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January 2022

Executive summary

The net-zero

transition

What it would cost, what it could bring

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

McKinsey Global Institute

in collaboration with

McKinsey Sustainability and

McKinsey’s Global Energy &

Materials and Advanced

Industries Practices

McKinsey Global Institute

Since its founding in 1990, the McKinsey Global Institute (MGI) has sought to develop a deeper

understanding of the evolving global economy. As the business and economics research arm of

McKinsey & Company, MGI aims to help leaders in the commercial, public, and social sectors understand

trends and forces shaping the global economy.

MGI research combines the disciplines of economics and management, employing the analytical tools

of economics with the insights of business leaders. Our “micro-to-macro” methodology examines

microeconomic industry trends to better understand the broad macroeconomic forces affecting

business strategy and public policy. Recent reports have assessed the impact of the COVID19 crisis

on the future of work, productivity and growth, and consumer demand; prioritizing health; the social

contract; Black economic mobility; the global balance sheet; the Bio Revolution; physical climate risk;

and the impact of corporations on economies and households.

MGI is led by McKinsey & Company senior partners James Manyika and Sven Smit, who serve as

co-chairs, and Chris Bradley, Kweilin Ellingrud, Marco Piccitto, Olivia White, and Jonathan Woetzel,

who serve as directors. Michael Chui, Mekala Krishnan, Anu Madgavkar, Jan Mischke, JaanaRemes,

Jeongmin Seong, and Tilman Tacke are MGI partners. Project teams are led by the MGI partners and

include consultants from McKinsey offices around the world. These teams draw on McKinsey’s global

network of partners and industry and management experts. The MGI Council is made up of McKinsey

leaders and includes Hemant Ahlawat, Michael Birshan, Andrés Cadena, SandrineDevillard, AndréDua,

Katy George, Rajat Gupta, Eric Hazan, Solveigh Hieronimus, AchaLeke, ClarisseMagnin, Jurica Novak,

Gary Pinkus, Hamid Samandari, Sha Sha, Oliver Tonby, and EckartWindhagen. The Council members

help shape the research agenda, lead high-impact research, and share the findings with decision makers

around the world. In addition, leading economists, including Nobel laureates, advise MGI research.

In collaboration with McKinsey Sustainability and the Global

Energy & Materials and Advanced Industries practices

McKinsey Sustainability is the firm’s client-service platform with the goal of helping all industry

sectors transform to get to net zero by 2050 and to cut carbon emissions by half by 2030.

McKinseySustainability seeks to be the preeminent impact partner and adviser for our clients,

from the board room to the engine room, on sustainability, climate resilience, energy transition,

and environmental, social, and governance (ESG). We leverage thought leadership, innovative

tools andsolutions, top experts, and a vibrant ecosystem of industry associations and knowledge

partnerships to lead a wave of innovation and economic growth that safeguards our planet and

advances sustainability.

McKinsey’s Global Energy & Materials Practice serves clients in industries such as oil and gas, mining,

steel, pulp and paper, cement, chemicals, agriculture, and power, helping them on their most important

issues in strategy, operations, marketing and sales, organization, and other functional topics. In addition,

MineLens, MineSpans, and Energy Insights, specialist divisions within the practice, offer fundamental

insight into commodity market dynamics. The practice serves many of the top global players, including

corporations and state-owned enterprises, and works with more than 80 percent of the largest mining

companies and 90 percent of the largest oil and gas companies worldwide.

McKinsey’s Advanced Industries Practice brings together three well-established global industry

practices with roots in technically complex design and manufacturing: Automotive & Assembly,

Aerospace & Defense, and Advanced Electronics / Semiconductors. Our global network of deeply

experienced industrials partners works with industry executives to address issues including strategy,

organization, operations, technology, marketing, sales, and risk. We focus on core operating capabilities

and help clients take a long-term, through-cycle view of the evolving competitive landscape. We work

with many high-performing iconic industrial companies around functional, business unit, and enterprise

transformations to accelerate revenue generation, technology integration, operations design, and

margin and cash flow improvements.

