatgeneration.Transportationincludesemissionsfromroadvehicles,rail,aviation,andmaritimetransportation.Agricultureincludesemissionsfromcropresidues,entericfermentation,fishing,manure,on-farmenergyuse,rice,andsyntheticfertilizers.Buildingsincludesemissionsfromcookingandheatingincommercialandresidentialbuildings.Wasteincludesemissionsfromthebiologicaltreatmentofsolidwaste,solidwastedisposal,wastewatertreatmentanddischarge,andtheincinerationoropenburningofwaste.Dataaboutemissionsfromlanduse,land-usechange,andforestryaremostreliablyavailableattheregionallevel,sowedidnotconsiderthoseemissionsinthiscountry-by-countryanalysis;globally,theyamountedtoabout4.2metricgigatonsin2019.¹CO₂e,orcarbondioxideequivalent,includesnotonlycarbondioxidebutalsoothergreenhousegases.CO₂eiscalculatedwithameasurecalledglobalwarmingpotential,whichindicateshowmuchenergytheemissionsofonetonofagreenhousegaswillabsorbinrelationtotheemissionsofonetonofCO₂overagivenperiod—inthiscase,100years.CountrygroupingsbyincomelevelarefromtheWorldBank’sclassicationsforcalendaryear2019.See“Newcountryclassicationsbyincomelevel:2020–2021,”DataBlog,WorldBank,July1,2020.Source:FoodandAgricultureOrganizationoftheUnitedNations,“FAOStat”;WorldBank;McKinseyEMITdatabase(v2021);McKinseyanalysisMcKinsey&Company1Forarangeofnear-termactionsthatcountriesandregionsaroundtheworldcouldtake,seeTheenergytransition:Aregion-by-regionagendafornear-termaction,McKinsey&Company,December2022.2ThosecalculationsrefertoemissionsofCO2andotherGHGs.Non-CO2emissionswereconvertedintoCO2equivalentsaccordingtotheir100-yearglobalwarmingpotential.3Thesecalculationsexcludeanthropogenicemissionsfromforestryandotherlandusebecausethosedataaremostreliablyavailableattheregionallevelandthisisacountry-levelanalysis.Thoseemissionsamountedto4.2metricgigatonsin2019.See“FAOStat,”Emissionstotals,FoodandAgricultureOrganizationoftheUnitedNations,May2023.4CountrygroupingsbyincomecamefromtheWorldBank’sclassificationsforfiscalyear2019.See“Newcountryclassificationsbyincomelevel:2020–2021,”DataBlog,WorldBank,July1,2020.Anaffordable,reliable,competitivepathtonetzero33Customizingnet-zerostrategiesfordifferentcountries(continued)ThenatureofemissionsalsovariesDevelopingcountriesalsotypicallyhavethreetimesasmuchasdevelopedones,fromcountrytocountry.AlargesharelessfirmingcapacitythatcouldonedaymeasuredasashareofGDP,onlow-ofhigh-incomecountries’emissionsissupportwindandsolarpower.Theageofandhigh-emissionsassetsforenergy,fromenergyproduction,buildings,andhigh-emissionsassetsalsovariesamongmaterials,andland-usesystems(bothtransportation.Inupper-middle-incomecountries.Emergingeconomiesoftenhaveforthetransitionandforeconomiccountries,emissionsresultingfromenergyyoungercoal-burningpowerplants,fordevelopment)toreachnetzeroby2050.6productionandindustrialusearehigh.example,andlessincentivetoprematurelyThatspendingislargelyusedtobuildInlow-incomecountries,emissionsaredecommissionthem.Thesamepointpowersystems.Yetfinancingisharderforrelativelylowfromenergyusebuthighappliestoyoung,high-emittingassetsinthosecountries.Soscalingupblendedfromagriculture.Therefore,thepriorityothersectors,suchassteelfurnaces.financecouldbeaparticularlyimportantforsomecountriesmaybeenergy-relatedsolution(seeprinciple3).emissions;forothers,emissionsfromIndevelopingcountries,therefore,agriculture.ButallcountrieswillneedtodesignersoffutureenergysystemsmustDevelopedcountries,bycontrast,haveconsiderwherethereareopportunitiestoconsidernotonlytheemissionsofsuchmorepowerassetsthatcanprovidedeployunderusedlower-costsolutionsandsystemsbutalsohowtodeliveraffordablefirmingcapacity.Sotheirprioritiesmightwheretransitionsolutionsmaybemostaccesstoenergy,addressthelackofincluderemovingconstraintsonthesupplyappropriate(seeprinciple1).firmingcapacity,andtackletheriskofofinputsneededforthetransition(seestrandedassets.Butthemixofenergyprinciple4)andrevampingenergymarketsAllcountrieswillalsoneedtoconsidertheirsolutionscouldvarysubstantiallyamong(principle5).opportunitiestopursuethreeprioritiescountries.Stepstoconsiderincludesimultaneously—emissionsreduction,switchingcookingfuelsfromwoodorEconomicactivityandendowments.economicdevelopment,andadaptationtocharcoaltogasandelectricity;buildingExistingeconomicactivityandjobsmaytherisksposedbyclimatechange—aswelllow-costsolarandwindpower,eitherbeputatriskbythetransition.Developingastensionsamongthosethreepriorities.aspartofelectricgridsorasdistributedcountriesandfossilfuel–richregionsForexample,forthemanylow-incomeenergyresources,andespeciallyinplacesarethemostvulnerabletobothkindscountriesthathaverelativelylowemissionswheretheneedforfirmingcapacitywouldoflosses.7Butallcountrieswillneedtotoday,thekeyprioritymightbedrivingnotsubstantiallyraisecosts;buildinggasconsiderhowtosupportaffectedworkerseconomicgrowthandjobcreationnowpower,includinggaspowerthatcouldandindustries.Theywillalsoneedtoandstrivingtodosoinwaysthatcouldalsoreplacecoalpowerwherefeasible,andconsiderhowtheycanbenefitfromkeepfutureemissionslow.ideallyinawaythatcanprovidelong-transition-relatedopportunitiesbytakingtermfirmingorcleancapacityaswellasadvantageoftheirnaturalendowmentsExistingenergysystems.Countries’near-termenergyaccess;andconsidering(seeprinciple7)andreducingtechnologycurrentcapacitytoproduceenergyalsootherlow-emissionsalternatives,suchascosts(principle2).Forexample,India,varies.In2020,4.6billionpeople,allgeothermalpowerandhydropower.whichhas300daysofsunshineperyear,isofthemindeveloping(thatis,low-andprioritizingbuildingasolarpowerindustry,middle-income)countries,consumedlessAlso,afteranalyzingascenariofromandsomeestimatessuggestthatitcouldthan50gigajoulesofenergyapiece—fartheNetworkforGreeningtheFinancialbecomethesecond-largestproduceroflessthanthe140-gigajouleaverageSystem,wefoundthatdevelopingsolarcomponentsby2026.8inhigh-incomecountries(Exhibit2).5countrieswouldneedtospendupto5ThoseestimatesarebasedoninformationinDataBank,theWorldBank,2023;“Finalrenewableenergyconsumption,”InternationalRenewableEnergyAgency,July2023;“Worldenergybalances,”InternationalEnergyAgency,August2023;andGlobalenergyperspective2023,McKinsey&Company,October2023.6Thenet-zerotransition:Whatitwouldcost,whatitcouldbring,McKinseyGlobalInstitute,January2022.7Ibid.8India’sphotovoltaicmanufacturingcapacitysettosurge,InstituteforEnergyEconomicsandFinancialAnalysisandJMKResearch&Analytics,April2023.Anaffordable,reliable,competitivepathtonetzero34Customizingnet-zerostrategiesfordifferentcountries(continued)Exhibit2In2020,4.6billionpeopleconsumedlessthan50gigajoulesHighest:ofenergyapiece.Qatar570gigajoulesFinalenergyconsumptionperperson,byeconomy’sincomelevel,2020,¹gigajoulespercapitaHeight=consumption500Width=population400HighincomeUpper-middleincomeTotalpopulationofeconomiesLower-middleincomebelow/above50gigajoulespercapitaLowincome4.63.2billionbillion300belowaboveUnitedStates192200Japan91DemocraticEthiopiaBrazilMainlandRepublic1546China100ofCongoIndiaIndonesia659182450Lowest:SouthSudanPopulation,billion02gigajoulespercapitaTotal:7.8billion¹GroupingsbyincomelevelarefromtheWorldBank’sclassicationsforcalendaryear2020.See“Newcountryclassicationsbyincomelevel:2021–2022,”DataBlog,WorldBank,July1,2021.ConsumptionestimatesarethosepublishedinGlobalEnergyPerspective2023,McKinsey&Company,October2023.Source:InternationalEnergyAgency,WorldEnergyBalances;InternationalRenewableEnergyAgency,FinalRenewableEnergyConsumption,2023;WorldBank;McKinsey’sGlobalenergyperspective2023;McKinseyanalysisMcKinsey&CompanyAnaffordable,reliable,competitivepathtonetzero35Anillustrationshowshowfollowingthoseprinciplescouldacceleratetheworld’scurrenttrajectoryAstheworldembarksonthetransition’snextphase,applyingtheprinciplesdescribedabovecouldhelpreduceemissionswhileensuringaffordability,reliability,andindustrialcompetitiveness.Todemonstratethatpoint,weconductedasetofanalyses.Theyillustratewhatmighthappenasaresultofdeployinglower-costsolutions(asinprinciple1)anddrivingdownthecostofmoreexpensiveones(asinprinciple2)todifferentdegrees.Specifically,theyprovideroughassessmentsofthecorrespondingcapitalspendingonlow-andhigh-emissionstechnologies,aswellasofemissionsandwarminglevels.88Asweproceedfromanalysistoanalysis,weshowhowprogressivelygreaterdeploymentoflow-costtechnologies,steepercostdeclinesoflow-emissionstechnologies,andhigherlow-emissionsspendingleadtolessandlesswarming,untilfinallywereachwarmingof1.5°C.Afewwordsaboutourmethodsareinorder.