The net-zero

transition

What it would cost, what it could bring

Authors

Mekala Krishnan, Boston

Hamid Samandari, New York

Jonathan Woetzel, Shanghai

Sven Smit, Amsterdam

Daniel Pacthod, New York

Dickon Pinner, San Francisco

Tomas Nauclér, Stockholm

Humayun Tai, New York

Annabel Farr, Montreal

Weige Wu, New York

Danielle Imperato, Brussels

January 2022

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January2022ExecutivesummaryThenet-zerotransitionWhatitwouldcost,whatitcouldbringMcKinseyGlobalInstituteincollaborationwithMcKinseySustainabilityandMcKinsey’sGlobalEnergy&MaterialsandAdvancedIndustriesPracticesMcKinseyGlobalInstituteSinceitsfoundingin1990,theMcKinseyGlobalInstitute(MGI)hassoughttodevelopadeeperunderstandingoftheevolvingglobaleconomy.AsthebusinessandeconomicsresearcharmofMcKinsey&Company,MGIaimstohelpleadersinthecommercial,public,andsocialsectorsunderstandtrendsandforcesshapingtheglobaleconomy.MGIresearchcombinesthedisciplinesofeconomicsandmanagement,employingtheanalyticaltoolsofeconomicswiththeinsightsofbusinessleaders.Our“micro-to-macro”methodologyexaminesmicroeconomicindustrytrendstobetterunderstandthebroadmacroeconomicforcesaffectingbusinessstrategyandpublicpolicy.RecentreportshaveassessedtheimpactoftheCOVID-19crisisonthefutureofwork,productivityandgrowth,andconsumerdemand;prioritizinghealth;thesocialcontract;Blackeconomicmobility;theglobalbalancesheet;theBioRevolution;physicalclimaterisk;andtheimpactofcorporationsoneconomiesandhouseholds.MGIisledbyMcKinsey&CompanyseniorpartnersJamesManyikaandSvenSmit,whoserveasco-chairs,andChrisBradley,KweilinEllingrud,MarcoPiccitto,OliviaWhite,andJonathanWoetzel,whoserveasdirectors.MichaelChui,MekalaKrishnan,AnuMadgavkar,JanMischke,JaanaRemes,JeongminSeong,andTilmanTackeareMGIpartners.ProjectteamsareledbytheMGIpartnersandincludeconsultantsfromMcKinseyofficesaroundtheworld.TheseteamsdrawonMcKinsey’sglobalnetworkofpartnersandindustryandmanagementexperts.TheMGICouncilismadeupofMcKinseyleadersandincludesHemantAhlawat,MichaelBirshan,AndrésCadena,SandrineDevillard,AndréDua,KatyGeorge,RajatGupta,EricHazan,SolveighHieronimus,AchaLeke,ClarisseMagnin,JuricaNovak,GaryPinkus,HamidSamandari,ShaSha,OliverTonby,andEckartWindhagen.TheCouncilmembershelpshapetheresearchagenda,leadhigh-impactresearch,andsharethefindingswithdecisionmakersaroundtheworld.Inaddition,leadingeconomists,includingNobellaureates,adviseMGIresearch.IncollaborationwithMcKinseySustainabilityandtheGlobalEnergy&MaterialsandAdvancedIndustriespracticesMcKinseySustainabilityisthefirm’sclient-serviceplatformwiththegoalofhelpingallindustrysectorstransformtogettonetzeroby2050andtocutcarbonemissionsbyhalfby2030.McKinseySustainabilityseekstobethepreeminentimpactpartnerandadviserforourclients,fromtheboardroomtotheengineroom,onsustainability,climateresilience,energytransition,andenvironmental,social,andgovernance(ESG).Weleveragethoughtleadership,innovativetoolsandsolutions,topexperts,andavibrantecosystemofindustryassociationsandknowledgepartnershipstoleadawaveofinnovationandeconomicgrowththatsafeguardsourplanetandadvancessustainability.McKinsey’sGlobalEnergy&MaterialsPracticeservesclientsinindustriessuchasoilandgas,mining,steel,pulpandpaper,cement,chemicals,agriculture,andpower,helpingthemontheirmostimportantissuesinstrategy,operations,marketingandsales,organization,andotherfunctionaltopics.Inaddition,MineLens,MineSpans,andEnergyInsights,specialistdivisionswithinthepractice,offerfundamentalinsightintocommoditymarketdynamics.Thepracticeservesmanyofthetopglobalplayers,includingcorporationsandstate-ownedenterprises,andworkswithmorethan80percentofthelargestminingcompaniesand90percentofthelargestoilandgascompaniesworldwide.McKinsey’sAdvancedIndustriesPracticebringstogetherthreewell-establishedglobalindustrypracticeswithrootsintechnicallycomplexdesignandmanufacturing:Automotive&Assembly,Aerospace&Defense,andAdvancedElectronics/Semiconductors.Ourglobalnetworkofdeeplyexperiencedindustrialspartnersworkswithindustryexecutivestoaddressissuesincludingstrategy,organization,operations,technology,marketing,sales,andrisk.Wefocusoncoreoperatingcapabilitiesandhelpclientstakealong-term,through-cycleviewoftheevolvingcompetitivelandscape.Weworkwithmanyhigh-performingiconicindustrialcompaniesaroundfunctional,businessunit,andenterprisetransformationstoacceleraterevenuegeneration,technologyintegration,operationsdesign,andmarginandcashflowimprovements.Thenet-zerotransitionWhatitwouldcost,whatitcouldbringAuthorsMekalaKrishnan,BostonHamidSamandari,NewYorkJonathanWoetzel,ShanghaiSvenSmit,AmsterdamDanielPacthod,NewYorkDickonPinner,SanFranciscoTomasNauclér,StockholmHumayunTai,NewYorkAnnabelFarr,MontrealWeigeWu,NewYorkDanielleImperato,BrusselsJanuary2022PrefaceMorethan10,000yearsofcontinuousandacceleratingprogresshavebroughthumancivilizationtothepointofthreateningtheveryconditionthatmadethatprogresspossible:thestabilityoftheearth’sclimate.Thephysicalmanifestationsofachangingclimateareincreasinglyvisibleacrosstheglobe,asaretheirsocioeconomicimpacts.Bothwillcontinuetogrow,mostlikelyinanonlinearway,untiltheworldtransitionstoanet-zeroeconomy,andunlessitadaptstoachangingclimateinthemeantime.Nowonder,then,thatanever-greaternumberofgovernmentsandcompaniesarecommittingtoaccelerateclimateaction.Atpresent,though,thenet-zeroequationremainsunsolved:greenhousegasemissionscontinueunabatedandarenotcounterbalancedbyremovals,noristheworldpreparedtocompletethenet-zerotransition.Indeed,evenifallnet-zerocommitmentsandnationalclimatepledgeswerefulfilled,researchsuggeststhatwarmingwouldnotbeheldto1.5°Cabovepreindustriallevels,increasingtheoddsofinitiatingthemostcatastrophicimpactsofclimatechange,includingtheriskofbioticfeedbackloops.Moreover,mostofthesecommitmentshaveyettobebackedbydetailedplansorexecuted.Norwouldexecutionbeeasy:solvingthenet-zeroequationcannotbedivorcedfrompursuingeconomicdevelopmentandinclusivegrowth.Itwouldrequireacarefulbalancingoftheshorter-termrisksofpoorlypreparedoruncoordinatedactionwiththelonger-termrisksofinsufficientordelayedaction.Indeed,amoredisorderlytransitioncouldimpairenergysupplyandaffectenergyaccessandaffordability,especiallyforlower-incomehouseholdsandregions.Itcouldalsohaveknock-onimpactsontheeconomymorebroadly,potentiallycreatingabacklashthatwouldslowdownthetransition.Noneofthesechallengesshouldcomeasasurprise.Achievingnetzerowouldmeanafundamentaltransformationoftheworldeconomy,asitwouldrequiresignificantchangestothesevenenergyandland-usesystemsthatproducetheworld’semissions:power,industry,mobility,buildings,agriculture,forestryandotherlanduse,andwaste.Tobringaboutthesechanges,ninekeyrequirements(encompassingphysicalbuildingblocks,economicandsocietaladjustments,andgovernance,institutions,andcommitment)wouldneedtobefulfilledagainstthebackdropofmanyeconomicandpoliticalchallenges.Thismeansaddressingdozensofcomplexquestions,including:whatistheappropriatemixoftechnologiesthatneedtobedeployedtoachieveemissionsreductionswhilestayingwithinacarbonbudget,limitingcosts,anddeliveringrequiredstandardsofperformance?Wherearesupplychainandinfrastructurebottlenecksmostlikelytooccur?Wheremightphysicalconstraints,whetherrelatedtotheavailabilityofnaturalresourcesorthescale-upofproductioncapacity,limitthepaceofthetransition?Whatlevelsofspendingonphysicalassetswouldthetransitionrequire?Whowouldpayforthetransition?Howwouldthetransitionaffectcompanies’marketsandoperations?Whatwoulditspellforworkersandconsumers?Whatopportunitiesandriskswoulditcreateforcompaniesandcountries?Andhowcouldconsumersbeencouragedtomakechangestoconsumptionandspendinghabitsthatwillbenecessarytoensurethetransition?Inthisreport,weattempttoanswersomeofthesequestions,namely,thosepertainingtotheeconomicandsocietaladjustments.Weprovideestimatesoftheeconomicchangesthatwouldtakeplaceinanet-zerotransitionconsistentwith1.5°Cofwarming.Weseektobuildandexpanduponthevastexternalliteratureonthenet-zerotransition,inordertoofferamoredetailedandgranularviewofthenatureandmagnitudeoftheeconomicchangesthatitwouldentail.Asaresult,ourestimatesoftheannualspendingonphysicalassetsforanet-zerotransitionexceedtoameaningfuldegreethe$3trillion–$4.5trilliontotalspendingestimatesthatpreviousanalyseshaveproduced.iiMcKinsey&CompanyThisreportisafirst-orderanalysisofahypothetical1.5°Cscenario.Assuch,ithasseverallimitations.First,itisnotclearwhethera1.5°Cscenarioisachievableinthefirstplace,norwhatpathwaytheworldwouldtaketoachieveitifitwere.Indeed,somebelievethat1.5°Cisalreadyoutofreach,giventhecurrenttrajectoryofemissionsandtheirpotentialtoactivateclimaticfeedbackloops,aswellasprevailingchallengeswithrevampingenergyandland-usesystems.Thisresearchdoesnottakeapositiononsuchquestions.Instead,itseekstodemonstratetheeconomicshiftsthatwouldneedtotakeplaceifthegoalof1.5degreesistobeattainedthrougharelativelyorderlytransitionbetweennowand2050.Second,thisreportisbynatureandnecessitylimitedinitsscope.Inparticularitdoesnotfocusonsuchissuesastechnologybreakthroughs,physicalconstraintsrelatedtoscale-upcapacityandtheavailabilityofnaturalresources,delayed-transitioncosts,theroleofadaptation,orotherimponderablesoruncertainties,norhaveweyetmodeledthefullrangeofeconomicoutcomeslikelyunderanet-zerotransition.Asaresult,itislikelythatrealoutcomeswilldivergefromtheseestimates,particularlyifthenet-zerotransitiontakesamoredisorderlypathorrestrictingwarmingto1.5°Cprovesunachievable.Spendingrequirementscouldbehigher,forexampleduetotheadditionalinvestmentneededtomaintainflexibilityandredundancyinenergysystems,orheightenedphysicalrisksandcommensurateadaptationcosts.Third,thisreportdoesnotexplorethecriticalquestionofwhopaysforthetransition.Whatisclearisthatthetransitionwillrequirecollectiveandglobalaction,particularlyastheburdensofthetransitionwouldnotbeevenlyfelt.Theprevailingnotionofenlightenedself-interestaloneisunlikelytobesufficienttohelpachievenetzero,andthetransitionwouldchallengetraditionalorthodoxiesandrequireunity,resolve,andingenuityfromleaders.Wenonethelesshopethatourscenario-basedanalysiswillhelpdecisionmakersrefinetheirunderstandingofthenatureandthemagnitudeofthechangesthenet-zerotransitionwouldentailandthescaleofresponseneededtomanageit.Wealsohopethatourattemptstodescribeasaccuratelyaswecanthechallengesthatlieaheadareseenaswhattheyare:acallformorethoughtfulandmoredecisiveaction,urgency,andresolve.ThereportisjointresearchbyMcKinseySustainability,McKinsey’sGlobalEnergyandMaterialsPractice,McKinsey’sAdvancedIndustriesPractice,andtheMcKinseyGlobalInstitute.McKinseyhaslongfocusedonissuesofenvironmentalsustainability,datingtoclientstudiesintheearly1970s.Wedevelopedourglobalgreenhousegasabatementcostcurvein2007,updateditin2009,andhavesinceconductednationalabatementstudiesincountriesincludingBrazil,China,Germany,India,Russia,Sweden,theUnitedKingdom,andtheUnitedStates.RecentresearchonwhichwebuildinthispublicationincludestheJanuary2020reportClimateriskandresponse:Physicalhazardsandsocioeconomicimpacts,aJanuary2021article,“Climatemath:Whatittakestolimitwarmingto1.5°C,”andtwoOctober2021articles,“Ourfuturelivesandlivelihoods:Sustainableandinclusiveandgrowing”and“Solvingthenet-zeroequation:Ninerequirementsforamoreorderlytransition.”ThisresearchwasledbyMekalaKrishnan,aMcKinseyGlobalInstitute(MGI)partnerinBoston;HamidSamandari,aMcKinseyseniorpartnerinNewYork;JonathanWoetzel,aseniorpartnerandMGIdirectorinShanghai;SvenSmit,aseniorpartnerinAmsterdamandco-chairofMGI;DanielPacthod,aseniorpartnerinNewYork;DickonPinner,aseniorpartnerinSanFrancisco;TomasNauclér,aseniorpartnerinStockholm;andHumayunTai,aseniorpartnerinNewYork.TheresearchteamwasledindifferentperiodsbyAnnabelFarr,DanielleImperato,JohannekeTummers,SophieUnderwood,andWeigeWu.Teammembers:WoutervanAanholt,RishiArora,CarolyneBarker,RyanBarrett,AnnaBenkeser,MélanieBru,GeneChang,JonasDeMuri-Siliunas,WilliamDésilets,JuliaDhert,SpencerDowling,WilliamEdwards-Mizel,KarinaGerstenchlager,JakobGraabak,ChantaldeGraaf,PragunHarjai,LauraHofstee,JaniaKesarwani,DhirajKumar,JohHannLee,YoutingLee,DiegoMiranda,IanMurphy,PritRanjan,ShresthSanghai,LexRazouxSchultz,RubenRobles,KevinRussell,NickThiros,BenD.Thomas,SarahVargese,ColinVarn,andJan-PaulWiringa.iiiThenet-zerotransition:Whatitwouldcost,whatitcouldbringWeareindebtedtoouracademicadvisers:MartinBaily,seniorfellowattheBrookingsInstitution;RakeshMohan,presidentanddistinguishedfellow,CentreforSocialandEconomicProgress;andLauraD.Tyson,distinguishedprofessorofthegraduateschoolattheHaasSchoolofBusiness,UniversityofCalifornia,Berkeley.Wewouldalsoliketothankotheradviserswhochallengedourthinkingandaddednewinsights:LaveeshBhandari,seniorfellow,CentreforSocialandEconomicProgress;DavidBlood,co-founderandseniorpartnerofGenerationInvestmentManagement;MarkCarney,UnitedNationsspecialenvoyforclimateactionandfinance;SpencerGlendon,founder,ProbableFutures;CameronHepburn,director,SmithSchoolofEnterpriseandtheEnvironment,UniversityofOxford;RonanHodge,technicallead,implementation,GlasgowFinancialAllianceforNetZero;JulesKorstenhorst,chiefexecutiveofficer,RMI;ClaireO’Neill,co-chair,WorldBusinessCouncilforSustainableDevelopmentImperativesAdvisoryBoard;JeremyOppenheim,founderandseniorpartnerofSYSTEMIQ;MichaelThompson,chiefeconomist,UKCommitteeonClimateChange;NigelTopping,UNHighLevelClimateActionChampion;and,attheWoodwellClimateResearchCenter,PhilipDuffy,presidentandexecutivedirector,ChristopherSchwalm,seniorscientist,andclimateriskprogramdirector,RichardBirdsey,seniorscientist,RichardHoughton,seniorscientistemeritus,andWayneWalker,associatescientist.Whilewebenefitedgreatlyfromthevarietyofperspectiveswegatheredfromtheseexpertsandadvisers,ourviewshavebeenindependentlyformedandarticulatedinthisreport.ManycolleaguesatMcKinseyprovidedvaluableinsightandsupport.WethankElaineAlmeida,DanielAminetzah,PaoloD’Aprile,VicenteAssis,PedroAssunção,NikhilAti,MarceloAzevedo,MarkAzoulay,DestonBarger,ChantalBeck,FrankBekaert,DonatellaBellone,FabianBilling,EmilyBirch,BrodieBoland,LyesBouchene,IvoBozon,JamesBragg,GiorgioBresciani,JulianConzade,FelipeChild,JulienClaes,RoryClune,XavierCostantini,PeterCrispeels,LuisCunha,ThomasCzigler,NicolasDenis,RajatDhawan,JulienDiederichts,DirkDurinck,JosebaEceiza,JasonEis,KarelEloot,HaukeEngel,FernandoFerrari-Haines,DavidFine,LucianoDiFiori,LoriFomenko,TracyFrancis,PeterGaius-Obaseki,PaulGargett,GodartvanGendt,WillGlazener,LutzGoedde,StephanGorner,RajatGupta,AlastairHamilton,EricHannon,ViktorHanzlik,StephanieHauser,KimberlyHenderson,RuthHeuss,SolveighHieronimus,ChristianHoffmann,DukoHopman,JerryvanHouten,EricHuang,ThomasHundertmark,FockoImhorst,KartikJayaram,AlexKazaglis,ArjenKersing,NainaKhandelwal,SomeshKhanna,GassanAl-Kibsi,TimKoller,MasahiroKomatsubara,GautamKumra,AlexandreLichy,ConnieJordan,SeanKane,JoshuaKatz,AdamKendall,SajalKohli,TasukuKuwabara,ElenaKuznetsova,NickLeung,CindyLevy,GuangyuLi,JohannesLüneborg,AnuMadgavkar,RachidMajiti,JukkaMaksimainen,PeterMannion,JamesManyika,SebastienMarlier,RyanMcCullough,TapioMelgin,TilmanMelzer,DanielMikkelsen,TimoMoller,VitalyNegulayev,JesseNoffsinger,Loïk-MaëlNys,GlenO’Kelly,AsutoshPadhi,AlexPanas,JohnParsons,MariaPersson,AlexanderPfeiffer,HaraldPoeltner,CarterPowis,PradeepPrabhala,JohnPratt,SebastianReiter,DemianRoelofs,MattRogers,RobertSamek,AdityaSanghvi,GregorySantoni,TarekElSayed,PatrickSchaufuss,PatrickSchulze,LizHiltonSegel,SuvojoySengupta,NestorSepulveda,MarcusSieberer,VivienSinger,BramSmeets,BenSnyder,KenSomers,PeterSpiller,DanStephens,JackStephenson,AntoineStevens,MattStone,CarlosTanghetti,OzgurTanrikulu,PankajTanwar,KarlTojic,OliverTonby,AndreasTschiesner,MagnusTyreman,AlexUlanov,BryanVadheim,ThomasVahlenkamp,FrancescaVentimiglia,ShallyVenugopal,StevenVercammen,MauritsWaardenburg,AmyWagner,DaanWalter,JohnWarner,AlexanderWeiss,JakeWellman,PawelWilczynski,RobertWilson,MarkusWilthaner,MaaikeWitteveen,HaoXu,YuitoYamada,DeeYang,andBenediktZeumer.ivMcKinsey&CompanyThereportwaseditedandproducedbyPeterGumbel,MGI’seditorialdirector,andJoshRosenfield,anexecutiveeditorwithMcKinseyPublishing,togetherwithVasudhaGupta,MGI’seditorialoperationsmanager,seniorgraphicdesignersMarisaCarder,AnandSundarRaman,andPatrickWhite,datavisualizationeditorsChuckBurke,RichJohnson,andMattPerry,andpictureeditorDianeRice.KristenJennings,globalexternalrelationsdirectorforMcKinseySustainability,andRebecaRobboy,MGI’sdirectorofexternalcommunications,helpeddisseminateandpublicizethereport.JanetMichaudandNathanWilsoncreatedthedigitalversionofthisreport,andLaurenMelingproducedanddisseminateddigitalassets.WearegratefultoGitanjaliBakshi,TimBeacom,AmandaCovington,AshleyGrant,DeadraHenderson,andMalgorzataRusieckafortheirsupport.Thisreportcontributestoourmissiontohelpbusinessandpolicyleadersunderstandtheforcestransformingtheglobaleconomy.AswithallMGIresearch,itisindependentandhasnotbeencommissionedorsponsoredinanywaybyanybusiness,government,orotherinstitution.January2022vThenet-zerotransition:Whatitwouldcost,whatitcouldbringInbriefThenet-zerotransition:Whatitwouldcost,whatitcouldbringGovernmentsandcompaniesareincreasinglycommittingtoclimateaction.Yetsignificantchallengesstandintheway,notleastthescaleofeconomictransformationthatanet-zerotransitionwouldentailandthedifficultyofbalancingthesubstantialshort-termrisksofpoorlypreparedoruncoordinatedactionwiththelonger-termrisksofinsufficientordelayedaction.Inthisreport,weestimatethetransition’seconomiceffectsondemand,capitalallocation,costs,andjobsto2050globallyacrossenergyandland-usesystemsthatproduceabout85percentofoverallemissionsandassesseconomicshiftsfor69countries.Ouranalysisisnotaprojectionorapredictionanddoesnotclaimtobeexhaustive;itisthesimulationofonehypothetical,relativelyorderlypathtoward1.5°CusingtheNetZero2050scenariofromtheNetworkforGreeningtheFinancialSystem(NGFS),toprovideanorder-of-magnitudeestimateoftheeconomictransformationandsocietaladjustmentsassociatedwithnet-zerotransition.Wefindthatthetransitionwouldbeuniversal,significant,andfront-loaded,withuneveneffectsonsectors,geographies,andcommunities,evenasitcreatesgrowthopportunities:Capitalspendingonphysicalassetsforenergyandland-usesystemsinthenet-zerotransitionbetween2021and2050wouldamounttoabout$275trillion,or$9.2trillionperyearonaverage,anannualincreaseofasmuchas$3.5trillionfromtoday.Toputthisincreaseincomparativeterms,the$3.5trillionisapproximatelyequivalent,in2020,tohalfofglobalcorporateprofits,one-quarteroftotaltaxrevenue,and7percentofhouseholdspending.Anadditional$1trillionoftoday’sannualspendwould,moreover,needtobereallocatedfromhigh-emissionstolow-emissionsassets.Accountingforexpectedincreasesinspending,asincomesandpopulationsgrow,aswellasforcurrentlylegislatedtransitionpolicies,therequiredincreaseinspendingwouldbelower,butstillabout$1trillion.Thespendingwouldbefront-loaded,risingfrom6.8percentofGDPtodaytoasmuchas8.8percentofGDPbetween2026and2030beforefalling.Whilethesespendingrequirementsarelargeandfinancinghasyettobeestablished,manyinvestmentshavepositivereturnprofiles(evenindependentoftheirroleinavoidingrisingphysicalrisks)andshouldnotbeseenasmerelycosts.Technologicalinnovationcouldreducecapitalcostsfornet-zerotechnologiesfasterthanexpected.Inthisscenario,theglobalaveragedeliveredcostofelectricitywouldincreaseintheneartermbutthenfallbackfromthatpeak,althoughthiswouldvaryacrossregions.Asthepowersectorbuildsrenewablesandtransmissionanddistributioncapacity,thefullyloadedunitcostofelectricityproduction,accountingforoperatingcosts,capitalcosts,anddepreciationofnewandexistingassets,inthisscenariocouldriseabout25percentfrom2020until2040andstillbeabout20percenthigherin2050onaverageglobally.Costincreasesintheneartermcouldbesignificantlyhigherthanthoseestimatedhere,forexample,ifgridintermittencyissuesarenotwellmanaged.Thedeliveredcostcouldalsofallbelow2020levelsovertimebecauseoftheloweroperatingcostofrenewables—providedthatpowerproducersbuildflexible,reliable,andlow-costgrids.Thetransitioncouldresultinagainofabout200millionandalossofabout185milliondirectandindirectjobsgloballyby2050.Thisincludesdemandforjobsinoperationsandinconstructionofphysicalassets.Demandforjobsinthefossilfuelextractionandproductionandfossil-basedpowersectorscouldbereducedbyaboutninemillionandfourmilliondirectjobs,respectively,asaresultofthetransition,whiledemandforabouteightmilliondirectjobswouldbecreatedinrenewablepower,hydrogen,andbiofuelsby2050.Whileimportant,thescaleofworkforcereallocationmaybesmallerthanthatfromothertrendsincludingautomation.Displacedworkerswillnonethelessneedsupport,training,andreskillingthroughthetransition.Whilethetransitionwouldcreateopportunities,sectorswithhigh-emissionsproductsoroperations—whichgenerateabout20percentofglobalGDP—wouldfacesubstantialeffectsondemand,productioncosts,andemployment.IntheNGFSNetZero2050scenario,coalproductionforenergyusewouldnearlyendby2050,andoilandgasproductionvolumeswouldbeabout55percentand70percentlower,respectively,thantoday.Processchangeswouldincreaseproductioncostsinothersectors,withsteelandcementfacingincreasesby2050ofabout30and45percent,respectively,inthescenariomodeledhere.Conversely,somemarketsforlow-carbonproductsandsupportserviceswouldexpand.Forexample,demandforelectricityin2050couldmorethandoublefromtoday.Poorercountriesandthosereliantonfossilfuelsaremostexposedtotheshiftsinanet-zerotransition,althoughtheyhavegrowthprospectsaswell.Thesecountriesaremoresusceptibletochangesinoutput,capitalstock,andemploymentbecauseexposedsectorsmakeuprelativelylargepartsoftheireconomies.Exposedgeographiesincludinginsub-SaharanAfricaandIndiawouldneedtoinvest1.5timesormorethanadvancedeconomiesasashareofGDPtodaytoviMcKinsey&Companysupporteconomicdevelopmentandbuildlow-carboninfrastructure.Theeffectswithindevelopedeconomiescouldbeuneven,too;forinstance,morethan10percentofjobsin44UScountiesareinfossilfuelextractionandrefining,fossilfuel–basedpower,andautomotivemanufacturing.Atthesametime,allcountrieswillhavegrowthprospects,fromendowmentsofnaturalcapitalsuchassunshineandforests,andthroughtheirtechnologicalandhumanresources.Consumersmayfaceadditionalup-frontcapitalcostsandhavetospendmoreintheneartermonelectricityifcostincreasesarepassedthrough,andlower-incomehouseholdseverywherearenaturallymoreatrisk.Consumerspendinghabitsmayalsobeaffectedbydecarbonizationefforts,includingtheneedtoreplacegoodsthatburnfossilfuel,liketransportationvehiclesandhomeheatingsystems,andpotentiallymodifydietstoreducehigh-emissionsproductslikebeefandlamb.Theup-frontcapitalspendingforthenet-zerotransitioncouldyieldloweroperatingcostsovertimeforconsumers.Forexample,totalcostofownershipforEVsisexpectedtobelowerthanICEcarsinmostregionsby2025.Economicshiftscouldbesubstantiallyhigherunderadisorderlytransition,inparticularbecauseofhigher-ordereffectsnotconsideredhere.Theeconomicandsocialcostsofadelayedorabrupttransitionwouldraisetheriskofassetstranding,workerdislocations,andabacklashthatdelaysthetransition.Evenunderarelativelygradualtransition,iftheramp-downofhigh-emissionsactivitiesisnotcarefullymanagedinparallelwiththeramp-upoflow-emissionsones,supplymaynotbeabletoscaleupsufficiently,makingshortagesandpriceincreasesorvolatilityafeature.Muchthereforedependsonhowthetransitionismanaged.Foralltheaccompanyingcostsandrisks,theeconomicadjustmentsneededtoreachnetzerowouldcomewithopportunitiesandpreventfurtherbuildupofphysicalrisks.Incrementalcapitalspendingonphysicalassetscreatesgrowthopportunities,inconnectionwithnewlow-emissionsproducts,supportservices,andtheirsupplychains.Mostimportantly,reachingnet-zeroemissionsandlimitingwarmingto1.5°Cwouldreducetheoddsofinitiatingthemostcatastrophicimpactsofclimatechange,includinglimitingtheriskofbioticfeedbackloopsandpreservingourabilitytohaltadditionalwarming.Governmentandbusinesswouldneedtoacttogetherwithsingularunity,resolve,andingenuity,andextendtheirplanningandinvestmenthorizonsevenastheytakeimmediateactionstomanagerisksandcaptureopportunities.Businesseswouldneedtodefine,execute,andevolvedecarbonizationandoffsettingplansforscope1and2emissionsandpotentiallyexpandthoseplanstoincludescope3emissions,dependingonthenatureoftheiroperations,andthemateriality,feasibility,andneedofdoingso.Overtime,theywouldneedtoadjusttheirbusinessmodelsasconditionschangeandopportunitiesarise;integrateclimate-relatedfactorsintodecision-makingprocessesforstrategy,finance,andcapitalplanning,amongothers;andconsiderleadingactionwithothersintheirindustryorecosystemofinvestors,supplychains,customers,andregulators.Financialinstitutionsinparticularhaveapivotalroletoplayinsupportinglarge-scalecapitalreallocation,evenastheymanagetheirownrisksandopportunities.Governmentsandmultilateralinstitutionscoulduseexistingandnewpolicy,regulatory,andfiscaltoolstoestablishincentives,supportvulnerablestakeholders,andfostercollectiveaction.Thepaceandscaleofthetransitionmeanthatmanyoftoday’sinstitutionswouldneedtoberevampedandnewonescreatedtodisseminatebestpractices,establishstandardsandtrackingmechanisms,drivecapitaldeploymentatscale,manageunevenimpacts,andsupportfurthercoordinationofefforts.Thegoalofthisresearchistoprovidestakeholderswithanin-depthunderstandingofthenatureandmagnitudeoftheeconomicandsocietaladjustmentsanetzerotransitionwouldentail.Ourhopeisthatthisanalysisprovidesleaderswiththetoolstocollectivelysecureamoreorderlytransitiontonet-zeroby2050.Thefindingsserveasaclearcallformorethoughtfulanddecisiveaction,takenwiththeutmosturgency.Therewardsofthenet-zerotransitionwouldfarexceedthemereavoidanceofthesubstantial,andpossiblycatastrophic,dislocationsthatwouldresultfromunabatedclimatechange,ortheconsiderablebenefitstheyentailinnaturalcapitalconservation.Besidestheimmediateeconomicopportunitiestheycreate,theyopenupclearpossibilitiestosolveglobalchallengesinbothphysicalandgovernance-relatedterms.Theseincludethepotentialforalong-termdeclineinenergycoststhatwouldhelpsolvemanyotherresourceissuesandleadtoapalpablymoreprosperousglobaleconomy.Moreimportantly,theypresagedecisivesolutionstoage-oldglobaleconomicandpoliticalchallengesastheresultoftheunprecedentedpaceandscaleofglobalcollaborationthatsuchatransitionwouldhaverequired.Andwhiletheimmediatetasksaheadmayseemdaunting,humaningenuitycanultimatelysolvethenet-zeroequation,justasithassolvedotherseeminglyintractableproblemsoverthepast10,000years.Thekeyissueiswhethertheworldcanmustertherequisiteboldnessandresolvetobroadenitsresponseduringtheupcomingdecadethatwillinalllikelihooddecidethenatureofthetransition.viiThenet-zerotransition:Whatitwouldcost,whatitcouldbringSixcharacteristicsofthenet-zerotransitionAllcarbondioxideandmethaneemissionstodaycomefromsevenenergyandland-usesystems.Capitalspendingonphysicalassetsforenergyandland-usesystemswillneedtoriseby$3.5trillionperyearforthenext30years,toanannualtotalof:Developingcountriesandfossilfuel-richregionsaremoreexposedtothenet-zerotransitioncomparedwithothergeographies.Someindustrysectorsarealsomoreexposed.PercentageofGDPgeneratedbysectorswithhighestdegreeofexposureAshigh-emissionsassetsarerampeddownandlow-emissionsonesrampedupinthetransition,risksincluderisingenergyprices,energysupplyvolatility,andassetimpairment.PowerIndustryMobilityBuildingsAgricultureForestryWaste$3.5trillionIncreaseinspendingonlow-emissionsassetsvs.today$2trillionContinuedspendingonlow-emissionsassets$1trillionSpendingreallocatedfromhigh-tolow-emissionsassets$2.7trillionContinuedspendingonhigh-emissionsassetsCountrieswithlowerGDPpercapitaCountrieswithhighertransitionexposureSize=population20%$9.2trillionEstimatesbasedonNetZero2050scenariofromNetworkforGreeningtheFinancialSystem,whichhasanevenchanceoflimitingwarmingto1.5ºC,ahypotheticalscenario,notapredictionorprojection.Seetechnicalappendixforfurtherdetailsonapproach.1Universal2Signicant4Uneven5ExposedtorisksIndiaChinaBrazilUSCurrentspendingNewspendingEmittersof:CarbondioxideMethaneSize=Shareoftotalofeachgreenhousegasemitted20212530402050Globalcapitalspendinginthetransitioncouldriseintheshorttermbeforefallingback.3Front-loaded8.8%ofglobalGDPin2026302020spendinglevel0%6.8%Cumulativespendingofaround$275trillionAbout7.6%ofglobalGDPacross202150$2.1trillionValueinpowerassetsalonethatcouldbestrandedby2050DecarbonizingprocessesandproductsReplacinghigh-emissionsproductsandprocesseswithlow-emissionsonesNewoeringstoaiddecarbonizationIncludingsupplychaininputs,infrastructure,andsupportservicesTheshifttoanet-zeroemissionsworldwillcreateopportunitiesforbusinessesandcountries.Thesecouldbeinthreeareas:6Richinopportunityc©VictorAndrade/GettyImages:EyeEmAsofthiswriting,inDecember2021,morethan70countriesaccountingformorethan80percentofglobalCO₂emissionsandabout90percentofglobalGDPhaveputnet-zerocommitmentsinplace,ashavemorethan5,000companies,aspartoftheUnitedNations’RacetoZerocampaign.1Yetevenifalltheexistingcommitmentsandnationalclimatepledgeswerefulfilled,estimatessuggestthatwarmingwouldexceed1.5°Cabovepreindustriallevels,increasingtheoddsofinitiatingthemostcatastrophicimpactsofclimatechange,includingbioticfeedbackloops.2Moreover,mostofthesecommitmentshaveyettobesupportedbydetailedplansorexecuted.Norwillexecutionbetrivial,asitwouldrequireacarefulbalancingofshorter-andlonger-termrisks.Today,whiletheimperativetoreachnet-zeroisincreasinglyrecognized,thenet-zeroequationisnotsolved.Thisstateofaffairsshouldnotbesurprising,giventhescaleofthetaskathand.Achievingnet-zeroemissionsby2050wouldentailafundamentaltransformationoftheglobaleconomy.Tobringaboutthesechanges,ninekeyrequirementsencompassingthethreecategoriesofphysicalbuildingblocks,economicandsocietaladjustments,andgovernance,institutions,andcommitmentwouldneedtobefulfilledagainstthebackdropofmanyeconomic(forexample,inflation)andpoliticalchallenges(forexample,polarizationwithinandamongcountries).3Inthisreport,wefocusonthesecondcategory,namely,understandingthenatureandextentoftheeconomicandsocietaladjustments.Wesimulatetheglobalshiftsindemand,capitalallocation,costs,andjobsthatwouldtakeplacebetweennowand2050inthecontextofanet-zerotransition,examiningpotentialgainsandopportunitiesaswellaslossesandcosts.Ouranalysiscoverstheenergyandland-usesystemsthatproduceabout85percentofoverallemissionsandtakesacloserlookathowthetransitionmightaffect69countries.Thisanalysisisnotaprojectionoraprediction;itprovidespointestimatesofspecificeconomictransformationslikelyunderagivenhypotheticalnet-zerotransitionscenariofromtheNetworkforGreeningtheFinancialSystem(NGFS),anorganizationsetupbycentralbanksandsupervisorsinDecember2017withthegoalofstrengtheningtheglobalresponsetoclimatechange.(WedescribeourmethodologyanditslimitationsinBoxE1,“Ourresearchmethodology:Approach,scenarios,limitations,anduncertainties.”)Thisscenariohasanevenchanceoflimitingwarmingto1.5°C;however,itisnotclearwhethertheworldwillbeabletokeepthetemperatureincreasetothatlevel,orwhichofnumerouspathwaysitmaytakeinanefforttodoso.Thisresearchdoesnottakeapositiononsuchquestions.Instead,itseekstodemonstratetheeconomicshiftsthatwouldneedtotakeplaceifthegoalof1.5degreesistobeattainableandarelativelyorderlytransitionachieved.1Includescountriesthathaveachievedtheirnet-zerotargets,orhaveputtheminlaw,inpolicydocuments,ormadeadeclarationorapledge.NetZeroTracker,EnergyandClimateIntelligenceUnit,Data-DrivenEnviroLab,NewClimateInstitute,andOxfordNetZero,2021.GDPdatafor2019fromWorldDevelopmentIndicatorsDataBank,WorldBank.Emissionsdatafor2018fromEmissionsDatabaseforGlobalAtmosphericResearch(EDGAR),v6.0,May2021.“RacetoZerocampaign,”UnitedNationsFrameworkConventiononClimateChange.2Basedonpoliciescurrentlyenactedintolaw,UNEP,ClimateActionTracker,andtheInternationalEnergyAgencyprojectthatwarmingwillbe2.6–2.7°Cby2100.Inalternatescenarios,wherecurrentnet-zerotargetsand2030pledgesarefullyimplemented,theseorganizationsprojectthatwarmingwouldberestrictedbetween2.1and2.2°C.IEAlowersthisestimateto1.8°Ciftargetsthatarestillunderdiscussionarealsofullyimplemented.Emissionsgapreport2021:Theheatison,UNEP,2021;Warmingprojectionsglobalupdate,ClimateActionTracker,November2021;andWorldenergyoutlook2021,InternationalEnergyAgency,October2021.EstimatesfromtheNetworkforGreeningtheFinancialSystem(NGFS)similarlysuggestthatifcurrentimplementedpoliciescontinue,approximately1,250additionalgigatonsofCO₂wouldentertheatmosphereby2050,breachingthelimitthatscientistsconsidernecessarytokeepwarmingbelow1.5°C.BasedonananalysisoftheNGFSCurrentPoliciesscenario,usingtheREMIND-MAgPIE2.1/4.2model.SeealsoClimatechange2021:Thephysicalsciencebasis:ContributionofWorkingGroupItotheSixthAssessmentReport,IntergovernmentalPanelonClimateChange(IPCC),2021.3MekalaKrishnan,TomasNauclér,DanielPacthod,DickonPinner,HamidSamandari,SvenSmit,andHumayunTai,“Solvingthenet-zeroequation:Ninerequirementsforamoreorderlytransition,”McKinsey&Company,October2021.Executivesummary1Thenet-zerotransition:Whatitwouldcost,whatitcouldbringBoxE11NGFSsaysthisscenario“limitsglobalwarmingto1.5°Cthroughstringentclimatepoliciesandinnovation,reachingnet-zeroCO₂emissionsaround2050,givingatleasta50percentchanceoflimitingglobalwarmingtobelow1.5°Cbytheendofthecentury,withnoorlowovershoot(<0.1°C)of1.5°Cinearlieryears.”WeusetheREMIND-MAgPIEscenariofromNGFS(2021release),whichallowsaCO₂budgetofabout440gigatons(Gt)after2020.2Forfurtherdetails,seeNGFSScenariosPortalandClimateScenariosDatabase,NGFS,June2021.3Forfurtherdiscussionoftheuncertaintiesassociatedwithmodelingphysicalrisks,seeClimateriskandresponse:Physicalhazardsandsocioeconomicimpacts,McKinseyGlobalInstitute,January2020.Ourresearchmethodology:Approach,scenarios,limitations,anduncertaintiesWeassessthenet-zerotransitionalongtwodimensions:sectorsandgeographies.Forthefirst,weexamineenergyandland-usesystemsthataccountforabout85percentofglobalemissions:power,industry(steelandcementproduction),mobility(inparticular,roadtransportation),buildings,agricultureandfood,andforestryandotherlanduse.Wealsolookedatfossilfuelsthatsupplyenergytomanyofthesesystems.Forthegeographicdimension,weanalyzeeffectsindepthin69countries,whichmakeupabout95percentofglobalGDP.Wechosenottodevelopourowntransitionscenariosandrelyinsteadonwidelyusedscenarioscreatedbyotherinstitutions.Specifically,weanalyzepotentialeffectsundertheNetZero2050scenariodefinedbytheNetworkforGreeningtheFinancialSystem(NGFS).Thishypotheticalscenariomirrorsglobalaspirationstocutemissionsbyabouthalfby2030andtonetzeroby2050(ExhibitE1).Itreachesnet-zeroCO₂emissionsby2050fortheeconomyasawhole;thismeanstherearesomelowresidualgrossCO₂emissionsinhard-to-abatesectorsandsomeregionsthatarecounterbalancedbyCO₂removals.WechosetoworkwiththeNGFSscenariosbecausetheycoverallmajorenergyandland