(Formoredetail,seethetechnicalappendix.)Tomeasuretheimplicationsofthetwoprinciplesforaffordability,weusedcapitalspendingonlow-emissionsassets,notoperatingspending.Wedidsoforanumberofreasons.First,thecurrentchallengefacingtheworldistodeploycapitaltowardlow-emissionstechnologies;aswementionedearlier,theamountofcapitalcurrentlybeingspentonthetransitionremainsfarshortofwhatisnecessarytolimitwarmingto1.5°C.Aswealsomentionedearlier,evenifthecapital88Inquantifyinginvestment,weincludewhatistypicallyconsideredinvestmentinnationalaccounts,suchasinvestmentinsolarandwindpowercapacity,aswellassomespendingonwhataretypicallyconsideredconsumerdurables,suchaselectricvehicles.Ouranalysisdistinguisheshigh-emissionsassetsandtechnologiesfromlow-emissionsones.Low-emissionsassetsemitrelativelylowamountsofGHGsbutarenotnecessarilycarbonneutral.Examplesoflow-emissionsassetsaresolarandwindfarmsandelectricvehicles.Insomecases,wealsoincludeenablinginfrastructure,suchasthetransmissionanddistributioninfrastructureneededforrenewablepowerorthecharginginfrastructureneededforelectricvehicles.Examplesofhigh-emissionsassetsarefossilfuel–basedpowerandvehicleswithinternalcombustionengines.Inthisanalysisspecifically,weconsidertheinvestmentneededforonetransitionsolution—namely,switchingcoalpowertogaspower—aslow-emissionscapitalspending.Wedothatbecauseouranalysisregardsthatswitchasawayofloweringemissions.Foradetailedlistofabatementsolutionsandtechnologiesconsideredinthisanalysis,seethetechnicalappendix.Anaffordable,reliable,competitivepathtonetzero36costoflow-emissionstechnologiesdeclinesasquicklyasexpected,only50percentofthecapitalspendingonthosetechnologiesneededby2030toeventuallyachievenetzeroislikelytotakeplaceundercurrentpolicyframeworks;anyadditionalspendingwouldthereforedependongreatersocietalcommitment,suchasincreasedpublicspendingoradditionalpolicies.89Second,capitalspendingismorerelevanttolow-emissionstechnologiesthanoperatingspendingis,becausemanyofthosetechnologiescostmoretobuildthantooperate;thereverseistrueforhigh-emissionstechnologies.Inreality,somespendingonoperatingcostswouldalsobeneeded,particularlyintheillustrativeanalysesthatincludegreateruseofhigh-emissionsassets,whichtendtohavehigheroperatingcosts.Theseareonlyillustrativeanalyses,andmuchmoreworkwouldbeneededtocomprehensivelyandrigorouslyevaluatetheimplicationsofthemeasureswehaveappliedhere,consideradditionalones,performabroaderandmorecarefulassessmentofcosts,anddesignrobusttransitionscenarios.Also,theanalysesareintendedtobenotoptionsthatadecision-makercouldchooseamongbutratheranillustrationofhowdifferentactionscantogetherachievethegoalsoftheParisAgreement.Nonetheless,webelievetheexercisecanhelpusunderstandthepotentialimplicationsofapplyingthetwoprinciplesinfullmeasure.Ouranalysesareasfollows(Exhibit11).—Maintaincurrentcapitalspending.Ourfirststepwastoestablishastartingpointfromwhichtobuildsubsequentanalyses.Weconsideredastartingpointinwhichthecurrentamountofspendingonlow-emissionstechnologieswouldcontinue,thoughitwouldgrowovertimewithGDP;onaverageinthisillustrativeanalysis,about$2.5trillionwouldbespentannuallybetween2021and2050.90Andthecostofthosetechnologieswouldcontinuetodecline.91(Inreality,aslow-emissionstechnologiesbecomemorecostcompetitivewithtraditionalalternatives,spendingonthosetechnologiescouldgrowmorequicklythanGDP.Wedidnotconsiderthateffectbecausethegoalofthisanalysiswastoestablishabaselinefortherestofourwork.)Intotal,about$8trillionwouldbespenteachyearfrom2021to2050,onaverage,onbothhigh-andlow-emissionstechnologies.EmissionsofCO2in2050wouldbehigherthan2020levels.Warmingby2100couldberoughly3.5°Cto4.0°Cabovepreindustriallevels,accordingtotherelationshipbetweenemissionsandtemperaturepublishedbytheIPCC.92(Formoredetail,seethetechnicalappendix.)—Unlocklower-costsolutionsfirst.Next,weconsideredwhatwouldhappenifaveragespendingonlow-emissionstechnologieswereabout10percenthigherthaninthepreviousanalysis.Alloftheincreasedspendingwouldbeallocatedtolower-costsolutions—specifically,improvingenergyefficiency,reducingmethaneemissionsinfossilfuelproduction,reducingGHGemissionsinagricultureandlanduse,andswitchingpowergenerationfromcoaltogas.93Asaresult,ourillustrativeanalysissuggests,emissionsofCO2in2050wouldbelowerthan2020levelsbyabout10percent,andwarmingby2100couldberoughly3.0°Cabovepreindustriallevels.89Frompovertytoempowerment:Raisingthebarforsustainableandinclusivegrowth,McKinseyGlobalInstitute,September2023.That50percentincludesbothacontinuationoftoday’sspendinglevelsandincreasedspendinglikelyundercurrentpolicyframeworks.90Theseestimatesarehigherthanothersintheliteraturebecausewehavetakenanexpansiveviewofthespendingrequiredinend-usesectorsandbecausewehaveconsideredagricultureandlanduse.91Weassumethatthoserateswouldbe80percentasfastastheratesthatareexpectedintypicalcurrentpolicyscenarios.92See“Technicalsummary”inClimatechange2021—Thephysicalsciencebasis:WorkingGroupIcontributiontotheSixthAssessmentReportoftheIntergovernmentalPanelonClimateChange,CambridgeUniversityPress,2023.93Asthisreportmentionedearlier,othercosts,suchasstrandedassetrisks,mayalsoexistfortransitionsolutions,suchasswitchingpowergenerationfromcoaltogas.Thisanalysisdoesnotconsiderthosecosts.Weensuredthatthemagnitudeofabatementfromthelow-costsolutionswaswithinboundsidentifiedintheliterature.Anaffordable,reliable,competitivepathtonetzero37Exhibit11Asetofillustrationsshowstheeectsofspendingonlow-costsolutionsandacceleratingthecostdeclinesoflow-emissionstechnologies.MaintainUnlockAccelerateAndNet-zerocurrentlower-costcostspendemissionsbycapitalsolutionsevenaboutmidcenturyspendingdeclinesmorersttooCapitalspending1.0×1.1×1.25×1.5×3.0×2.0×onlow-emissionstechnologyAnnualaverage,202150,multipleof“maintaincurrentcapitalspending”analysisCapitalspendingonlow-andhigh-emissionstechnologyAnnualaverage,1×~1×~1×~11.–1×~11..32–×~11.–1×202150,multipleof“maintaincurrentcapitalspending”analysisIncreasedabatementfromlower-costsolutions¹Reductioninlow-emissionstechnologycostsRateofreduction,²1.0×1.0×2.0×2.0×1.5×2.0×multipleof“maintaincurrentcapitalspending”analysisEmissionsoutcomen/a~10%~30%~60%~100%~100%(increase)ReductioninCO₂emissions,2020to2050³Estimatedwarming3.54.0ºC~3.0ºC~2.5ºC<2.0ºC~1.5ºC~1.5ºCWarmingabovepreindustriallevelsby2100,basedonIPCCmethodsNote:Theseareonlyillustrativeanalyses.Theyareintendedtobenotoptionsthatadecision-makercouldchooseamongbutratheranillustrationofhowdierentactionscantogetherachievethegoalsoftheParisAgreement.Ouranalysisfocusesoncapitalspendingonlow-emissionsassets,notoperatingspending;formoredetails,seethetechnicalappendix.Inquantifyingcapitalspending,weincludewhatistypicallyconsideredinvestmentinnationalaccounts,aswellassomespendingonconsumerdurables,suchaselectricvehicles.Ouranalysisdistinguisheshigh-emissionsassetsandtechnologiesfromlow-emissionsones.Low-emissionsassetsemitrelativelylowamountsofGHGsbutarenotnecessarilycarbonneutral.Examplesoflow-emissionsassetsaresolarandwindfarmsandelectricvehicles.Insomecases,wealsoincludeenablinginfrastructure,suchasthetransmissionanddistributioninfrastructureneededforrenewablepowerorthecharginginfrastructureneededforelectricvehicles.Examplesofhigh-emissionsassetsarefossilfuel–basedpowerandvehicleswithinternalcombustionengines.Inthisanalysisspecically,weconsidertheinvestmentneededforonetransitionsolution—namely,switchingcoalpowertogaspower—aslow-emissionscapitalspending.Wedothatbecauseouranalysisregardsthatswitchasawayofloweringemissions.Numbershavebeenrounded.¹Suchsolutionsincludeincreasedenergyeciency,reducedmethaneemissionsfromfossilfueloperations,shiftingfromcoaltogastogenerateelectricity,andmeasuresrelatedtoemissionsfromagriculture,forestry,andotherlanduse.²Therateofcostdeclinesisanexogenousinputintothisanalysis.Weassumethattherateforthe“maintaincurrentcapitalspending”analysiswouldbe80%asfastastheratethatisexpectedintypicalcurrentpolicyscenarios.Weassumethatsomepartofthespendingonlow-emissionstechnologywouldbeallocatedtodrivingdownthecostofmoreexpensivesolutions.Seethetechnicalappendixfordetails.³Roundedtothenearest10%.Source:McKinseyanalysisMcKinsey&CompanyAnaffordable,reliable,competitivepathtonetzero38—Acceleratecostdeclinestoo.Next,weconsideredwhatwouldhappenifaveragespendingonlow-emissionstechnologieswere25percenthigherthaninthefirstanalysis.Someofthatincreasedspendingwouldbeallocatedtothelower-costsolutionsjustdescribed.SomewouldbeallocatedtoinvestmentinR&Dandmarketstimulation,andsometotheearlydeploymentofsomehigher-costsolutions,tohelpdrivedownthecostofsuchsolutions.Weassumedthatthoseeffortscouldreducecoststwiceasquicklyasinthefirstanalysis.94Werecognizethatthisisanambitiousassumption,butwehavemadeittotestthepotentialimpactthatsuchameasurecouldhaveonoverallspendingneedsandwarminglevels.Asaresultofthesemeasures,emissionsofCO2wouldbefurthertempered:by2050,theywouldbeabout30percentlowerthan2020levels.Andwarmingcouldreachroughly2.5°Cabovepreindustriallevelsby2100.—Andspendevenmore.Here,weconsideredwhatwouldhappenifaveragespendingonlow-emissionstechnologieswere50percenthigherthaninthefirstanalysis.Asinthepreviousanalysis,someofthatincreasedspendingwouldbeallocatedtolower-costsolutions,andsomewouldbeallocatedtodrivingdownthecostofmoreexpensivesolutions,againmakingthereductioninthecostoftechnologytwiceaslargeasinthefirstanalysis.Asaresult,emissionsofCO2by2050wouldbeabout60percentlowerthan2020levels,andwarmingby2100couldbelessthan2.0°Cabovepreindustriallevels.—Net-zeroemissionsbyaboutmidcentury.Innoneoftheanalysesdescribedsofardoestheworldachievewarmingof1.5°Cabovepreindustriallevels.SoweconductedtwofurtheranalysesinwhichtheworldwouldsucceedinreducingnetemissionsofCO2tozerobyabout2050.95Theanalysesconsidertwowaystoachievethatgoal.Inonecase,averagespendingonlow-emissionstechnologieseachyearwouldbethreetimesashighasitisinthefirstanalysis.Someofthatincreasedspendingwouldbeallocatedtolower-costsolutions.Andthecostofmoreexpensivesolutionswouldbedrivendown1.5timesasquicklyasinthefirstanalysis.96Intheothercase,averagespendingonlow-emissionstechnologieseachyearwouldbetwiceashighasitisinthefirstanalysis.Slightlymoreoftheincreasedspendingwouldbeallocatedtolower-costsolutions.Andfargreatereffortswouldbemadetodrivedownthecostofmoreexpensivesolutions,sothatthatcostwouldfalltwiceasquicklyasinthefirstanalysis.Asaresult,onceagain,net-zeroemissionsofCO2wouldbereachedbyabout2050andwarmingcouldbelimitedto1.5°Cabovepreindustriallevelsbytheendofthecentury.Thoughtheyareonlyillustrative,ouranalysesallowustomakefourobservations.First,spendingonlower-costsolutionsholdspromiseforreducingemissionsandimprovingwarmingoutcomes.Second,acceleratingthecostdeclinesoflow-emissionstechnologiesdoesthesame,bymoreeffectivelyusingthecapitalthatisdeployed.Infact,theseillustrativeanalysessuggestthatifitwaspossibletounlocklower-costsolutions,doubletherateofcostdeclines,andspendevenoneandahalftimesasmuchastheworldisspendingtodayonlow-emissionstechnologies,asinthefourthanalysislaidoutabove,theworldcouldsubstantiallybendthecurrent94ThatassumptionisinlinewiththeconclusionsstatedinRupertWayetal.,“Empiricallygroundedtechnologyforecastsandtheenergytransition,”Joule,volume6,number9,September2022.Formoredetail,seethetechnicalappendix.95Thesetwoanalysesaremeanttoshowhowapplyingthetwoprinciplesmoreorlessextensivelycouldshiftthelow-emissionscapitalspendingneededtoachievea1.5°Coutcome.Therefore,intheinitialone,low-costsolutionsareappliedtoalesserextentthaninthesubsequentone,andtherateofcostreductionisslower.Neitheranalysisisaleast-cost-optimized1.5°Canalysisofthesortperformedbyintegratedassessmentmodels,whichtrytominimizecombinedcapitalandoperatingcosts.96Thatrateofcostdeclineisinlinewithmanytypical1.5°Cscenarios.Anaffordable,reliable,competitivepathtonetzero39trajectoryofemissions.Doingsocouldpotentiallyevenlimitwarmingtolessthan2.0°C,incontrastto3.5°Cto4.0°Cwithoutthosemeasures.97Third,limitingwarmingto1.5°Cwouldrequirespendingtwotothreetimesasmuchastheworldisspendingtodayonlow-emissionstechnologies.Hereagain,prioritizinglower-costsolutionsanddrivingcostdeclinescouldhelpreducelow-emissionsspending—potentiallybyasmuchasone-third,thedifferencebetweenspendinginourtwoillustrativeanalysesthatlimitwarmingto1.5°C.Finally,thetotalamountofspendingonlow-andhigh-emissionstechnologiestogetherincreasesaswemovefromthefirstanalysistothosewithsteeperemissionsreductions,thoughmuchmoreslowlythandoesspendingonlow-emissionstechnologiesalone.Thatindicatesasubstantialreallocationofspendingfromhigh-tolow-emissionstechnologies.97Again,bytheamountthattheworldisspendingtoday,wemeanthecurrentamountbutgrowingovertimewithGDP.Also,bringingdownthecostofhigh-costtechnologieshasasecondbenefit,thoughitisnotmodeledhere:itcouldhelpmakelow-emissionstechnologiesmorecostcompetitivewithhigh-emissionsones,thushelpingdrivecapitaltothemandincreasingthelikelihoodoftheiradoption.Formoredetails,seeFrompovertytoempowerment:Raisingthebarforsustainableandinclusivegrowth,McKinseyGlobalInstitute,September2023.Anaffordable,reliable,competitivepathtonetzero40Embracingachangeofmindsetcanhelptheworldmoveclosertoitsnet-zerogoalsTheprincipleswehavedescribedcouldbeappliedinmanyotherways.Butallofthemdependonaneededchangeofmindsetaboutthetransition.Asstakeholdersconsiderhowtoexecutethenextphaseofthetransition,inadditiontomakingcommitmentstoreachnetzerointhefuture,theyshouldcommittomakingmoreandmoreprogresseveryyear.Byclearlydefiningnear-termgoals,theycanilluminatetheimmediatenextstepsofthetransition,helpingturntheaspirationsoftheParisAgreementintotangibleaction.Aswehavediscussedthroughoutthisreport,ratherthanconsideringemissionsreductionalone,stakeholdersshoulddosowhilebearinginmindaffordability,reliability,andindustrialcompetitiveness.Thoseobjectivesareimportantbothintheirownrightandinacceleratingprogresstowardnetzero.Andstakeholdersshouldapproachthetransitionwithasenseofparticipationandcollaboration,becauseallofthemhaverolestoplay.Governmentscancreateanenvironmentthatsupportsthetransitiontonewtechnologies,developanintegratedviewofhowenergysupplysystemswouldtransformintandemwithdemand,andsafeguarddomesticcompetitivenesswhilealsoencouragingglobalcooperation.Thesocialsectorcanhelpensurethatnosinglegroupisdisproportionatelyburdenedasthetransitionunfolds.Individualconsumers,employees,andcitizenswillplayapart.Companieswillbethepartiesenactingthetransitionbybuildingassets,developingproducts,andradicallychangingprocesses.Theirstrategyforvaluecreationwillhavetoincludebothguardingagainstrisksandunleashinginnovationtocaptureopportunities.Alloftheseactorswillhavetoworktogethertoreimagineandexecutethetransition.Guidedbytheprinciplesdescribedinthisreport,theymightbeginbyaskingafewprovocativequestions:—Howcanlower-costsolutionsbedeployedtoabatetenmetricgigatonsofGHGsby2030?Anaffordable,reliable,competitivepathtonetzero41—Whatwouldittaketodoubletherateatwhichexpensivesolutionsbecomecheaper?—Wheremighttheworstbottlenecksoccur,andhowcouldtheybepreempted?—Howcouldathoughtfulportfolioofnet-zeroopportunitiesbeconstructed—andonethatalsomirrorseachstakeholder’scomparativeadvantage?Theanswerstosuchquestionsmightdramaticallyincreasetheworld’slikelihoodofreachingglobalnet-zerogoals.Anaffordable,reliable,competitivepathtonetzero42TechnicalappendixThisreportdescribesillustrativeanalysesinwhichmorelower-costsolutionsaredeployedwhilethecostofexpensivesolutionsissimultaneouslydrivendown.Thegoaloftheanalyseswastodemonstratethatthosetwoapproachescouldhelpreduceemissionsandmakethenet-zerotransitionmoreaffordable.Here,weofferinformationabouthowwecreatedtheanalyses.MethodsBecausethegoaloftheanalyseswasnottodesignarobustpathwaytonetzero,wechosetoconductarelativelysimpleassessment.Ourmethodsshouldthereforenotbecomparedwithmoreelaborateanalyses,suchasthoseusedinmakingfull-scaleintegratedassessmentmodels.Weperformedthefollowingsteps.1.Definingtheunitcapitalcostofabatementforeachsolutionfrom2021to2030.TheunitcapitalcostisthecostindollarsofabatingonetonofCO2equivalent.2.Projectingtheunitcapitalcostthrough2100.Weprojectedatrajectoryofunitcapitalcostsbyusingassumptionsabouttheratesatwhichunitcapitalcostschangeeachyear.Todeterminehowquicklythoseratesmightbeincreasedinordertofurtherdrivedowncosts,wedrewonrangesofvaluesfromtheacademicliterature.Specifically,weconsideredcasesinwhichcostdeclineshappenrapidlyasaresultofmeasuressuchasR&D,learning-by-doing,andeconomiesofscale.9898Inour“maintaincurrentcapitalspending”analysis,weassumedthatthepaceofcostdeclineswouldbe80percentasfastasthepaceexpectedintypicalcurrentpolicyscenarios.Toestimatehowmuchthepacecouldaccelerateintheotheranalyses,wemadeassumptionsthatcostscouldfalluptotwiceasquicklyasinthe“maintaincurrentcapitalspending”analysis.Thoseassumptionsareambitious,butwehavemadethemtotestthepotentialimpactthatsuchameasurecouldhaveonoverallspendingneedsandwarminglevels.Theyareinlinewiththehigher-endconclusionsstatedinRupertWayetal.,“Empiricallygroundedtechnologyforecastsandtheenergytransition,”Joule,volume6,number9,September2022.Thatresearchexaminespotentialratesofcostdeclinesformanytechnologies.Itfindsthattechnologycostscoulddeclinesubstantiallymorequicklyinanambitioustransitionscenariothaninoneakintoacurrentpolicyscenario:forsolarpower,1.5timesasquickly;forwindpower,1.3timesasquickly;andforlessmaturetechnologies,suchaselectrolyzers,manytimesmorequickly(thevaluesarebasedonmedian-to-mediancomparisonsamongscenarios).If,insteadofassessingtheambitiousscenarioinrelationtoacurrentpolicyscenario,weassesseditinrelationtoour“maintaincurrentcapitalspending”analysis,thosefactorswouldbecome1.9,1.6,andfarhigher,respectively.Anaffordable,reliable,competitivepathtonetzero433.Defininganalyses.Wedefinedvariousanalysesbyallocatingcapitalinvestmenttovariouslow-emissionstechnologiesandtovariousperiodsfrom2021to2100.99Todothat,wefirstsetthelevelofoverallcapitalspendingonlow-emissionstechnologiesforeachanalysis,basingitonvariousmultiplesoftoday’sspendinglevel.Wethenallocatedanyinvestmentbeyondtoday’sleveltodifferentlow-emissionstechnologies—firsttolower-costtechnologiesandthentohigher-costones.100Ineachcase,wealsoassessedwhethertheresultingspendingprofileswerereasonablebycomparingthemwiththoseinestablishedscenariosfromotherorganizations.Weaccountedforinvestmentsinbothbuildingnewassetsandreplacingexistingonesattheendoftheirlives.WealsoroughlyaccountedforspendingthatwouldbeneededtodriveR&Dandothermeasurestolowerthecostsoftechnologies.Todoso,weexaminedvarioushistoricalbenchmarksforR&Dspending,aswellasincentivesforR&Dandearly-stagedeploymentinmeasuressuchastheInflationReductionAct.Wealsoconductedasensitivityanalysisandfoundthatouroverallconclusionsstillheld,evenunderdifferent(reasonable)assumptionsforhowmuchmightbespentonR&Dandothermeasurestodrivecostreductions.4.Derivingadditionalcapitalinvestmentsrequiredinhigh-emissionstechnologies.Weusedthecapitalinvestmentinlow-emissionstechnologiestodeterminetheadditionalcapitalinvestmentrequiredinhigh-emissionstechnologies.Todothat,weassessedhowmuchthespendingonlow-emissionstechnologiesquantifiedabovecouldmeetunderlyingdemandforenergyandotherproducts—andhowmuchdemandwouldremainandneedtobemetbyspendingonhigh-emissionstechnologies.Together,thosetwospendingvaluesdeterminedthetotalspendingineachanalysis.5.Calculatingabatementineachanalysis.Wecalculatedtheabatementachievedonthebasisofhowmuchcapitalwasallocatedtoeachlow-emissionstechnologyandthattechnology’sexpectedunitcapitalcostofabatement.6.Estimatingthetrajectoryofnetemissionsandresultingwarmingin2100.Wedeterminedthetrajectoryofnetemissionsineachanalysisbysubtractingtheabatementitwouldachievefromtotalemissionsforeachdecade(anamountthatwouldincreasewitheconomicandpopulationgrowth).WeconvertedgreenhousegasesotherthanCO2intocarbondioxideequivalentaccordingtotheirpotentialtoincreaseglobalwarmingover100years.Weestimatedwarmingby2100usingtherelationshipbetweencumulativeemissionsandtemperaturedescribedbytheIPCC.101Inperformingthosesteps,wereliedondatafromavarietyofsources.TheyincludeNetzeroby2050:Aroadmapfortheglobalenergysector,InternationalEnergyAgency,October2021;“NGFSPhase3scenarioexplorer,”NetworkforGreeningtheFinancialSystem,2022;Climatechange2022:Mitigationofclimatechange.ContributionofWorkingGroupIIItotheSixthAssessmentReportoftheIntergovernmentalPanelonClimateChange,IntergovernmentalPanelonClimateChange,2022;andGlobalEnergyPerspective2023,McKinsey&Company,October2023.WealsousedotherMcKinseyproprietaryinformationaboutdecarbonizationsolutionsandtheircapital99Inquantifyinginvestment,weincludewhatistypicallyconsideredinvestmentinnationalaccounts,suchasinvestmentinsolarandwindpowercapacity,aswellassomespendingonwhataretypicallyconsideredconsumerdurables,suchaselectricvehicles.Ouranalysisdistinguisheshigh-emissionsassetsandtechnologiesfromlow-emissionsones.Low-emissionsassetsemitrelativelylowamountsofGHGsbutarenotnecessarilycarbonneutral.Examplesoflow-emissionsassetsaresolarandwindfarmsandelectricvehicles.Insomecases,wealsoincludeenablinginfrastructure,suchasthetransmissionanddistributioninfrastructureneededforrenewablepowerorthecharginginfrastructureneededforelectricvehicles.Examplesofhigh-emissionsassetsarefossilfuel–basedpowerandvehicleswithinternalcombustionengines.Inthisanalysisspecifically,weconsidertheinvestmentneededforonetransitionsolution—namely,switchingcoalpowertogaspower—aslow-emissionscapitalspending.Wedothatbecauseouranalysisregardsthatswitchasawayofloweringemissions.100Thelower-costtechnologieswereimprovingenergyefficiency,reducingmethaneemissionsinfossilfuelproduction,reducingGHGemissionsinagricultureandlanduse,andswitchingpowergenerationfromcoaltogas.Thosetechnologieshaverelativelylowercapitalcostsperunitofabatement,andinmanycases,theyalsohavelowertotal(capitalandoperating)costsperunitofabatement.101See“Technicalsummary”inClimatechange2021—Thephysicalsciencebasis:WorkingGroupIcontributiontotheSixthAssessmentReportoftheIntergovernmentalPanelonClimateChange,CambridgeUniversityPress,2023.Anaffordable,reliable,competitivepathtonetzero44costs,aswellasvarioussourcesforinvestmentindifferentcategoriesoftechnologies;fordetailsaboutthose,seeFrompovertytoempowerment:Raisingthebarforsustainableandinclusivegrowth,McKinseyGlobalInstitute,September2023.Foreachofouranalyses,wevalidatedthatabatementpotentials,unitcosttrajectories,andoverallinvestmentlevelswereinlinewiththoseinothercomparableanalysesintheliterature.Thoughsomeofouranalysisinthisresearchwasbasedondatafromotherorganizations,itisnotendorsedbyanyofthem.Wegratefullyacknowledgetheirinput,buttheconclusionsandanyerrorsareourown.LimitationsOuranalyseshadvariouslimitations.Wenarrowlydefinedaffordabilityasthemagnitudeofcapitalspending.Weconsideredcapitalspending,notoperatingspending,foranumberofreasons.First,thecurrentchallengefacingtheworldistodeploycapitaltowardlow-emissionstechnologies;asthisreportmentionedearlier,theamountofcapitalcurrentlybeingspentonthetransitionremainsfarshortofwhatisnecessarytolimitwarmingto1.5°C.Asthisreportalsomentionedearlier,evenifthecapitalcostoflow-emissionstechnologiesdeclinesasquicklyasexpected,only50percentofthecapitalspendingonthosetechnologiesneededby2030toeventuallyachievenetzeroislikelytotakeplaceundercurrentpolicyframeworks;anyadditionalspendingwouldthereforedependongreatersocietalcommitment.102Second,capitalspendingismorerelevanttolow-emissionstechnologiesthanoperatingspendingis,becausemanyofthosetechnologiescostmoretobuildthantooperate;thereverseistrueforhigh-emissionstechnologies.Inreality,somespendingonoperatingcostswouldalsobeneeded,particularlyinouranalysesthatincludegreateruseofhigh-emissionsassets,whichtendtohavehigheroperatingcosts.Althoughwechosetofocusoncapitalspending,futureanalysiscouldexpandourworktoincludeoperatingcosts(aswellasothermeasuresofaffordability,suchasthecostofenergy).Also,weconsideredonlytheamountofspendingneededonlow-emissionssolutions,notwhethertheywouldbecostcompetitivewithtraditionalalternatives.Drivingdownthecapitalcostsoftechnologiescanbothreducethetotalspendingneededandensurethatmoresolutionsarecostcompetitive.Otherfactorsnotconsideredinouranalysesincludetheimpactofstrandedassets;transitionfrictions,whichcouldraisecosts;theamountofspending,consideredindetail,neededtodrivedowntechnologycosts;andcostdeclinesresultingfromeconomiesofscaleratherthanfromR&Dorfromthelearningthathappensascompaniesstarttobuildanddeployaproduct.Ouranalysesaredecade-by-decadefiguresratherthanyearlyones.Also,theremaybeincreaseduncertaintyinthelateryearsoftheanalyses.Foreachsolution,therateatwhichunitcapitalcostdeclinesisexogenous.Thatis,wetreatitasaninput,anditsvalueisbasedondatafrommajorpublishedscenariosandresearchliterature.Finally,wegroupedlow-emissionstechnologiesinto12categories.Ouranalyseswerethereforerelativelycoarse,andfutureresearchmightconsiderapproachingthesamequestionsingreaterdetail.102Frompovertytoempowerment:Raisingthebarforsustainableandinclusivegrowth,McKinseyGlobalInstitute,September2023.That50percentincludesbothacontinuationoftoday’sspendinglevelsandincreasedspendinglikelyundercurrentpolicyframeworks.Anaffordable,reliable,competitivepathtonetzero45AcknowledgmentsThisreportisacollaborativeeffortbytheMcKinseyGlobalInstitute,McKinsey’sGlobalEnergyandMaterialsPractice,andMcKinsey’sSustainabilityPractice.TheresearchwasledbyMekalaKrishnan,aMcKinseyGlobalInstitutepartnerinMcKinsey’sBostonoffice;HumayunTai,aseniorpartnerintheNewYorkoffice;DanielPacthod,aseniorpartnerintheNewYorkoffice;SvenSmit,aMcKinseyseniorpartnerintheAmsterdamofficeandMGI’schairman;TomasNauclér,aseniorpartnerintheStockholmoffice;BlakeHoughton,apartnerintheDallasoffice;andJesseNoffsinger,apartnerintheSeattleoffice.TheprojectteamwasledbyDirkSimon,aconsultantinBoston,andCarolineJupe,aconsultantinDallas.TheteamincludedMairéadBarron,AnitaDing,DapoFolami,JohnGrabda,PaulineLeeuwenburg,AaronSchifrin,CarloTanghetti,andDanielWaring.WethankSimonDietz,professor,GranthamResearchInstituteonClimateChangeandtheEnvironment;MarionDumas,professor,GranthamResearchInstitute;SamFankhauser,professor,UniversityofOxford;BenHaleyandRyanJones,EvolvedEnergyResearch;CarterPowis,UniversityofOxford;andJohnWard,founder,PengwernAssociates,andvisitingseniorfellow,GranthamResearchInstitute,forkindlysharingtheirinsights.TheprojectbenefitedimmenselyfromtheexpertiseandperspectivesofmanyMcKinseycolleagues,especiallyPradhumanAggarwal,KemiAjala,GassanAl-Kibsi,DanielAminetzah,SuzanneAngliviel,NikhilAti,GeorgiosAvgerinopoulos,RyanBarrett,GillianBoccara,WouterBos,ChrisBradley,BenedictBraun,PatrickChen,RoryClune,LauraCorb,DanielCramer,RomainDebroux,TiagoDevesa,LucianodiFiori,JasonEis,HaukeEngel,Jan-EricFähnrich,AnnabelFarr,FranciscoGaltieri,RajatGupta,CaitlinHayward,ThomasHundertmark,RobJagt,NitinJain,KartikJayaram,LionelJohnnes,AdamKendall,GiannisKourousias,CindyLevy,EricLing,LadislavaLipinova,RachidMajiti,JukkaMaksimainen,MicheleMauceri,EthanMcCormac,AgataMucha-Geppert,JonathanNieman,MichielNivard,GeoffOlynyk,AnnaOrthofer,JoséDiogoPeres,EvanPolymeneas,MikeRath,OleRolser,SuvojoySengupta,NestorSepulveda,NamitSharma,BramSmeets,MicahSmith,SwiadSnieder,DanStephens,ChristianTherkelsen,PetervandeGiessen,RunevanderMeijden,MichelVanHoey,OliviaWhite,andPawelWilczynski.ThereportwaseditedbyMGIsenioreditorBenjaminPlotinsky,togetherwithseniordatavisualizationeditorChuckBurkeandeditorialoperationsmanagerVasudhaGupta.WealsothankourcolleaguesDavidBatcheck,TimBeacom,AshleyGrant,KristenJennings,MoiraPierce,RebecaRobboy,andRachelRobinsonfortheirsupport.Anaffordable,reliable,competitivepathtonetzero46FindmorecontentlikethisontheMcKinseyInsightsAppScan•Download•PersonalizeNovember2023Copyright©McKinsey&CompanyMcKinsey.com@McKinsey@McKinsey

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