-usesystemsinacoherentmanner,provideregionalgranularity,aredesignedforuseinriskandopportunityanalysis,andarebecomingthestandardscenariosusedbyfinancialinstitutions,regulators,andsupervisors.1Insomecases,asacounterfactualforcomparison,wealsousetheNGFSCurrentPoliciesscenario.Thisscenarioprojectsthegreenhousegasemissionsthatwouldoccurifonlytoday’smitigationpoliciesremaininplace(basedonanNGFSassessmentofpoliciesasofthestartof2020),anditanticipatesalittleover3°Cofwarmingby2100.2ThecomparisonallowsustoaccountforhowotherfactorssuchasGDPgrowthorpopulationgrowthcouldaffecttheeconomybetweennowand2050.WealsocollaboratedwithVividEconomicstousethetwoNGFSscenariostogeneratemoregranularsectorvariableswhereneeded(forexample,salesofnewautomobiles),inamannerthatwasbasedonandcompliantwiththeNGFSscenarios.Insuchcases,westillrefertothespecificsectorvariableasbeingbasedontherelevantNGFSscenario.Weperformedtheanalysisasfollows.First,weusedtheNGFSscenariosanddownscalingbyVividEconomicstoquantifychangesinimportantvariablesineachenergyandland-usesystem(forexample,changesinpowerproductionbysource).ThedownscalingwasdonetoprovidesectoralortechnologicalgranularitywherenotavailablefromNGFS.Weusedthistoassesschangesindemand,andthenassessedtheimplicationsforcapitalstockandinvestment,producerandconsumercosts,andemploymentbasedoninformationaboutdecarbonizationtechnologiesandtheircapitalandoperatingcosts,laborintensity,andeffectsonvaluechains.Wherepossible,weusedregion-specificcostsandlaborassumptions,aswellasexpectedtechnologylearningcurvesovertime,basedonMcKinseyanalysis.Limitationsofourapproachanduncertainties.WerecognizethelimitationsoftheNGFSscenarios,aswithanytransitionscenario,giventhatthisisanemergingfieldofresearch.First,whilesomevariablesareexploredatthesectorlevel,thescenariossometimesdonotprovideenoughdetailtoexplorehowdifferenttypesofactivitieswillbeaffected,thusrequiringdownscalingtoachievethenecessarysectoralgranularity.Second,themodelsunderpinningtheNGFSscenariosmaynotcaptureimportantdynamicsorconstraintswithinasector.Forexample,themodelweusedfavorsmoreeconomy-wideuseofbiomassinenergyandindustry(forexample,hydrogenproduction)thanmaybeconsideredfeasibleinothersector-specificdecarbonizationpathways.Third,althoughthemodelsdocaptureongoinglearningandtechnologicalinnovation,theymayfailtosufficientlyanticipatetheemergenceofdisruptivetechnologiesthatmaychangedecarbonizationpathwaysandlowercosttrajectoriesfasterthananticipated.Fourth,whilesomeNGFSscenarioshavebeguntoincorporatedamagesfromphysicalrisksintheeconomicmodeling,furtherworkisneededtofullyintegratephysicalrisksintothedecarbonizationpathways.Asaresult,wehavefocusedhereonscenariosthatdonotincorporatephysicalrisk.Thisapproachalsoallowsustofocusouranalysisontheeffectsofthetransitionalone.3Finally,thescenariosreflectclimatepoliciesandtechnologicaltrendsinplacebeforetheCOVID-19pandemicandclimatenegotiationsandpledgesatCOP26inGlasgowinNovember2021.Ouranalysislargelyconsistsofananalysisoffirst-ordereffects.Variousuncertaintiescouldinfluencethemagnitudeofoutcomeshighlightedhere.Whilesomeofthesefactorscouldresultinloweroutcomesthanthosesizedinthisresearch,somefactorssuggestthatadditionalcostsandeffectswilllikelyoccurasthetransitionunfolds.Bythesametoken,thecostsofphysicalclimateriskscouldlikelyprovehigherthanthosedescribedhere.2McKinsey&CompanyKeyuncertaintiesincludethefollowing:—Warmingscenarioandemissionspathway.Ahigherwarmingscenario(forexample,2.0°Cabovepreindustriallevels)mayleadtosmallertransitioneffectsthana1.5°Cwarmingscenario,giventhelowerdegreeofemissionsreductionanddeviationfromtoday’sproductionandconsumptionpatternsitentails(thoughphysicalriskswouldnaturallybehigher).—Sectors’decarbonizationactionsandactivitylevels.Becausethefocusofourworkisassessingthenatureandmagnitudeofeconomicshiftsandnotidentifyingdecarbonizationactions,weusedaprespecifiednet-zeroscenariofromNGFS.Itisfeasiblethatanalternatetechnologymixcouldresultinlowercostsanddifferentshiftsthanthosedescribedhere,andthatfurthertechnologicalinnovationcouldresultinadifferentpathwaywithlowercosts.Itisalsofeasiblethatthepaththeworldundertakestodecarbonizeisdifferentfromtheonedescribedhere.Analternatescenariomayconsistofmoreuseofcarboncaptureandstorage(CCS)technologiesandafocusondecarbonizingthehydrocarbonvaluechain,forexample,thiscouldhappenifcapturecostsfall,regulatoryframeworksareputinplacetoincentivizeCCSuse,andmarketsmatureforrecycledCO₂asamaterialfeedstock.4—Magnitudeofdirectandindirectsocioeconomiceffects.Someeffectscouldbelargerthandescribedhere,forexample,ifexecutingthetransitionismorecomplexthanthescenarioheresuggests,andadditionalcapitalspendingisneededtomaintainflexibilityandredundancyinenergysystems.Ifsupplyofkeymaterialsorlow-emissionssourcesofenergydoesnotkeepupwithdemand,thiscouldresultinshortagesandpriceincreases,whichwehavenotconsideredinourquantification.Higher-ordereffectscouldmagnifyrisksandincreasecosts,particularlyintheshortterm.Forexample,dependingonhowthetransitionisfinanced,theeffectsontheoveralleconomycouldbesubstantiallyhigherthansizedhere.Finally,effectscouldalsobelargerunderanabruptordelayedtransition.—Economicandsocietaladjustmentsneededforthetransition.Costsandinvestmentscouldbehigherthansizedhere,forexampletoimplementsocialsupportschemestoaideconomicandsocietaladjustments.Similarly,additionalcostsmayarisefromdelays,setbacks,andurgentlyneededadaptationmeasures,particularlyifrestrictingwarmingto1.5°Cprovesnottobepossible.Forouranalysis,wequantifythescaleoffirst-ordereffectsanddescribequalitativelytheadjustmentsneeded.Aspectswedidnotcover.Topicswedidnotcoverincludethelikelihood,validity,andcomparativecostsassociatedwithvariousdecarbonizationscenarios;thecomparativemeritsofdifferentemissions-reductiontechnologies;constraintstoimplementanddeploydecarbonizationtechnologies(forexample,scalingupsupplychains);theactionsneededtodriveandincentivizedecarbonization;quantificationofhigher-ordereconomiceffectsofthetransition,includingonoutput,growth,valuepools,valuations,tradeflows,andhumanwell-being;relativecostsandmeritsofdecarbonizationandadaptation;andimpactsthatcouldresultfromphysicalclimatehazards.Weusebenchmarksfromtheexternalliteratureandourpastresearchtodescribetheselatterpossibilities.Asdiscussedabove,ouranalysishererepresentsfirst-orderestimates.Fullyquantifyingthecostsofrisingphysicalrisksandthetransitioniscomplex.Itwouldrequireestimatingimpactsfromrisingphysicalrisksandthecostofadaptationactions,buildingrobustestimatesoftheimpactofthenet-zerotransitionontheeconomythattakesintoaccountthehigher-ordereffectsdescribedabove,anddoingsoovertimeandwhilegrapplingwiththevariousuncertaintiesdescribedpreviously.Fulldetailsofourmethodologyareinthetechnicalappendix.4FormoreonCCS,seealsochapter1.BoxE1(continued)3Thenet-zerotransition:Whatitwouldcost,whatitcouldbringBoxE1(continued)ExhibitE1100350500150300200250400202050254030205040035045100150200250300350403520201552530452050-10-50102025303540OuranalysisusestheNetZero2050scenariofromtheNetworkforGreeningtheFinancialSystem(NGFS).1.Thenet-zeroscenarioisbasedontheNGFSNetZero2050scenariousingREMIND-MAgPIEfromthe2021releaseofNGFS(phase2).2.CO2emissionsfromenergyuseinresidentialandcommercialbuildings.3.CO2emissionsfromenergyuseintransportationsector(road,rail,shipping,andaviation).4.CO2emissionsfromenergyuseinindustryandindustrialprocessemissions,energyconversionexcludingelectricity,fugitiveemissionsfromfuels,andemissionsfromcarbondioxidetransportandstorage.5.TotalCO2emissionscapturedthroughbioenergycarboncaptureandstorage(BECCS).BECCSisdeployedacrossmultipleenergysystems(eg,electricitygeneration,hydrogenproduction,andindustry).6.Methaneemissionsfromenergyuse.7.Methaneemissionsfromenergyconversionincludingelectricityandfugitiveemissionsfromfuels.8.Methaneemissionsfromagriculture,forestry,andotherlanduse.9.Methaneemissionsfromallothersources(eg,waste).NetZero2050scenariopathwayfromNGFS1CO2emissions,billionmetrictonsMethaneemissions,millionmetrictonsEnd-usesectors6Supplyofenergy7Agriculture,forestry,andotherlanduse8Other9PowerBuildings2Mobility3Industry4Agriculture,forestry,andotherlanduseCO2removal5Note:ThisisbasedontheNGFSdatabase.Today’semissionsmayvaryacrossotheremissionsdatabasesdependingonthemethodologyused.Source:NetworkforGreeningtheFinancialSystemscenarioanalysis2021phase2(NetZero2050scenario)REMIND-MAgPIEmodel;McKinseyGlobalInstituteanalysisNetemissionsNetemissions4McKinsey&CompanyOutcomesmaywellexceedourestimateshere,particularlyifthenet-zerotransitiontakesadisorderlypathorifitprovesimpossibletorestrictwarmingto1.5°C(seeBoxE2,“Whowillpayforthetransition?”).Wenonethelesshopesuchanexercisewillhelpdecisionmakersrefinetheirunderstandingofthenatureandthemagnitudeofthechangesthenet-zerotransitionwouldentail,andthescaleofresponseneededtomanageit.Sixcharacteristicsofthenet-zerotransitionemergefromourscenario-basedanalysis.First,thetransitionwouldbeuniversal.Indeed,net-zeroemissionscanbeachievedifandonlyifallenergyandland-usesystemsthatcontributetoemissionsaredecarbonized,asthesecontributionsaresignificantinallcases.Alleconomicsectorsandallcountrieswouldneedtoparticipate.Second,thescaleoftherequiredeconomictransformationwouldbesignificant.Inparticular,weestimatethatthecumulativecapitalspendingonphysicalassetsforthenet-zerotransitionbetween2021and2050wouldbeabout$275trillion.Thismeansthatspendingwouldneedtorisefromabout$5.7trilliontodaytoanannualaverageof$9.2trillionthrough2050,anincreaseof$3.5trillion.Accountingforexpectedincreasesinspending,asincomesandpopulationsgrow,aswellasforcurrentlylegislatedtransitionpolicies,therequiredincreaseinspendingwouldbelower,butstillabout$1trillion.Third,theseeffectswouldbefront-loaded:spendingwouldneedtorisetoalmost9percentofGDPbetween2026and2030fromabout7percenttodaybeforefalling.Likewise,weestimatethatthedeliveredcostofelectricity(acrossgeneration,transmission,distribution,andstorage,andincludingoperatingcosts,capitalcosts,anddepreciationofexistingandnewassets)wouldrisebyabout25percentbetween2020and2040inthescenariomodeledherebeforefallingfromthatpeak,althoughthiswouldvaryacrossregions.Fourth,thetransitionwouldbefeltunevenlyamongsectors,geographies,andcommunities,resultingingreaterchallengesforsomeconstituenciesthanothers.Fifth,thetransitionisladenwithshort-termrisks,evenasthetransitionwillhelpmanagelong-termphysicalrisks.Ifpoorlymanaged,itcouldincreaseenergyprices,withimplicationsforenergyaccessandaffordability,especiallyforlower-incomehouseholdsandregions.Itwouldalsohaveknock-oneffectsontheeconomymorebroadly.Ifnotwellmanaged,thereisariskthatthetransitionitselfwouldbederailed.Sixthisthat,despitethechallengeswithmakingeconomicandsocietaladjustments,thetransitionwouldgiverisetogrowthopportunitiesacrosssectorsandgeographies—and,critically,itwouldhelpavoidthebuildupofphysicalrisks.Thisresearchaimstohighlightthenatureandmagnitudeoftheeconomictransformationthatanet-zerotransitionwouldrequire.Whilethechallengesaheadarelarge,thefindingsofthisresearchshouldbeseenforwhattheyare:acallformorethoughtful,decisive,andurgentactiontosecureamoreorderlytransitiontonet-zeroemissionsby2050.Everyonewouldhavearoletoplay,includinggovernments,businesses,andindividuals.Toeasestakeholders’adjustmentstotheseeffects,governmentsandbusinesseswilllikelyneedtoadoptalong-termperspectiveandcoordinateactioninaspiritofunity,resolve,andcooperationand,atthesametime,takenear-termactionstomanagetheirownrisksandcaptureopportunities.Thisresearchisacallformorethoughtful,decisive,andurgentaction.5Thenet-zerotransition:Whatitwouldcost,whatitcouldbringBoxE2Whowillpayforthetransition?Asdiscussedlaterinthisreport,thespendingneededonphysicalassetsforthenet-zerotransitionissignificant.Itrepresentsasubstantialscale-upofspendingrelativetotoday’slevels.Itisalsocapitalthatwillbespentverydifferentlyrelativetotoday,withcapitalreallocatedawayfromhigh-emissionsassetsandtowardlow-emissionsones.Whilesomeofthisspendingwouldeventuallyyieldareturn,variouschallengeswithraisingcapitalatthisscalewillneedtobeeffectivelymanaged.Theseincludeaddressingtechnologicaluncertaintyofinvestment,managingrisk/returntrade-offs,drivingcapitalflowstodevelopingcountries,andensuringdemandforthiscapitalexistsinthesectorsandgeographiesinwhichemissionsreductionismostneeded.Thisraisesthequestionofhowtobestpayforthetransition.Variousaspectstoconsiderincludewhoprovidesthefinancing(forexample,publicversusprivateactors,andthemixoffinancingprovidedbydevelopedanddevelopingcountries),howcapitalisraised(forexample,debtversusequity,throughtaxesoncompaniesorconsumers),andvariouscombinationsthereof.Forexample,publicfinancingcancomethroughraisingtaxesoncompanies,carbontaxes,taxesonconsumers,orthroughtakingondebt,tonameafewapproaches.Indecidingtheoptimalapproachtofinancingthetransition,stakeholderswillneedtoconsiderthreefactors.First,whichapproachwouldraisecapitalatthespeedandscaleneeded,andincentivizethedeploymentofthiscapital.Second,howfinancingcanbestincludeprinciplesofequity,includingwhatequitywouldrequirebasedonthehistoryofemissionsandwhohastheabilitytopay.Andfinally,whatarebroaderknock-onconsequencesofdifferentfinancingapproaches.Thelatterisespeciallyimportant,becauseitcanprofoundlyinfluencethesocioeconomicconsequencesofanet-zerotransition.First,somewaysofraisingcapital—forexample,taxesonconsumers—couldcurtailspendinginotherpartsoftheeconomyifnotbalanced,forexample,withfiscalstimuluselsewhere.Thisinturncouldhaveknock-oneffectsoncorporaterevenuesforaffectedsectors,onjobcreation,andongrowthmorebroadly.Second,thesourceoffinancingcouldexacerbateexistinginequalitiesifnotcarefullymanaged.Developingcountries,forexample,mayfinditchallengingtoraisethecapitalneededforthetransitionontheirown.Third,thetypeoffinancingcouldhavearoleininfluencingthepaceofthenet-zerotransition.Certaintechnologies,suchaselectricvehicle(EV)charginginfrastructure,mayrequirepublicfinancingatscaletoreachthespeedofdeploymentneededtoachievenet-zero.Theresultspresentedheredonotfactorintheseconsiderations,asourfocusisonsizingthemagnitudeoftheneed.However,thequestionof“whopays”isunavoidableasstakeholdersundertaketheeconomictransformationneededforthenet-zerotransition,anddosowiththeconsequencesmentionedaboveinmind.6McKinsey&CompanyNet-zeroemissionscanbeachievedonlythroughauniversaltransformationofenergyandland-usesystemsTostabilizetheclimateandlimitphysicalclimaterisks,climatesciencetellsusthatitisnecessarytoreducetheadditionofGHGstotheatmospheretonetzero(seeBoxE3,“Physicalriskswillcontinuetobuildupuntilnetzeroisachieved”).Sevenenergyandland-usesystemsactasdirectsourcesofglobalemissions(ExhibitsE2andE3).4Onesystem—forestryandotherlanduse—alsoactsasanaturalsinkforcarbondioxideandwouldneedtoincreaseitsrateofemissionsabsorption.Thesystemsandtheiremissionsfootprintsarethefollowing:—Power,consistingofelectricityandheatgeneration:30percentofCO₂emissions,and3percentofnitrousoxide(N₂O)emissions5—Industry,consistingofvariousindustrialprocesses,includingproductionofsteel,cement,andchemicals,andextractionandrefiningofoil,gas,andcoal:30percentofCO₂emissions,33percentofmethaneemissions,8percentofN₂Oemissions—Mobility,consistingofroad,aviation,rail,maritime,andotherformsoftransportation:19percentofCO₂emissions,and2percentofN₂Oemissions—Buildings,includingheatingandcooking:6percentofCO₂emissions—Agriculture,consistingofdirecton-farmenergyuseandemissionsfromagriculturalpracticesandfishing:1percentofCO₂emissions,38percentofmethaneemissions,and79percentofN₂Oemissions—Forestryandotherlanduse,primarilylandcoverchange:14percentofCO₂emissions,5percentofmethaneemissions,and5percentofN₂Oemissions—Waste,consistingofsolidwastedisposalandtreatment,incineration,andwastewatertreatment:23percentofmethaneemissions,3percentofN₂OemissionsCarbondioxideineachcaseisemittedthroughthecombustionoffossilfuelstoproduceenergy(oil,gas,andcoal),aswellasthroughnon-energyemissions(forexample,emissionsassociatedwithindustrialprocesseslikethereductionofironoretoproducesteelandwithdeforestation).Basedoncurrentaccountingmethodologies,energy-relatedemissionsmakeupasmuchas83percentofcarbondioxideemissions.64UNFoodandAgricultureOrganization(FAO),2020;“Energyuse,”FAOSTAT;EMITdatabase,McKinseySustainabilityInsights,September2021;andMcKinseyGlobalEnergyPerspectives.5Heatgenerationincludesheatfromcombinedheatandpowerplants.6Notably,thisisbasedonthecurrentsystemofemissionsmeasurement,inwhichforestryemissionsinparticularareconsideredasnetemissions,consideringtheirroleasbothsourcesandsinksofgreenhousegases.Consideringonlytheirroleasgrosssourcesofemissions,andaccountingforsecond-ordereffectsofdeforestation,wouldsubstantiallyincreasethecontributionofforestryassourcesofemissions.Forfurtherdetails,seechapter3.Reachingnet-zeroemissionswillrequireatransformationoftheglobaleconomy.7Thenet-zerotransition:Whatitwouldcost,whatitcouldbringBoxE31NoahS.DiffenbaughandChristopherB.Field,“Changesinecologicallycriticalterrestrialclimateconditions,”Science,volume341,number6145,August2013;SethD.Burgess,SamuelBowring,andShu-zhongShen,“High-precisiontimelineforEarth’smostsevereextinction,”ProceedingsoftheNationalAcademyofSciences,volume111,number9,March2014.2Climateriskandresponse:Physicalhazardsandsocioeconomicimpacts,McKinseyGlobalInstitute,January2020.3Climatechange2021:Thephysicalsciencebasis:ContributionofWorkingGroupItotheSixthAssessmentReport,IntergovernmentalPanelonClimateChange(IPCC),2021.4SeeBox1inClimateriskandresponse:Physicalhazardsandsocioeconomicimpacts,McKinseyGlobalInstitute,January2020.5Makingestimatesofthiskindischallenging,andwehavenotattemptedtodosoinourresearch.TherangesherecomefromareviewoftheliteraturefocusedonquantifyingthevariousimpactsofphysicalclimateeffectsonrealGDPorGDPgrowth.Fordetailedsources,seechapter1andthebibliography.6“Summaryforpolicymakers,”inClimatechange2021:Thephysicalsciencebasis:ContributionofWorkingGroupItotheSixthAssessmentReport,IPCC,2021.7Emissionsdataforothergreenhousegasesarelessfrequentlyreported.In2019,annualemissionswere364megatonsofmethane(CH₄),and10megatonsofnitrousoxide(N₂O).SeealsoGlobalCarbonBudget,2021;EMITdatabasebyMcKinseySustainabilityInsights,September2021.Formoreontheimpactofthepandemic,seeCorinneLeQuéréetal.,TemporaryreductionindailyglobalCO₂emissionsduringtheCOVID-19forcedconfinement,GlobalCarbonProject,March2021.8Restrictingfuturenetemissionsto1,150–1,350GtCO₂wouldresultina50–67percentprobabilityoflimitingwarmingto2.0°C.Atcurrentemissionsrates,thecarbonbudgetfor1.5°Cofwarmingwouldbeexceededinapproximatelythenextdecade,andthe2.0°Cbudgetwouldbeexceededinaboutthreedecades.9H.DamonMatthewsetal.,“Focusoncumulativeemissions,globalcarbonbudgets,andtheimplicationsforclimatemitigationtargets,”EnvironmentalResearchLetters,volume13,number1,January2018.PhysicalriskswillcontinuetobuildupuntilnetzeroisachievedAsaveragetemperaturesrise,acutehazardssuchasheatwavesandfloodsincreaseinfrequencyandseverity,andchronichazards,suchasdroughtandrisingsealevels,intensify.1Thesehazardsandchangescouldleadtorising,nonlinear,andsystemicsocioeconomicimpacts,asdescribedinour2020reportonphysicalclimaterisk.2Mostrecently,theSixthAssessmentReportoftheUnitedNationsIntergovernmentalPanelonClimateChange(IPCCAR6)reaffirmedthatcontinuedGHGemissionswillresultinincreasinglysevereconsequencesfortheEarthsystemand,potentially,abruptandcatastrophicchangesthatmightoccurastheclimatepassestippingpoints.3Asphysicalclimateriskspreads,itcouldtriggerbroadereconomic,financial,andsocialdisruptions.4Estimatessuggestthatfailingtolimittheriseofgreenhousegasemissionscouldaffectbetween2and20percentofglobalGDPby2050underahigh-emissions(RCP8.5)scenario.5Thewiderangereflectstheintrinsicdifficultyinmakingtheseestimates.Theeffectofhard-to-predictbioticfeedbackloops(forexample,thethawingofpermafrost)orknock-oneconomiceffects(forexample,fromimpactsonfinancialvaluations)couldpushlosseswellbeyondthehigh-endestimate.Tostabilizetheclimateandlimitphysicalclimaterisks,climatesciencetellsusthatitisnecessarytoreducetheadditionofGHGstotheatmospheretonetzeroandlimitwarmingto1.5°Cabovepreindustriallevelstoreducetheoddsofinitiatingthemostdangerousandirreversibleeffectsofclimatechange.6Globalemissionsofcarbondioxideareabout40gigatons(GtCO₂)today.EmissionsofCO₂haverisensignificantlysince1970,thoughtherateofgrowthhasslowedinrecentyears.7TheIPCCAR6reportestimatedthatrestrictingallfuturenetCO₂emissionsto400–500Gt,combinedwithsubstantialdecreasesinemissionsofshort-livedGHGslikemethane,wouldresultina50to67percentprobabilityoflimitingwarmingto1.5°Cabovepreindustriallevels.8Atcurrentemissionsrates,thecarbonbudgetfor1.5°Cofwarmingwouldthuslikelybeexceededwithinaboutthenextdecade.ClimatesciencetellsusthattheEarthsystemwillcontinuetochangealongthejourneytonetzeroandthatsomechangeswillcontinueevenafterwehavestoppedtheplanetfromwarming;thus,actionstoreduceemissionswillalsoneedtogohand-in-handwithadaptation.9Decisionstakenoverthenextdecadewillthusbecrucial.8McKinsey&CompanyExhibitE2PowerIndustryMobilityBuildingsAgricultureForestryandotherlanduseEnergyuseaccountsfor83percentoftheCO₂emittedacrossenergyandland-usesystems.CO₂emissionsperfuelandenergyandland-usesystem,2019,share¹Source:EMITdatabasebyMcKinseySustainabilityInsights(September2021,datafor2019);InternationalEnergyAgency;McKinseyGlobalEnergyPerspectives;McKinseyGlobalInstituteanalysis1.IncludesallfossilfuelCO₂sourcesaswellasshort-cycleemissions(eg,large-scalebiomassburning,forestfires).Powerincludesemissionsfromelectricityandheatgeneration(i.e.,fromcombinedheatandpowerplants);Industryincludesvariousindustrialprocesses,includingproductionofsteel,cement,andchemicals,andextractionandrefiningofoil,gas,andcoal;Mobilityincludesemissionsfromroad,aviation,rail,maritime,andotherformsoftransportation;Buildingsincludesemissionsfromheating,cooking,andlightingofcommercialandresidentialbuildings;Agricultureincludesemissionsfromdirecton-farmenergyuseandfishing;ForestryincludesnetfluxofCO₂fromlanduseandlandcoverchangebutnottheopportunitycostoflostcarboncapture.TheglobalCO₂emissionsinthisexhibitrepresentthetotalemissionsofthefullsectors,notofthesubsectorsconsideredinthisreport.Basedon2019emissions.2.Inadditiontoenergy-relatedCO₂emissions,anthropogenicemissionsincludeindustryprocessemissionsanddeforestation.Note:ThisisbasedontheMcKinseyEMITdatabasethatdrawsonavarietyofbottom-upsources.Dependingontheemissionsdatabaseused,datapersectorandtheeconomyasawholemayvary.Figuresmaynotsumto100%becauseofrounding.2040107080901005030010203040600OilCoal31%17%17%35%NaturalgasNon-energy2Emissions,billionmetrictonsperyearSourceofemissions,%share9Thenet-zerotransition:Whatitwouldcost,whatitcouldbringEffectivedecarbonizationactionsincludeshiftingtheenergymixawayfromfossilfuelsandtowardzero-emissionselectricityandotherlow-emissionsenergycarrierssuchashydrogen;adaptingindustrialandagriculturalprocesses;increasingenergyefficiencyandmanagingdemandforenergy;utilizingthecirculareconomy;consumingfeweremissions-intensivegoods;deployingcarboncapture,utilization,andstorage(CCS)technology;andenhancingsinksofbothlong-livedandshort-livedgreenhousegases.AvoidingdeforestationandenablingforestrestorationareparticularlyimportantforrestoringandenhancingGHGsinks.7RecentMcKinseyresearchonwhatitwouldtaketoachievea1.5°Cpathwayexaminedarangeofscenariosandfoundthattheaboveactionswouldneedtobedeployedacrossallsectorsintheeconomyandwouldrequireemissions-reductioneffortsbeginningtoday.87Estimatessuggestthatovera30-yearperiod,atreecanstoreanadditional60to85percentasmuchcarbonasisreleasedwhenthetreeiscutdownorburned,andthatoverallsecondaryemissionsandforgonecarbonsequestrationresultingfromdeforestationcanbethreetoninetimeshigherthanthedirectemissionsalone.Researchindicatesthatforgonecarbonsequestrationandforestdegradationarehighlyunderestimatedincurrentevaluationsofdeforestationemissions.Fordetails,seechapters1and3.8KimberlyHenderson,DickonPinner,MattRogers,BramSmeets,ChristerTryggestad,andDanielaVargas,“Climatemath:Whata1.5-degreepathwaywouldtake,”McKinsey&Company,April2020.Seealso“Curbingmethaneemissions:Howfiveindustriescancounteramajorclimatethreat,”McKinsey&Company,September2021.ExhibitE3Shareofemissions1perenergyandland-usesystem,2019,%Powerandindustryaremajorenergyconsumersandtogethergenerateabout60percentofCO2emissions.Source:EMITdatabasebyMcKinseySustainabilityInsights(September2021,datafor2019);McKinseyGlobalInstituteanalysis1.IncludesallfossilfuelCO₂sourcesaswellasshort-cycleemissions(eg,large-scalebiomassburning,forestfires).Powerincludesemissionsfromelectricityandheatgeneration(i.e.,fromcombinedheatandpowerplants);Industryincludesvariousindustrialprocesses,includingproductionofsteel,cement,andchemicals,andextractionandrefiningofoil,gas,andcoal;Mobilityincludesemissionsfromroad,aviation,rail,maritime,andotherformsoftransportation;Buildingsincludesemissionsfromheating,cooking,andlightingofcommercialandresidentialbuildings;Agricultureincludesemissionsfromdirecton-farmenergyuseandfishing;ForestryincludesnetfluxofCO₂fromlanduseandlandcoverchangebutnottheopportunitycostoflostcarboncapture;Wasteincludesemissionsfromsolidwastedisposalandtreatment,incineration,andwastewatertreatment.TheglobalCO₂emissionsinthisexhibitrepresentthetotalemissionsofthefullsectors,notofthesubsectorsconsideredinthisreport.Basedon2019emissions.2.Forestryandotherlanduse.Note:ThisisbasedontheMcKinseyEMITdatabasethatdrawsonavarietyofbottom-upsources.Dependingontheemissionsdatabaseused,datapersystemandtheeconomyasawholemayvary.Figuresmaynotsumto100%becauseofrounding.Subsectors’shareofsystememissions,%PowerIndustryMobilityBuildingsAgricultureForestry2ElectricityHeat973SteelCementOilandgasex-tractionChemicalsCoalminingOther26201512620RoadAviationMaritimeRailOther7513111<1Residen-tialCommer-cial7030FarmingFishing964Forestry100PowerMobilityAgricultureForestryWaste3030196141CarbondioxidePowerIndustryMobilityBuildingsAgricultureForestry2Industry3338523Methane3827953Nitrousoxide10McKinsey&CompanyAkeyfeatureofanytransitiontonet-zeroemissionsisitsuniversality,acrossenergyandland-usesystemsandthroughouttheglobaleconomy.Thisisfortworeasons.First,eachoftheseenergyandland-usesystemscontributessubstantiallytoemissions.Thus,everyoneofthesesystemswillneedtoundergotransformationifthenet-zerogoalistobeachieved.Second,thesesystemsarehighlyinterdependent;actionstoreduceemissionsmustthustakeplaceinconcertandatscaleacrosssystems,economicsectors,andgeographies.Forinstance,electricvehiclesarevaluableonlytotheextentthatlow-emissionselectricityproductionhasbeenachieved.Allsectorsoftheeconomyparticipateintheseenergyandland-usesystemsacrossglobalvaluechains.Similarly,allcountriescontributetoemissions,eitherdirectlyorthroughtheirroleinvaluechains.Reachingnet-zeroemissionswillthusrequireatransformationoftheglobaleconomy.Anet-zerotransitionwouldhaveasignificantandoftenfront-loadedeffectondemand,capitalallocation,costs,andjobsDecarbonizingtheenergyandland-usesystemsdescribedpreviouslywillbepossibleonlyifninesystem-levelrequirementsaremet.Theyencompassphysicalbuildingblocks,economicandsocietaladjustments,andgovernance,institutions,andcommitment(seeBoxE4,“Thenet-zero‘equation’andsystem-levelrequirementstohelpsolveit”).Thisreportfocusesontheeconomicandsocietaladjustmentsneededforanet-zerotransition.Weillustratethesignificantadjustmentsthatwouldneedtobemadethroughananalysisofthenatureandthemagnitudeofthetransitionondemand,capitalallocation,costs,andjobs.Variousotherknock-oneffectscouldalsoensueandaffect,forexample,valuepools,financialvaluations,GDP,andglobaltradeflows.Whilewedonotquantifythese,wediscusssomeofthemqualitativelythroughoutthereport.9Specificaspectsincludethefollowing:—Demand:Changesinpolicies,technologies,andconsumerandinvestorpreferencesunderanet-zerotransitioncouldincreasedemandforlow-emissionsgoodsandservicesandlowerdemandforhigh-emissionsones,inturncausingchangesacrossvaluechains.—Capitalallocation:Decarbonizingtheglobaleconomyandsecuringlowemissionsgoingforwardwouldrequiresignificantcapitalspendingontheformationofnewphysicalassetsandthetransformationofexistingones.—Costs:Operatingandproductioncostswouldchangeaslow-emissionsprocessesareimplemented,investmentismade,andenergyconsumptionshiftstowardlow-emissionssources.—Jobs:Workforcerequirementswouldevolveasmarketsarereshapedandorganizationsinstitutenewoperationalpracticesandprocesses.OuranalysisusingtheNGFSNetZero2050scenarioisahypotheticalsimulation,notaprojectionoraprediction.Ourperspectivesondemand,investment,costs,andjobsbelowrepresentaconsistentandinterdependentviewoftheworldunderthisscenario.Theanalysisisnotexhaustive,andweacknowledgeitslimitationsanduncertainties.9Wehavefocusedonquantifyingthedirectshifts,giventhevastuncertaintiesinvolvedinmodelingthesehigher-ordereffects,andbecausetheiroutcomecouldvarybasedonspecificactionstakentomanagethem.Forfurtherdetailsonourmethodology,seeBoxE1.11Thenet-zerotransition:Whatitwouldcost,whatitcouldbringBoxE41MekalaKrishnan,TomasNauclér,DanielPacthod,DickonPinner,HamidSamandari,SvenSmit,andHumayunTai,“Solvingthenet-zeroequation:Ninerequirementsforamoreorderlytransition,”McKinsey&Company,October2021.2See,forexample,Paolod’Aprile,HaukeEngel,GodartvanGendt,StefanHelmcke,SolveighHieronimus,TomasNauclér,DickonPinner,DaanWalter,andMaaikeWitteveen,“HowtheEuropeanUnioncouldachievenet-zeroemissionsatnet-zerocost,”McKinsey&Company,December2020.OurworkondecarbonizationinEuropefoundthatmorethan85percentoftoday’semissionsinEuropecanbeabatedwithalreadydemonstratedtechnologies,including28percentthatarematureand32percentthatareintheearly-adoptionphase(althoughitisimportanttonotethatthepathwaytodeployingthesetechnologiesisstilluncertainandwouldrequireaddressingtheotherrequirementsmentionedhere).3SeealsoKimberlyHenderson,DickonPinner,MattRogers,BramSmeets,ChristerTryggestad,andDanielaVargas,“Climatemath:Whata1.5-degreepathwaywouldtake,”McKinseyQuarterly,April2020.Thenet-zero‘equation’andsystem-levelrequirementstohelpsolveitPriorresearchbyMcKinseySustainabilitymakesthepointthatachievingnetzeroisakintosolvinganequation—onethatbalancessourcesandsinksofemissionsbyreducingGHGemissionsasmuchaspossiblewhileincreasingGHGstorestoremoveanyremainingemissionsfromtheatmosphere.1Tohelpsolvethisequation,thatresearchidentifiedninefundamental,interrelatedsystem-levelrequirementsforanet-zerotransition.Ourresearchinthisreportusestheserequirementsasastartingpoint.Weplacethemintothefollowingthreegroups:Physicalbuildingblocks,encompassing(1)technologicalinnovation;(2)abilitytocreateat-scalesupplychainsandsupportinfrastructure;and(3)availabilityofnecessarynaturalresources.PastMcKinseyresearchsuggeststhatthereisalineofsighttothetechnologiesneededtolimitwarmingto1.5ºCabovepreindustriallevels,althoughcontinuedinnovationisstillneeded.2Furtherinnovation,bothtodevelopnewtechnologiesthatcanbedeployedatscaleandtoreducetheircosts,willbeneedednonetheless.Forexample,undera1.5ºCpathway,thenumberofsolarpanelsinstalledgloballyperweekwouldbeapproximatelyeighttimeshigherthanthenumbertoday.Therateofwind-turbineinstallationswouldneedtoincreasefivefold.3Andnaturalresources,includingrawmaterialssuchascopper,nickel,rare-earthmetals,land,andwater,wouldalsoneedtobecarefullymanagedtoensuresufficientavailabilityandminimizebottlenecks,andpreventpricespikesandinflation.Buildingoutsupplychainstosupportthekindofstepchangeindeploymentneededrequiresnotonlysignificantcapitalandtherightcapabilitiesbutalsoextensivecoordination.Economicandsocietaladjustments,comprising(4)effectivecapitalreallocationandfinancingstructures;(5)managementofdemandshiftsandnear-termunitcostincreases;and(6)compensatingmechanismstoaddresssocioeconomicimpacts.Aswediscussinthisresearch,anorderlytransitiontonetzerowouldrequiresignificantchangestocapitalallocation.Companiesandcountrieswouldneedtomanagethedemandshiftandcostchangesfromawholesalerevampingofenergyandland-usesystems,evenastheimplicationsforindividualsandcommunitiesforlivelihoodsandexpenditurescouldbesubstantial.Governance,institutions,andcommitment,consistingof(7)governingstandards,trackingandmarketmechanisms,andeffectiveinstitutions;(8)commitmentby,andcollaborationamong,public-,private-,andsocial-sectorleadersglobally;and(9)supportfromcitizensandconsumers.Thepace,scale,andsystemicnatureoftherequiredtransitionmeanthatallstakeholderswillneedtoplayarole,workingtogetherinnewways.Securinganorderlytransitionwillrequireleaderswhohavethecommitmentandcapabilitiestodevelopcoherent,reliable,andworkablepoliciesandhelptheirorganizationsnavigatethechangesthatlieahead.Thetransitionisalsounlikelytooccurwithoutthesupportofcitizensandconsumers,andinsomecases,consumersmayneedtofundamentallyshiftbehaviorstoreducetheirownemissions.Asstakeholdershaveincreasedtheircommitmentstonetzero,movingtoactionhasnotproveneasyorstraightforward.Thisisforfivereasons:first,thescaleandpaceofthestep-upinspendingneededonphysicalassets,giventhatentireenergyandland-usesystemsevolvedoveracenturyortwoandwouldneedtobetransformedoverthenext30years;second,thecollectiveandglobalactionrequired,particularlyastheburdensofthetransitionwouldnotbeevenlyfelt;third,thenear-termshiftsneededforlonger-termbenefits;fourth,theshiftsneededinbusinesspracticesandlifestylesthathaveevolvedoverdecades;andfifth,thecentralroleofenergyinalleconomicactivity,whichmeansthattransformationwouldneedtobecarefullymanaged.Indeed,thetransitioninvolvesthetransformationofthemostimportantsystemssupportingourlivesandwell-being.Evensmalldisturbancestothesesystemscouldaffectdailylives,fromraisingproducerandconsumercoststoimpairingenergyaccess,andcouldleadtodelaysandpublicbacklash.Together,thesefactorshighlightwhytheprevailingnotionofenlightenedself-interestaloneisunlikelytobesufficienttohelpachievenetzero.Inthisreport,wefocusonthesecondofthesegroupingsofrequirements,theeconomicandsocietaladjustments,tobetterunderstandthesechallengesandhowstakeholderscanrespond.Thereisarealriskthattransitioncostscouldbeunbearabletomanyintheabsenceofcompensatingmeasures;forexample,ifcompaniesandcountriesdonotmanagetheshiftsindemandorcostimpactstotheirexistingproductsandservices,orifcommunitiesareleftbehindastheworldtransitionstoanet-zeroeconomy.12McKinsey&CompanyDemand:Inthenet-zeroscenarioexaminedhere,high-emissionsproductswouldseeshrinkingdemand,whileuptakeoflow-emissionsproductswouldcreategrowthopportunitiesOuranalysissuggeststhatundertheNGFSNetZero2050scenario,changesinpolicies,technologies,andconsumerandinvestorpreferenceswouldleadtoconsiderableshiftsindemandforvariousgoodsandservices(ExhibitE4).By2050,oilandgasproductionvolumeswouldbe55percentand70percentlower,respectively,thantheyaretoday.Coalproductionforenergyusewouldnearlyendby2050.Similarly,thetransitionwouldaffectdemandforproductsthatusefossilfuels.Demandforinternalcombustionengine(ICE)carswouldeventuallyceaseassalesofbattery-electricandfuelcell-electriccarsincreasefrom5percentofnewcarsalesin2020tovirtually100percentby2050.Inothersectors,demandcouldshift,withasubstitutionofproductsmanufacturedwithemissions-intensiveoperationstolower-emissionalternatives.Forexample,steelproductionwouldincreasebyabout10percentrelativetotoday,butwithlow-emissionssteelrisingfromone-quarterofallproductiontoalmostallproductionby2050.Intheagricultureandfoodsystem,thedietaryshiftsnecessaryforanet-zerotransitionwould,overtimeandinthecaseofsomeconsumers,moveproteindemandfromemissions-intensivebeefandlambtolower-emissionsfoodslikepoultry.Inotherareas,inparticularthoserelatedtolow-emissionsenergysources,demandwouldgrow.10Powerdemandin2050wouldbemorethandoublewhatitistoday.Productionofbothhydrogenandbiofuelswouldincreasemorethantenfoldbetween2021and2050.11Otherindustries,suchasthosethatmanagecarbonwithnature-basedsolutionsorcarboncaptureandstoragetechnologies,couldalsogrow(seealsodiscussionlateronopportunitiesfromthetransition).Forexample,forestryandotherlandusewouldcontributetosequesteringapproximatelyninemetricgigatonsofCO₂bythemiddleofthecentury.Capitalallocation:About$275trillionofcumulativespendingonphysicalassetswouldbeneededthrough2050undertheNGFSNetZero2050scenarioShiftsindemandduringthenet-zerotransitionwouldtriggertheretirementortransformationofsomeexistingphysicalassetsandtheacquisitionofnewones.Ouranalysissuggeststhatthesemoveswouldinfluencespendingonphysicalassetsintwoways.First,spendingwouldincreasesignificantlyrelativetotoday.Second,aportionofthecapitalthatisnowbeingspentonhigh-emissionsassetswouldbespentonlow-emissionsassets,includingthosewithCCSinstalled.12OuranalysisoftheNGFSNetZero2050scenariosuggeststhatabout$275trillionincumulativespendingonphysicalassets,orapproximately$9.2trillionperyear,wouldbeneededbetween2021and2050acrossthesectorsthatwestudied(ExhibitE5).1310Increasedenergyaccessrelativetotodayandgrowingpopulationandincomesgloballywouldalsodrivesomeoftheincreasedescribedhere.11Forhydrogen,thisexcludescaptiveproductionforindustrialendusessuchasrefineriesandchemicals.12Ouranalysisdivideshigh-emissionsassetsfromlow-emissionsassetsandenablinginfrastructure.Low-emissionsassetshavearelativelylowemissionsfootprint;thetermdoesnotalwaysmeancarbonneutral.Thissegmentationwasdonetoallowustosizethescaleofcapitalreallocationneededforthenet-zerotransition.Indoingso,werecognizethatthedemarcationbetweenhighandlowemissionsisnotalwaysclear.Low-emissionsassetsandenablinginfrastructureincludeassetsforblue-hydrogenproductionwithCCS;green-hydrogenproductionusingelectricityandbiomass;biofuelproduction;generationofwind,solar,hydro-,geothermal,biomass,gaswithCCS,andnuclearpoweralongwithtransmissionanddistributionandstorageinfrastructure;heatproductionfromlow-emissionssourcessuchasbiomass;steelfurnacesusingEAF,DRIwithhydrogen,basicoxygenfurnaceswithCCS;cementkilnswithbiomassorfossilfuelkilnswithCCS;zero-emissionsvehiclesandsupportinginfrastructure;heatingequipmentforbuildingsrunonelectricityorbiomass,includingheatpumps;districtheatingconnections;cookingtechnologynotbasedonfossilfuels;buildinginsulation;GHG-efficientfarmingpractices;foodcrops,poultryandeggproduction;landrestoration.13Basedonanalysisofsystemsthataccountforabout85percentofoverallGHGemissionstoday.Thisestimationincludesspendforphysicalassetsacrossvariousformsofenergysupply(forexample,powersystems,hydrogen,andbiofuelsupply),energydemand(forexample,forvehiclesandalternatemethodsofsteelandcementproduction),andvariousformsoflanduse(forexample,GHG-efficientfarmingpractices).Thisincludesbothwhatistypicallyconsideredinvestmentinnationalaccountsandspend,insomecases,onconsumerdurablessuchaspersonalcars.Wetypicallyconsiderspendingtoreplacephysicalassetsatthepointofemissions(forexample,carsformobility);additionalspendingwouldalsooccurthroughthevaluechain.Wehavenotsizedthis,tominimizedoublecounting.13Thenet-zerotransition:Whatitwouldcost,whatitcouldbringExhibitE4Activityleveltrajectory,2020–501Emissionstrajectory,2020–501OverallPrimaryenergy,ExajouleGlobalCO2emissions,billionmetrictons2PowerElectricitygenerationbysource,Peta-WatthoursElectricitygenerationCO2emissions,billionmetrictonsIndustry:SteelSteelproduction,billionmetrictonsIndustrialprocessandenergydemand,CO2emissions,billionmetrictons3Industry:CementCementproduction,billionmetrictonsTheNGFSNetZero2050scenarioentailsatransformationofenergyandland-usesystems.(1of2)Source:NGFSNetZero2050scenariousingREMIND-MAgPIE(phase2);VividEconomics;McKinseySustainabilityInsights;McKinseyGlobalInstituteanalysis1.BasedontheNGFSNetZero2050scenariousingREMIND-MAgPIE.Insomeinstances,variablesweredownscaledbyVividEconomics.Thisrepresentsglobalactivitylevelsandemissions.IntheNetZero2050scenario,differentsystemsreachzeroemissionsatdifferenttimes.2.TheoveralltrajectoryofCO2emissionswillbeinfluencedinlargepartbythetrajectoryandmixofprimaryenergyuse.However,otherfactors,forexampleratesofafforestationanddeforestationaswellasindustrialprocesses,willalsoplayarole.3.Emissionsfortheentireindustrysystem,notonlyforcementandsteel.3020100504060302020402050302020040301040205020-52020153010402050053001000200400500600205020203040BiofuelsRenewablesGasOilNuclearCoalCoalOtherGeothermalBiomassSolarHydroWindNuclearOilGas4520133020204020502.000.51.51.0402050302020Lowemissions(EAFfromscrapandDRI-EAFwithhydrogen)Lowemissions(BF-BOFwithCCS)Highemissions(BF-BOF)andmediumemissions(DRI-EAFwithnaturalgas)0205020202304046810Lowemissions(biomasskilnsandfossilfuelkilnswithCCS)Highemissions(fossilfuelkilns)Notexhaustive14McKinsey&CompanyExhibitE15Activityleveltrajectory,2020–501Emissionstrajectory,2020–501MobilityTotalnewpassengercarssoldperyear,millionTransportationCO2emissions,billionmetrictons2BuildingsTotalheatingsystemssoldperyear,millionBuildingsCO2emissions,billionmetrictonsAgricultureAgricultureproduction,%,billionmetrictonsdrymatterAgriculture,forestry,andotherlanduse(AFOLU)methaneemissions,millionmetrictons3ForestryandotherlanduseForestcover,billionhectaresAFOLUCO2emissions,billionmetrictons4TheNGFSNetZero2050scenarioentailsatransformationofenergyandland-usesystems.(2of2)Source:NGFSNetZero2050scenariousingREMIND-MAgPIE(phase2);VividEconomics;McKinseySustainabilityInsights;McKinseyGlobalInstituteanalysisNotexhaustive1.BasedontheNGFSNetZero2050scenariousingREMIND-MAgPIE.Insomeinstances,variablesweredownscaledbyVividEconomics.Thisrepresentsglobalactivitylevelsandemissions.IntheNetZero2050scenario,differentsystemsreachzeroemissionsatdifferenttimes.2.Includesroadtransportation,aviation,freight,andrail.3.Methaneemissionsfromagriculture,forestry,andotherlandusearemostlyinfluencedbyagriculture,buttheyalsoincludeasmallamountofemissionsfromforestryandotherlanduse.4.Carbondioxideemissionsaremostlyinfluencedbyforestryandotherlanduse,buttheyalsoincludeasmallamountofemissionsfromagriculture.Afforestationcontributestocumulativelysequesteringapproximatelyninemetricgigatonsofcarbondioxideby2050intheNGFSNetZeroscenario.0201004014060801204020203020502001502500501002020304020502020602483040205001.00.51.52.02.54020203020504.13.904.04.230202040205010002005020201503040205053-10142202030402050HeatpumpDistrictheatingBiomassboilerFossilfuelboilerBattery-electricvehiclesandfuel-cellelectricvehiclesInternalcombustionengineExhibitE4(continued)4.002.08.06.010.012.0202030402050LivestockBiomassFoodcrops15Thenet-zerotransition:Whatitwouldcost,whatitcouldbringExhibitE5Spendingonphysicalassetsforenergyandland-usesystemsintheNGFSNetZero2050scenariowouldrisetoabout$9.2trillionannually,orabout$3.5trillionmorethantoday.Annualspendingonphysicalassetsforenergyandland-usesystems¹intheNetZero2050scenario,²average2021–50,$trillion1.Wehavesizedthetotalspendingonphysicalassetsinpower,mobility,fossilfuels,biofuels,hydrogen,heat,CCS(notincludingstorage),buildings,industry(steelandcement),agriculture,andforestry.Estimationincludesspendforphysicalassetsacrossvariousformsofenergysupply(eg,powersystems,hydrogen,andbiofuelsupply),energydemand(eg,forvehicles,alternatemethodsofsteelandcementproduction),andvariousformsoflanduse(eg,GHG-efficientfarmingpractices).2.BasedontheNGFSNetZero2050scenariousingREMIND-MAgPIE(phase2).Basedonanalysisofsystemsthataccountfor~85%ofoverallCO₂emissionstoday.Spendestimatesarehigherthanothersintheliteraturebecausewehaveincludedspendonhigh-carbontechnologies,agriculture,andotherlanduse,andtakenamoreexpansiveviewofthespendingrequiredinend-usesectors.3.Ouranalysisdivideshigh-emissionsassetsfromlow-emissionsassets.High-emissionsassetsincludeassetsforfossilfuelextractionandrefining,aswellasfossilfuelpowerproductionassetswithoutCCS;fossilfuelheatproduction,gray-hydrogenproduction;steelBOF;cementfossilfuelkilns;ICEvehicles;fossilfuelheatingandcookingequipment;dairy,monogastric,andruminantmeatproduction.Low-emissionsassetsandenablinginfrastructureincludeassetsforblue-hydrogenproductionwithCCS;green-hydrogenproductionusingelectricityandbiomass;biofuelproduction;generationofwind,solar,hydro-,geothermal,biomass,gaswithCCS,andnuclearpoweralongwithtransmissionanddistributionandstorageinfrastructure;heatproductionfromlow-emissionssourcessuchasbiomass;steelfurnacesusingEAF,DRIwithhydrogen,basicoxygenfurnaceswithCCS;cementkilnswithbiomassorfossilfuelkilnswithCCS;low-emissionsvehiclesandsupportinginfrastructure;heatingequipmentforbuildingsrunonelectricityorbiomass,includingheatpumps;districtheatingconnections;cookingtechnologynotbasedonfossilfuels;buildinginsulation;GHG-efficientfarmingpractices;foodcrops,poultryandeggproduction;andlandrestoration.Source:McKinseyCenterforFutureMobilityElectrificationModel(2020);McKinseyHydrogenInsights;McKinseyPowerSolutions;McKinsey–MissionPossiblePartnershipcollaboration;McKinseySustainabilityInsights;McKinseyAgriculturePractice;McKinseyNatureAnalytics;McKinseyGlobalInstituteanalysisNewspendingCurrentspending$9.2TotalannualspendingintheNetZeroscenario$3.5Newspendingonlow-emissionsassetsandenablinginfrastructure$2.7Continuedspendingonhigh-emissionsassets3$2.0Continuedspendingonlow-emissionsassetsandenablinginfrastructure3$1.0Spendingreallocatedfromhigh-tolow-emissionsassets16McKinsey&CompanyThisrepresentsspendingrelatedspecificallytothedeploymentofnewphysicalassetsandtothedecarbonizationofexistingassets.Itdoesnotincludespendingtosupportotheradjustments—forexample,toreskillandredeployworkers,compensateforstrandedassets,oraccountforthelossofvaluepoolsinspecificpartsoftheeconomy.Spendingcouldalsobehigherthansizedhere,forexample,inordertobuildredundancyintoenergysystemsduringthetransitiontoavoidsupplyvolatility.Otherresearchtodatethathassizedinvestmentneedsforthetransitionhaslargelyfocusedonestimatingrequiredenergyinvestment.Hereweexpandthistoincludeadditionalspendingcategories.14Asaresult,ourestimatesexceedtoameaningfuldegreethe$3trillionto$4.5trillionofannualspendingforthenet-zerotransitionthatothershaveestimated.15Theamountofcumulativespendingisequivalenttoabout7.5percentofGDPfrom2021to2050.Therequiredspendingwouldbefront-loaded,risingfromabout6.8percentofGDPtodaytoabout9percentofGDPbetween2026and2030beforefalling.Indollarterms,theincreaseinannualspendingisabout$3.5trillionperyear,or60percent,morethanisbeingspenttoday,allofwhichwouldbespentinthefutureonlow-emissionsassets.Thisincrementalspendingwouldbeworthabout2.8percentofglobalGDPbetween2020and2050.Toputthisincomparableterms,theincreaseisapproximatelyequivalent,in2020,tohalfofglobalcorporateprofits,one-quarteroftotaltaxrevenue,15percentofgrossfixedcapitalformation,and7percentofhouseholdspending.Thesecondaspect,thereallocationofspending,wouldalsobesignificant.Atpresent,$3.7trillion—or65percentoftotalspending—goesannuallytowardhigh-emissionsassets,suchascoal-firedpowerplantsandvehicleswithinternalcombustionengines.Inthisnet-zeroscenario,about$1trillionoftoday’sspendonhigh-emissionsassetswouldneedtobereallocatedtolow-emissionsassets.Oftheoverall$9.2trillionneededannuallyforanet-zerotransitionoverthenext30years,$6.5trillion—or70percentoftotalspending—wouldbeonlow-emissionsassets,reversingtoday’strend.Threesectorgroups—mobility,power,andbuildings—wouldaccountforapproximately75percentofthetotalspendingonphysicalassetsinthisnet-zeroscenario(seethenextsectionforadetaileddiscussionofspendingneededbysector).14Webroadenedtheanalysistoincludeamorecomprehensiveviewofspendingbyhouseholdsandbusinessesonassetsthatuseenergy(forexample,thefullcostofpassengercarsandheatpumps),capitalexpendituresinagricultureandforestry,andsomecontinuedspendinhigh-emissionsphysicalassetslikefossilfuel–basedvehiclesandpowerassets.15SeeNetZeroby2050:Aroadmapfortheglobalenergysector,IEA,2021;NGFSclimatescenariosforcentralbanksandsupervisors,NGFS,2021;ChristophBertrametal.,“EnergysystemdevelopmentsandinvestmentsinthedecisivedecadefortheParisAgreementgoals,”EnvironmentalResearchLetters,volume16,number7,June2021;DavidMcCollumetal.,“EnergyinvestmentneedsforfulfillingtheParisAgreementandachievingtheSustainableDevelopmentGoals,”NatureEnergy,volume3,June2018;Makingmissionpossible:Deliveringanet-zeroeconomy,EnergyTransitionsCommission,September2020;andBettergrowth,betterclimate:Thenewclimateeconomyreport,TheGlobalCommissionontheEconomyandClimate,2014.Ourestimatesexceedtoameaningfuldegreethe$3trillionto$4.5trillionofannualspendingforthenet-zerotransitionthatothershaveestimated.17Thenet-zerotransition:Whatitwouldcost,whatitcouldbringIfweconsiderthelikelyevolutionofthisspendinggivenpopulationgrowth,GDPgrowth,andcurrentmomentumtowardthenet-zerotransition,thecapitaloutlaywouldbesmallerbutremainsignificant.IfwetakeasabasistheNGFSCurrentPoliciesscenario—whichaccountsforexpectedincomeandpopulationgrowth,aswellascurrentlylegislatedpoliciesandexpectedcostreductionsinkeylow-emissionstechnologies—theincrementalannualspendinanet-zeroscenariowouldbeabout$0.9trillionratherthanthe$3.5trillionincreasenotedabove(ExhibitE6).16Approximately50percentofthe$8.3trillioninannualspendingintheCurrentPoliciesscenariowouldbeonlow-emissionsassets,whichhighlightsthatalreadysomeshifttolow-emissionspendingisanticipatedinthisscenariofromexistingtechnologicaltrendsandpoliciestoday.Thetransitioncouldalsoleadtoassetstranding,wherebyexistingphysicalassetsareeitherunderutilizedorretiredbeforetheendoftheirusefullife.Inthecontextofthenet-zerotransition,thecapitalstockassociatedwithfossilfuelsandemissionsisworthmanytrillionsofdollars,asignificantshareofthetotalglobalcapitalstock—andevenmorecapitalstockdependsindirectlyontheseassets.Strandinglargeportionsofthiscapitalstockinadisorderlyorabruptwaycouldimpedevaluegenerationinmanyindustrialsectorsandindeedtheglobaleconomyandwouldthereforeneedtobecarefullymanaged.Inpoweralone,forexample,weestimatethatsome$2.1trillionworthofassetscouldbestrandedby2050.About80percentofthesestrandedassetswouldpertaintofossilfuel–basedpowerplantsinoperationtoday,primarilycoal-firedplantsincountriessuchasChinaandIndiathatarerelativelynew(lessthan15yearsold)andwouldnormallyhavemanymoreyearsofproductivelife.17Moreover,manyassetsthatcouldbestrandedarecapitalizedonthebalancesheetsoflistedcompanies.Earlyretirementoftheseassetswouldpotentiallyleadtothereductionof(currentlyperceived)valueandtobankruptciesandcreditdefaults,withpotentialknock-oneffectsontheglobalfinancialsystem.Andmarketsmaywellpronouncetheirverdictbeforetheactualstrandinghastakenplace.Unsurprisingly,then,thepossibilityofassetstrandinghaspromptedconcernsaboutfinancial-sectorriskandtheneedtobuildthecapabilitiestoquantifyandmanageit.18Whilethescaleofthecapitalthatwouldneedtobedeployedinanet-zerotransitionissubstantial,itisimportanttoputitincontext.Firstandforemost,aswediscusslater,theeconomicadjustmentsinvolvedinreachingnetzeroinacoordinatedandorderlymannerwouldpreventthefurtherbuildupofphysicalrisksandtheadditionalcostsarisingfromamoredisorderlytransition.Second,inthelongrun,theup-frontcapitalexpendituresforanet-zerotransitioncouldresultinoperatingsavingsforsomesectorsthroughreducedfuelconsumption,improvedmaterialandenergyefficiency,andlowermaintenancecosts.16TheNGFSCurrentPoliciesscenarioprojectsthegreenhousegasemissionsthatwouldoccurifonlytoday’spoliciesremainedinplace,anditanticipatesabout3°Cofwarmingby2100.SeeBoxE1andthetechnicalappendix.17Ourdefinitionofstrandedassetsrepresentsthecumulativevalueofprematurelyretiredandunderutilizedassetsin2020–50,undiscounted.WeestimateitbyfirstidentifyingthelevelofyearlydepreciationthatisexpectedgivenassetlifeandassumedeconomiclifeusingdatafromtheWRIGlobalPowerPlantdatabaseasinput.Thatfigurewasmultipliedbythefractionofassetsthatareunderutilizedrelativetopastaverageutilizationrates(between2005and2020)andsummedacrossyears.Otherresearchhasfoundsimilareffectsonthepowersector,andothersectors.See,forexample,Strandedassetsandrenewables:Howtheenergytransitionaffectsthevalueofenergyreserves,buildingsandcapitalstock,InternationalRenewableEnergyAgency,2017;DavidNelsonetal.,Movingtoalow-carboneconomy:Theimpactofpolicypathwaysonfossilfuelassetvalues,ClimatePolicyInitiative,October2014;andJean-FrancoisMercureetal.,“Reframingincentivesforclimatepolicyaction,”NatureEnergy,November2021.18See,forexample,DavidNelsonetal.,Movingtoalow-carboneconomy:Theimpactofpolicypathwaysonfossilfuelassetvalues,ClimatePolicyInitiative,October2014.Theup-frontcapitalexpendituresforanet-zerotransitioncouldresultinoperatingsavingsforsomesectorsinthelongrun.18McKinsey&CompanyExhibitE6TheNGFSNetZero2050scenariowouldentailaround$275trillionincumulativeinvestmentsover30years—around$25trillionmorethantheCurrentPoliciesscenario.Annualspendonphysicalassetsforenergyandland-usesystems,¹$trillionperyear1.Wehavesizedthetotalspendingonphysicalassetsinpower,mobility,fossilfuels,biofuels,hydrogen,heat,CCS(notincludingstorage),buildings,industry(steelandcement),agriculture,andforestry.Estimationincludesspendforphysicalassetsacrossvariousformsofenergysupply(forexample,powersystems,hydrogen,andbiofuelsupply),energydemand(forexample,forvehicles,alternatemethodsofsteelandcementproduction),andvariousformsoflanduse(forexample,GHG-efficientfarmingpractices).Thisincludesbothwhataretypicallyconsidered“investments”innationalaccountsandspend,insomecases,onconsumerdurablessuchaspersonalcars.Annualaverageover5-yearperiods.2.ScenariobasedontheNetworkforGreeningtheFinancialSystemNetZero2050scenariousingREMIND-MAgPIE(phase2).CurrentpoliciesisbasedontheNGFSCurrentPoliciesscenariousingREMIND-MAgPIE(phase2).Basedonanalysisofsystemsthataccountfor~85%ofoverallCO₂eemissionstoday.Ouranalysisincludesamorecomprehensiveviewofspendingbyhouseholdsandbusinessesonassetsthatuseenergy,capitalexpendituresinagricultureandforestry,andsomecontinuedspendinhigh-emissionsphysicalassets.Seetechnicalappendix.Source:NetworkforGreeningtheFinancialSystem2021(NetZero2050scenarios)REMIND-MAgPIEmodel;VividEconomics;McKinseyCenterforFutureMobilityElectrificationModel(2020);McKinseyHydrogenInsights;McKinseyPowerSolutions;McKinsey–MissionPossiblePartnershipcollaboration;McKinseySustainabilityInsights;McKinseyAgriculturePractice;McKinseyNatureAnalytics;McKinseyGlobalInstituteanalysis11092875643041–452021–2536–4031–3526–302046–50MobilityHydrogen,bio-fuels,andheatIndustryFossilfuelsAgricultureForestryBuildingsPowerNGFSNetZero2050scenario2NGFSCurrentPoliciesscenario210102985743626–3036–4031–352046–5041–452021–25Totalaround$275trillionTotalaround$250trillion%ofGDP%ofGDP1005213467892020Average9.28.38.88.57.66.86.18.06.87.47.16.56.15.87.22020level19Thenet-zerotransition:Whatitwouldcost,whatitcouldbringItisalsoimportanttorecognizethatcapitalspendingisnotmerelyacost.Muchofthisinvestmentisalreadycost-effectiveandcomeswithareturn.Forexample,researchanalyzingothernet-zeroscenarioshasfoundthatabout40–50percentofspendingcancomewithapositiveinvestmentcase.19Variouschallengeswillneedtobemanagedintheshortruntoachievesuchoutcomes.Theyincluderaisingcapitalandsecuringfinancingatthisscale,managingtechnologicaluncertaintyofinvestment,consideringrisk/returntrade-offs,anddrivingcapitalflowstobothdevelopedanddevelopingcountries.Raisinganddeployingcapitalcouldbemorechallengingforspecificsectorsandgeographies.19McKinseyresearchfindsthatabouthalfoftherequiredinvestmentstoreachnet-zeroemissionsinEuropehaveapositiveinvestmentcase.Thismeansthatswitchingtotherelevantlow-emissionstechnologywouldrepresentacostsavingatthecostofcapitalforeachsectorandsegment.SeePaoloD’Aprile,HaukeEngel,GodartvanGend,StefanHelmcke,SolveighHieronimus,TomasNauclér,DickonPinner,DaanWalter,andMaaikeWitteveen,“HowtheEuropeanUnioncouldachievenet-zeroemissionsatnet-zerocost,”McKinsey&Company,November2020.TheIEAalsoexaminedtheactionsrequiredtobetakenbyconsumersintheIEANetZero2050scenariosuchasswitchingtolow-emissionsvehicles.Theyfindthat40percentwouldresultinoverallcostsavingsrelativetoanAnnouncedPolicesscenariowheregovernmentsfollowthroughontheirclimatetargetsandcommitments.SeeWorldeconomicoutlook,IEA,2021.Onthemacroeconomiclevel,higherlevelsofpublicandprivateinvestmentcouldprovideeconomicstimulus,leadingtonegligiblenetnegativeimpacts,orevenmodestnetpositiveimpacts,onGDPgrowth(thoughasdiscussed,muchdependsonhowthetransitionisfinancedandmanaged).Forexample,theEuropeanCommissionfoundinconductinganimpactassessmentforproposed2030net-zero-alignedemissionstargetsfortheEuropeanUnionthatraisingpolicyambitionwouldresultinacumulativeimpactofbetween-0.7percentand+0.55percentonGDPby2030comparedtoabaselineforecast.SeeImpactassessment:SteppingupEurope’s2030climateambition.Investinginaclimate-neutralfutureforthebenefitofourpeople,CommissionStaffWorkingDocumentSWD/2020/176,September2020.Capitalspendingisnotmerelyacost:muchofthisinvestmentisalreadycost-effectiveandcomeswithareturn.20McKinsey&CompanyCosts:Steel,cement,andpowerwouldseecostincreasesintheNetZero2050scenario,duetoshiftsinproductionprocessesandcapitalexpenditures,whiletotalcostofownershipofEVswouldfallThetransition’sfinancialimplicationsreachbeyondspendingonphysicalassets.Productioncosts,whichreflectchangingoperatingcostsaswellascapitalcostsfornewinvestmentandassetdepreciation,wouldalsoshiftasprocessesarechangedandhigh-emissionsassetsarereplacedorretrofitted.Andanychangesinproductioncostscouldpossiblyaffectthecostsofconsumergoods,ifcostsarepassedthrough.Weexaminetheseeffectsinturn.Inthesteelandcementsectors,productioncosts,includingoperatingcosts,capitalcharges,anddepreciation,couldrisebyabout30percentand45percent,respectively,fromtheircurrentlevels,thoughcontinuedinnovationcouldlowertheseestimates.Inthepowersector,ouranalysisindicatesthattheglobalaveragedeliveredcostofelectricityacrossgeneration,transmission,distribution,andstoragewouldincreasebeforefallingfromtheirpeak,inthescenariomodeledhere.Theimpactwouldbefront-loaded:costswouldincreasebyabout25percentby2040,includingoperatingcosts,capitalcosts,anddepreciationofnewandexistingassets,from2020levels(ExhibitE7).Thisisfortwomainreasons:firstly,investmentswillbeneededinbuildingrenewablesandgridandstoragecapacity,creatingcapitalcostsanddepreciationcharges.Secondly,somefossil-basedpowerassetswouldcontinuetoincurcapitalcosts,eveniftheyareunderutilizedorretiredprematurely.20Thisanalysisrepresentsaglobalaverageperspective.Thepicturecouldlookdifferentacrossregionsdependingonthecurrentstateofthepowersystem,theavailabilityofnaturalresourceslikesunshineandwind,andtheageoffossilpowerfleets,amongotherfactors.Itisconceivablethatinnovationandeconomiesofscalecoulddrivedowncapitalandgridspending.Deliveredcostofelectricityinthefirsthalfofthecenturycouldthenbelowerthananticipatedinthescenario.Ontheotherhand,impactscouldbesignificantlyhigherthanthosesizedhere(thoughitisimportanttonotethatcostsassizedherearenotthesameasconsumerelectricityprices).Variousfactorscouldcontributetothis,includingpotentialgridintermittencyissuesasrenewableassetsarescaledup,shortageoffossilfuel–basedcapacitytoservepeakloadsandprovidebackupforrenewables,andshortageofcoalandgasinputsforfossilfuelpowerplants,tonameafew.Thepotentialimpactsofsuchoutageswouldbeevengreaterwithelectricitybeingusedmoreextensivelyacrosstheeconomythantodayunderanet-zerotransition,forexampleforheating,mobility,andindustry.Iftheshiftfromhigh-emissionsfossilfuel–basedpowerassetsandtheramp-upoflow-emissionsassetsthatreplacethemisnotwellmanaged,thiscouldincreasebothenergypricesandvolatilityandtherecouldbechallengeswithreliablepower.(SeeBoxE5,“Howrisingenergypricescancreaterisk.”)20Toassesscostchangesforpower,wefirstquantifiedthechangeinthreemaincostdrivers:powergenerationcapitalchargeanddepreciation(ataweightedaveragecostofcapitalof6.5percent),powergenerationoperatingcosts,andtransmission,distribution,andstorageinvestments.Thesewerethentranslatedintoadeliveredcostofelectricitybydividingbyelectricityproductionineachtimeperiod.Thismetricindicateshowtheunderlyingcostsarechangingfortheentirepowersector.Ourmethodologyisbroaderthanotherstudiesfocusedonthelevelizedcostofenergyfornewassetswhichoftenhighlightthecompetitivecostpositionofrenewablesinthepowermix.Ouranalysisalsotakesintoaccountinfrastructurespendingongrids,capitalcharges,anddepreciationoflegacyassetseveniftheyareprematurelyretiredorunderutilized.SeealsoRupertWayetal.,Empiricallygroundedtechnologyforecastsandtheenergytransition,InstituteforNewEconomicThinkingOxford,workingpapernumber2021-01,September2021.Notethatourmetricisdifferentfromtheactualcostpaidbyconsumers,andeventualenergypricesforconsumerscouldlooksubstantiallydifferent.Consumerelectricitypricesdependonamultitudeoffactors,includingdecisionsonhowthepowersystemtransformationispaidforandoverwhattimeframe.Forexample,akeyquestionishowtobestmanagecoalgenerationdecommissioningandwrite-downcosts.Moreovernotallexpectedchangesindeliveredcostsareduetodecarbonization.Forinstance,sometransmissionanddistributioninvestmentswouldhappenregardless,ascountriesincreaseelectricityaccess.Thisanalysisdoesnottakeintoaccountshort-termvariationsinsupplyanddemand,subsidies,ortaxes.21Thenet-zerotransition:Whatitwouldcost,whatitcouldbringInthescenariomodeledhere,costswouldsubsequentlydecreasefromthe2040peak;forexample,by2050,operatingcostsforgenerationcoulddropbymorethan60percentrelativeto2020astheenergymixshiftstorenewables.Someofthereductioninoperatingandothercostsforgenerationwouldbeoffsetbyanincreaseintheoperatingandothercostsassociatedwithgridflexibility,transmission,anddistribution.Asaresult,deliveredcostofelectricityinthisscenariowouldstillbeabout20percenthigherin2050than2020levels.Inthelongrun,thereismoreuncertaintyabouthowdeliveredcostofelectricitycouldevolve,andcostscouldatsomepointbelowerthan2020levels,dependingoninnovationstopowertechnologies,griddesign,andevolutionofthepowersystemtomanageflexibilityissues.Othersectorscouldseeoverallcostdecreases.Akeyexampleofthisismobility.OuranalysissuggeststhatthetotalcostofownershipforelectriccarscouldbecheaperthanICEcarsinmostregionsby2025,aswedescribeinmoredetailbelow.21Medium-dutyBEVtruckscovering200–300kmadayareexpectedtoreachtotalcostparitywithICEsbyaround2025,withheavy-dutylong-haultrucksreachingparityby2030inEuropeandlaterinotherregions.21Totalcostofownershipaccountsforpurchaseprice,operatingcosts,forinstancefuelandmaintenancecosts,andresalevalue;basedonthreeyearsofownershipofanewcar.ExhibitE7GlobalaveragedeliveredcostofelectricityintheNGFSNetZero2050scenariowouldriseintheshortrunandthenfallbackfromitspeak.Deliveredcostofelectricity,1$perMWh,index(100=2020),NGFSNetZero2050scenario,globalaverageSource:NetworkforGreeningtheFinancialSystemscenarioanalysis2021phase2(NetZero2050scenario)REMIND-MAgPIE(phase2)model;VividEconomics;WorldResourcesInstitutePowerPlantDatabase;McKinseyPowerSolutions;McKinseyGlobalInstituteanalysis1.Thismetricrepresentsafullsystemcostforpower,acrossgeneration,transmission,andstorage.Itincludesoperatingcosts,capitalcosts,anddepreciation.Toassesscostchangesforpower,wefirstquantifiedthechangeinthreemaincostdrivers:powergenerationcapitalcharge(ataweightedaveragecostofcapitalof6.5percent),powergenerationoperatingcosts,andtransmission,distributionandstorageinvestments.Thesewerethentranslatedintothedeliveredcostofelectricitybydividingbyelectricityproductionineachtimeperiod.Thismetricindicateshowtheunderlyingcostsarechangingforthepowersectorandisnotthesameasconsumerelectricityprices.Thetrendsdescribedhereareglobalaveragesandwouldvaryacrossregions.2.Transmissionanddistributionplusstorage.600402080120100140206020202100Additionalgridcosts2GenerationcapitalcostsanddepreciationGenerationoperatingcosts+25%22McKinsey&CompanyBoxE51CarlosFernándezAlvarezandGergelyMolnar,“Whatisbehindsoaringenergypricesandwhathappensnext?”InternationalEnergyAgency,October2021.2USretailgasolinepricedata,allgrades,allformulations,USEnergyInformationAdministration.3CarlosFernándezAlvarezandGergelyMolnar,“Whatisbehindsoaringenergypricesandwhathappensnext?”InternationalEnergyAgency,October2021.4Stateoftheenergyunion2021,EuropeanCommission,October2021.5ZolanKanno-Youngs,StanleyReedandJimTankersley,“TheUnitedStatesandotherworldpowerswilltapoilreserves,”NewYorkTimes,November23,2021.6BidenadministrationdeploysAmericanRescuePlanfundstoprotectAmericansfromrisinghomeheatingcosts;callsonutilitycompaniestopreventshutoffsthiswinter,WhiteHouseFactSheet,November18,2021.7“Italysetsasidemorethan3blneurostocurbenergybills,”Reuters,September23,2021;“SpaintargetsenergyfirmsasEuropeanbillssurge,”BBCNews,September14,2021.8JoeWallace,“EnergypricesinEuropehitrecordsafterwindstopsblowing,”WallStreetJournal,September13,2021.CarlosFernándezAlvarezandGergelyMolnar,“Whatisbehindsoaringenergypricesandwhathappensnext?”InternationalEnergyAgency,October2021.HowrisingenergypricescancreateriskGlobalenergypricessurgedinthethirdquarterof2021,providingaglimpseofthespeedwithwhichmarketimbalancescanfeedthroughtoconsumersandpromptswiftgovernmentreactionsincludingsubsidiestolow-incomehouseholds.NaturalgaspricebenchmarksinEuropeandAsiaweretentimeshigherinOctober2021thanoneyearprior,whileUSmonth-aheadnaturalgaspricesreachedtheirhighestlevelsince2008.Internationalcoalpriceswerealsosharplyhigher,atfivetimestheirfall2020levels.1RisingprimaryfuelpricessparkedlargeincreasesinconsumerelectricitypricesinGermany,Spain,andelsewhereinEurope.IntheUnitedStates,gasolinepumppricesof$3.50pergallonwerethehighestinsevenyears.2Deterioratingmarginsforenergyprovidersandelectricity-intensiveindustriessuchasfertilizerproductionforcedseveralcompaniestocurtailoperations.3Energypricesarealreadyahighlycriticaltopicgiventhecentralityofenergytoconsumersandeconomicactivity—evenundernormalcircumstances.Forexample,accordingtotheEuropeanCommission,31millionEuropeansliveinenergypovertyandareunabletoadequatelyheattheirhomes.4Tohelpalleviatepricerises,India,Japan,SouthKorea,theUnitedKingdom,andtheUnitedStatesannouncedinNovember2021theywouldbetappingintotheirrespectivestrategicoilreserves.5Somegovernmentsalsoinitiatedsubsidyprograms.TheseincludedtheUSmakingavailablea$4billionbudgetfortheLowIncomeEnergyAssistanceProgram,providingaidtomorethanfivemillionfamilies.6ItalyandSpaincappedhomeenergybillsandredirectedutilitycompanyprofitstosubsidizelow-incomehouseholdsandsmallenterprises.7Aconfluenceoffactorsledtothepricefluctuations,includingareboundinconsumeractivityaslockdownsrelatedtotheCOVID-19pandemiceasedalongwithpersistentlaborandsupplychainshortages.Insomeinstances,weathereventsexacerbatedthesituation,includinglowwindspeedsintheNorthSea,acoldsnapinTexasthatledtoagasproductionshut-in,droughtinBrazilthatdepletedhydropowerreservoirlevelsto25percentbelowtheirfive-yearaverage,andfloodingofChinesecoalminesthatexacerbatedshortagesdriveninpartbytherecentfreezeoncoalimportsfromAustralia.8Suchevents,whilenotdirectlyattributedtoanet-zerotransition,nonethelessshinealightonsupplychainandgridvulnerabilities.Indoingso,theycanserveasacautionarypreviewofpotentialfutureenergymarketvolatilitythatcanbetriggeredbyrapidsimultaneousshiftsonthesupplyanddemandsidesoftheglobalenergyandmaterialslandscape.Forexample,asrelianceonrenewablesgrowsandinvestmentinfossilfuel–basedpowergenerationdeclines,tightsupplyforrawmaterialinputsfortechnologieslikesolarpanelsandbatteriesmaycompoundenergypricevolatilitygivenlongleadtimesinthecapital-intensiveminingsector.Astheworldactsonnet-zeropledges,periodsofenergypricevolatilitylikethoseinthelastmonthsof2021,amongothers,thusserveasareminderoftheimportanceofcarefultransitionmanagement.Exposuretotheseriskswouldalsoincreasewithelectrificationasakeypillarofthetransition.Poweroutages,whetherduetotheenergymix,weatheroroperatorerror,wouldhavefar-reachingconsequenceswherehouseholdsandbusinessesaredependingonareliablesourceofelectricityforday-to-dayneedssuchasheating,cooling,appliances,vehicles,andindustrialapplications.Asthemixofthepowersystemshiftstorenewablesinthenet-zerotransitionwehaveanalyzedhere,variousfactorscouldinfluencethedeliveredcostofelectricity,andalsoelectricitypricesforconsumers.First,asalreadynoted,thedeliveredcostofelectricitywouldinitiallyriseintheNetZero2050scenarioaspowergenerationassetsarereplacedandtransmission,distribution,andstoragecapacityisbuilt.Increasesinthesecostscouldevenbehigherthancalculatedhere,withimplicationsforpricesandwithmorevolatility,forthevariousreasonsdiscussedpreviously.Second,storageandtransmissioncosts,whichconstituteasubstantialportionofthecostofelectricity,couldfeedthroughtoconsumersinanunevenway,withsomepayingmorewhileothersexperiencesavings.Thiswilldependinpartonarangeoflocalizedfactorsincludingexistingtransmissionanddistributioncapacityandtheneedforlongdurationstorage.Finally,marketdesigncouldbeanimportantfactor:asthepowersystemchanges,powermarketsmayneedtochangewithit.Today,powerissoldthroughthespotmarket,inwhichpricesaresetaccordingtoproductioncostsofthemarginalpowerproducer,andthroughbilateralpurchaseagreementsbetweenpowerproducersandconsumers.Capacitymarketshavehistoricallyaccountedforarelativelysmallshareofpowersales,buttheymayplayalargerroleinthefuturetofullycompensateflexibleproducersthathelpbalancethegrid.Newmarketmechanismsmaybeneededtoencouragesomemarginalfossilfuelpowerproducerstodecommissiontheirplantsearlier.Keyquestionsremainabouthowthiswouldbepaidfor,andalsohowcostincreases,ifany,wouldaffectendconsumers.23Thenet-zerotransition:Whatitwouldcost,whatitcouldbringConsumerswouldfaceadditionalup-frontcapitalcostsandmayneedtospendmoreintheneartermonelectricityifcostincreasesarepassedthrough;lower-incomehouseholdseverywherearenaturallymoreatriskThenet-zerotransitioncouldalsoaffectconsumerspending.Consumersmayfacehigherpricesandup-frontcapitalcostsintheneartermandmayneedtoadjusttheirspendingifsignificantemissionsreductionsaretobeachieved,althoughtheextentoftheimpactcouldvarydependingonthecompositionofconsumers’spendingbasketsandwhethercompaniespassoncosts,amongotherfactors.22Low-incomehouseholdsareparticularlyatrisk.Overtime,allconsumerscouldseesomebenefits.First,consumers’spendinghabitsmaybeaffectedbydecarbonizationefforts.Forexample,theymayneedtoreplacegoodsthatburnfossilfuels,liketransportationvehiclesandhomeheatingsystemsthatrelyonfossilfuels,andpotentiallymodifydietstoreducebeefandlambconsumption.Second,anyriseinelectricitypriceswouldaffectconsumers,particularlylower-incomeconsumers,whosespendonenergymakesupalargeshareofwallet.However,thisdependsonhowcostrecoveryisallocatedamongconsumers,uptoandincludingtheextentanyincreasesindeliveredcostofelectricityarepassedthroughtoendconsumers.Third,consumerswouldincurup-frontcapitalcostsrelatedinparticulartothemobilityandbuildingstransition.Forexample,asICEvehiclesarephasedout,householdswouldshiftspendingtoEVs,whichcostmorethancomparableICEcarsbecauseoftheirlargebatteries.Eventhough,inthelongterm,consumerscouldbenefitoverthelifeoftheasset—forexample,becauseofthelowertotalcostofownershipforEVsorsavingsfromenergyefficiencymeasuresinhomes.McKinseyanalysissuggeststhatthetotalcosttoownanEV,whichtakesintoaccountpurchaseprice,maintenance,fuelcost,andresalevalue,wouldbecheaperthananICEcarinmostregionsby2025.Forexample,thetotalcostofownershipforbattery-electriccarsinEuropemaybecheapercomparedtothatofICEsby2025,andtheUnitedStatesby2030.23Afasterdeclineinbatterypricesorlocalsubsidiescouldacceleratethisbreak-evenpoint.Evenso,thehigherup-frontcostsmayprovechallengingforlower-incomehouseholds.Foodcostsareoneareawhereconsumercostscouldfallifthedietaryshiftsrequiredtodecarbonizetheagricultureandfoodsectorsmanifest—thatis,ifeatinghabitsmoveawayfromemissions-intensiveandhigher-costruminantproteinlikebeefandlambtootherformsofproteinlikepoultry.24Finally,higherproductioncostscouldalsoaffectthepriceofconsumergoodsandservicesinotherareas.Highercostsforlow-emissionsshippingcouldbepassedontotheconsumerforgoodsshippedinternationally;however,theextenttowhichthiswillflowthroughtohighercostsforconsumerswilllikelybecountry-andproduct-specific.25Likewise,risingcostsinhard-to-abatesectorssuchassteelandcementcouldraisethecostofendproducts,thoughthiswilldependonthefractionofthecostofthesematerialsinfinalgoodsandservices.26Allofthesecouldbeaddressedthrougharangeofcompensatingmechanismstoeasethetransition.22Acomprehensiveaccountingoftheeffectsonconsumerswouldbecomplex,sinceeffectsvarybasedonsuchfactorsasaconsumer’sspendingbasket,whethercompaniespassthroughanyadditionaloperatingorcapitalcosts,andthetransition’seffectongovernmentrevenuesandsubsidies.Effectsonconsumersarelikelytovarybyregion.Forexample,developingcountriescouldhaveahigherproportionoftheirtotalspendbasketaffectedbytheclimatetransition,duetohigherspendingonenergy.Individuals’incomescouldalsobeaffectedbyshiftsinlivelihoodoranychangesintaxationasaresultofthetransition.23McKinseyCenterforFutureMobilityElectrificationModel(2021),pricebenchmarksinkeymarkets.24DerekHeadeyandHaroldAlderman,“Therelativecalorificpricesofhealthyandunhealthyfoodsdiffersystematicallyacrossincomelevelsandcontinents,”JournalofNutrition,volume149,issue11,November2019.25Forexample,researchhashighlightedthatthecostofjeansmayonlyriseby1percentbutthismightvaryforotherproducttypes.SeeHydrogeninsights:Aperspectiveonhydrogeninvestment,marketdevelopmentandcostcompetitiveness,HydrogenCouncilandMcKinsey&Company,February2021.26SeeEricHannon,TomasNauclér,AndersSuneson,andFehmiYüksel,“Thezero-carboncar:Abatingmaterialemissionsisnextontheagenda,”McKinsey&Company,September2020.24McKinsey&CompanyJobs:Thenet-zerotransitionanalyzedherecouldleadtoareallocationoflabor,withabout200milliondirectandindirectjobsgainedand185millionlostby2050OuranalysisoftheNGFSNetZero2050scenariosuggeststhatthetransitioncouldresultinanincreaseindemandforabout162milliondirectandindirectjobs(referredtoas“jobgains”)andadecreaseindemandforabout152milliondirectandindirectjobs(referredtoas“joblosses”)inoperationsandmaintenanceby2050acrossdifferentsectorsoftheeconomy.Inaddition,about41millionjobscouldbegainedand35millionlostrelatedtodirectandindirectjobsassociatedwithspendingonphysicalassetsneededforthenet-zerotransitionby2050(ExhibitE8).27Jobsinthelattercategory,linkedtoshiftsincapitalspending,arelikelytobemoretransitorythanthoseintheformer,relatedtooperationsandmaintenance,asdiscussedbelow.Together,thisresultsin202milliondirectandindirectjobsgainedand187millionlostby2050,asaresultofthenet-zerotransitionmodeledhere.Whenconsideringjoblossesandgainshere,weonlyconsiderthosewhicharedirectlyattributabletothenet-zerotransition,ratherthanotherfactorslikeincomeorpopulationgrowth.Theeffectonjobswouldbeespeciallynotablenotsomuchforitsoverallsizeintermsofnetlossesorgainsasforitsconcentrated,uneven,andre-allocativenature.Thesizeofthejobdislocationinthescenarioanalyzedhereneedstobeputinperspectivewithjobdislocationsfromothertrends.Forexample,previousresearchbytheMcKinseyGlobalInstitutesuggeststhatautomation,remotework,ande-commercetrendscouldleadtojoblossesofabout270millionto340millionacrosseightcountriesbetween2018and2030,withcommensuratejobgains—considerablymorethanourestimatesfornet-zerotransition-relatedjoblossesandgainsglobally.28Onenotablecharacteristicinouranalysisofthejoblossesandgainsduringthenet-zerotransitionwouldbetheirconcentrationinspecificsectorsandgeographicregions.Jobgainswouldbelargelyassociatedwiththetransitiontolow-emissionsformsofproduction,forexampletorenewable-powerproduction,whilethelosseswouldparticularlyaffectworkersinfossilfuel–intensiveorotherwiseemissions-intensivesectors,asignificantreallocationofjobsacrosstheeconomy.IntheNGFSNetZero2050scenario,demandfordirectoperationsandmaintenancejobsinthefossilfuelextractionandproductionsectorandthefossilfuel–basedpowersectorcouldbelowerbyaboutninemillionandaboutfourmillionjobs,respectively—equivalenttoabout70percentand60percentoftoday’sworkforceinthoserespectivesectors,duetothenet-zerotransition.Jobsintheagricultureandfoodsectorscouldalsobereallocatedasdemandforanimalproteinisaffectedunderanet-zerotransition.About34milliondirectjobs,mainlyinlivestockandfeed-relatedjobs,couldbelostby2050,including19millioninruminantmeatfarming.Thesecouldbepartiallyoffsetbyagainof12milliondirectjobs,includingforexampletenmillioninpoultryfarming.27By“direct”jobswemeanjobsinthespecifiedsector,asopposedto“indirect”jobs,whichreferstotheupstreamjobsthatproduceinputsforproductioninthesector.Joblossesandgainsdescribedinthisanalysisrefertothosetiedspecificallytotransition-relatedchanges(forexample,theshiftfromfossilfuelenergyproductiontosolarandwindpowerdrivingincreasesinsolarandwindpowerjobsanddecreasesincoalandgaspowerjobs).Lossesandgainsduetomacroeconomicforcessuchasincome,population,andproductivitygrowthhavebeenexcluded.Ajobiscountedasalossoragainifitinvolvesashiftinsectororsubsectorforaworker,indicatingachangingjobfunction,orachangeinthegeographyofanexistingjob.Joblossesandgainscouldinrealitymanifestasjobshifts.Ourmethodologydoesnotaccountforanyhigherorderimpactsandassumesanorderlytransition,forexample,withoutconstraintscreatedfromfinancingthetransition.Forfurtherdetails,seetechnicalappendix.28Formoreinformation,seeThefutureofworkafterCOVID-19,McKinseyGlobalInstitute,February2021.Itisimportanttonotethatotherfactorscouldinfluencethejobnumberspresentedhere,potentiallyleadingtogreaterreallocations.Theseincludewhetherthetransitionisorderlyordisorderly,whetherfinancingforthetransitionlimitsinvestmentinotherpartsoftheeconomy,andfiscalandmonetarypolicydecisions,whichwedonotmodel.25Thenet-zerotransition:Whatitwouldcost,whatitcouldbringExhibitE8IntheNGFSNetZero2050scenario,about200milliondirectandindirectjobscouldbegainedand185millionlostby2050.1.Includesalldirectandindirectjobs;basedontheNGFSNetZero2050scenariousingREMIND-MAgPIE(phase2).Basedonanalysisofsystemsthataccountfor~85%ofoverallemissionstoday;ajobiscountedasagrosslossoragainifitinvolvesashiftinsectororsubsectorforaworker(indicatingachangingjobfunction),orgeographyofanexistingjob.Operationsandmaintenancejobsconsistofthoserelatedtotheoperationsandmaintenanceactivitiesinthesector(directjobs),andtheirsupplychains(indirectjobs).Capexjobsarethosearisingfromcapitalinvestmentinthesector,associatedwithmanufacturingandconstruction(directjobs),andtheirsupplychains(indirectjobs),andarenotincludedinthe2020baselinenumber.Whilecalculatingindirectjobs,weincludeupstreamjobsfromallothersectorsoftheeconomysuchasfinancialservices,wholesaletrade,retailtrade,transportation,etc,butexcludeasetofsectorsforwhichwehavedonebottom-upcalculations,including:Agriculture,forestryandfishing,miningandextractionofenergy;cokeandrefinedpetroleum,othernonmetallicmineralproducts,manufactureofbasicmetals,motorvehicles,trailersandsemi-trailers;power;machinery,andequipmentandconstruction.Impactsofanet-zerotransitionconsistofjoblossesandgainsdirectlyassociatedwiththetransition,anddonotincludeothermacroeconomicforceslikepopulationorincomegrowth.Seetechnicalappendix.2.Othercomprisesmineral,forestry,cement,carbonabatement,steel,andbiofuels.Note:Figuresmaynotsumtototalbecauseofrounding.Totaljobshifts,directandindirect,by2050,million1Totaljobshiftsbysector,1directandindirect,by2050,millionJobgainsJoblosses60-8040-600-40-202080-16AgricultureAutoPowerHydrogenOil,gas,andcoalOther2Capexjobs896797202-1872020baselineNetZero2050-114Impactofnet-zeroshiftsImpactofgrowthinpopulation,income,andproductivityby205069522501140-38-68-90-33-3-355OperationsandmaintenancejobsSource:NetworkforGreeningtheFinancialSystem2021(NetZero2050scenarios)REMIND-MAgPIEmodel;VividEconomics;McKinseyCenterforFutureMobilityElectrificationModel(2020);McKinseyHydrogenInsights;McKinseyPowerSolutions;McKinseySustainabilityInsights;McKinseyAgriculturePractice;McKinseyNatureAnalytics;Jobsbaseline(ILO,OECD,MinSTAT,INDSTAT,IHS,WIOD,IEA,USBLS,IndiaNSS-EmploymentSurvey,China-NBS,IRENA);Jobsmultipliers(McKinseyEconomicsAnalyticsPlatform,GTAP,AsianDevelopmentBank,USBEA,OECD,OxfordEconomics);McKinseyGlobalInstituteanalysis26McKinsey&CompanyLow-emissionssectors,bycontrast,wouldlikelyseejobgains.Forexample,therenewablepowersectorcouldseeanincreaseindemandforapproximatelysixmilliondirectoperationsandmaintenancejobsby2050drivenbythenet-zerotransition.Asmentionedabove,jobgainscouldalsooccurasaresultofcapitaloutlays,particularlyduringtheearlieryearsofthetransition.Inconstruction,manufacturing,andotherindustriesassociatedwiththebuild-outoflow-emissionsphysicalassets,netjobgains(jobgainsminusjoblosses)couldbeashighasabout37millionby2030andcouldstillbeaboutfivemillionby2050(whichfurtheremphasizesthepotentialtransitorynatureofthesejobs).Thetransitionmightalsocreatestillmorejobs,aspastdiffusionofnewtechnologieshasdone.29Joblossesthataffectentiresectorsorsubsectorsandthosethataregeographicallyconcentratedinspecificcommunitiesorregionswillcreateparticularneedsforeconomicandsocietaladjustmentsduringthetransition.30Forexample,in44UScounties,morethan10percentoftheworkforceisemployedinthecoal,oil,andgasextraction,mining,andrefiningsectors,thefossilfuel–basedpowersector,andtheautomotivesector(ExhibitE9).Similarly,automotiveproductionisarelativelylargeshareofemploymentinGermany,Japan,Mexico,andSouthKorea(seealsodiscussionlateronhowcountriesareexposedtothenet-zerotransitionandcouldbenefitfromtransitionopportunities).DisruptionswouldbesubstantiallyhigherunderamoredisorderlytransitionHowthetransitionismanagedwillbedecisive.TheeffectsdescribedherereflecttheNGFSNetZero2050scenario,inwhichgradualyetsubstantialreductionsinemissionstakeplace,resultinginarelativelyorderlytransition.However,thecomplexityofthetransformationmaywellleadtotherealitybeingmoredisorderly,andindeeditmaynotbefeasibletolimitwarminglevelsto1.5°C.Thismakesthecaseforactionevenmorecritical.Thekeyrisksarethreefold:thefirstconcernsthechoiceofpathwaytoarriveatnet-zeroemissions,andwhetherthiswillbesmoothorabrupt.Thesecondrelatestothemeasurestakenbystakeholderstoeasetheadjustmentsneededforanet-zerotransition.Thethirdhastodowitharangeofconstraintsthatcouldprovechallengingevenifthepathwaychosenisarelativelysmoothandgradualone.29Onestudyfoundthat0.56percentofnewjobsintheUnitedStateseachyearareinentirelynewoccupationsthatdidnotpreviouslyexist.SeeJeffreyLin,“Technologicaladaptation,cities,andnewwork,”ReviewofEconomicsandStatistics,volume93,number2,May2011.SeealsoJobslost,jobsgained:Whatthefutureofworkwillmeanforjobs,skills,andwages,McKinseyGlobalInstitute,December2017.30Asanexample,analysisbyMcKinsey&CompanyincollaborationwiththeGreaterHoustonPartnershipfindsthatHoustoncouldloseupto650,000jobsby2050undera1.5°Cpathway,ifnoactionistakentorespondtothechangingenergylandscape.However,withdecisiveactiontoleadintheenergytransition,Houstoncouldgainupto560,000additionaljobs.Forfurtherdetails,seeHouston:Leadingthetransitiontoalow-carbonworld,GreaterHoustonPartnership,June2021.Onenotablecharacteristicinouranalysisofthejoblossesandgainsduringthenet-zerotransitionwouldbetheirconcentrationinspecificsectorsandgeographicregions.27Thenet-zerotransition:Whatitwouldcost,whatitcouldbringSomepathwaystonet-zeroemissionsassumethatthedeclineinemissionsbeginsimmediatelyandprogressesgraduallyto2050,withappropriatemeasuresinplacetomanagedisruptionsandlimitcosts.Othersassumethatreductionofemissionsbeginslaterandprogressesmorequicklytoachievethesameamountofcumulativeemissions.Thelattercouldinvolvesignificantandabruptchangesinpolicy,highcarbonprices,andsuddenchangestoinvestmentpractices—alongwithgreatersocioeconomiceffectsandalarger-scaleresponse.31Makingjobtransitionswouldbemorechallenging,andtherecouldbegreaterriskofstrandedassets.Second,ifactionsarenottakentomanagetransitiondisruptions,thiscouldleadtomorechallenges,especiallyforvulnerablecommunities—forexample,ifrisesinenergycostsarepassedthroughtolow-incomehouseholds,orifdisplacedworkersarenotprovidedappropriatesupporttoreskillandredeploy.31SeealsoInevitablePolicyResponse2021:PolicyForecast,PrinciplesforResponsibleInvestment,March2021.ExhibitE9Morethan10percentoftheemploymentin44UScountiesisincoalmining,oilandgasextractionandrefining,fossil-basedpower,andautomotivemanufacturing.Source:USBureauofLaborStatistics1.Top20UScountiesby%localemploymentincoalmining,oilandgasextractionandrefining,fossil-basedpower,andautomotivemanufacturing.Basedonananalysisof3,273countiesandcountyequivalents(parishes,censusarea,municipalities)acrosstheUnitedStates,PuertoRico,andVirginIslands.CoalminingOilandgasextractionFossil-basedpowerAutomotivemanufacturing%of%of%of%ofCountyCountyemploymentSectoremploymentCountyCountyemploymentSectoremploymentCountyCountyemploymentSectoremploymentCountyCountyemploymentSectoremploymentMcDowell,WV183Upton,TX410Stewart,TN114Clay,IL310Buchanan,VA185Irion,TX340Indiana,PA28DeKalb,TN270Boone,WV163Dunn,ND260Dunklin,MO11Crenshaw,AL260Campbell,WY1517Hutchinson,TX251Imperial,CA16Washington,KY260Greene,PA148Reagan,TX250Berkeley,SC14Elkhart,IN257Mingo,WV133Hemphill,TX220Sumner,TN03Howard,IN252Wyoming,WV112Sterling,TX200Schuylkill,PA02LaGrange,IN211Harlan,KY82Crockett,TX160Anderson,TN02Marion,KY180Leslie,KY81Midland,TX157Oswego,NY01Noble,IN171Logan,WV84Winkler,TX150Cambria,PA01Madison,OH151Knott,KY71Woods,OK140Clermont,OH01Marshall,OK150Perry,KY63Duchesne,UT140Northampton,PA02Giles,TN130Pike,KY65Burke,ND140Darlington,SC00Champaign,OH130Raleigh,WV68Woodson,KS120Colbert,AL00Shelby,OH121Letcher,KY61Stephens,TX120Madison,IL01Calhoun,MI111Bell,KY41Eddy,NM112Delaware,PA03Perry,IN110Nicholas,WV31Crane,TX110Hamilton,OH06Nelson,KY100Somerset,PA33Richland,MT100Lancaster,NE02Tishomingo,MS100Floyd,KY31Mountrail,ND90Prince,MD03Gibson,IN90Wise,VA31Lincoln,WY90Dearborn,IN00Shelby,KY90LowHighCounties1with>10%ofcountyemploymentintheexaminedsector28McKinsey&CompanyFinally,evenifthepathwaychosenisrelativelyorderly,giventhescaleofthetransformationrequired,supplymaynotbeabletoscaleupsufficiently,makingshortagesandpriceincreasesorvolatilityafeature.Rapidlyscalingupdemandforlow-emissionsassetsandotherproductsneededforthetransition,withoutcorrespondingscale-upofsupply,couldleadtosupply/demandimbalances,shortages,priceincreases,andinflation.32Asalreadynoted,amismatchormistimingbetweentherampingdownofhigh-emissionsactivitiesandtherampingupoflow-emissionsactivitiescouldcreateenergypricevolatilityandissueswithreliabilitythatcouldpotentiallyresultinabacklashthatdelaysthetransition.Anotherriskisthatstakeholdersmaintaintwoparallelenergysystemsinamannerthatisinefficientandnotcosteffective.Thusthetransformationoftheenergysystemneedstobecarefullymanaged.Andtheremaybeotherconstraints,includingaccessingthevolumeoffinancingrequiredintheinitialphasesofthetransitionwhenmanyoftheinvestmentswouldbefront-loaded.Therecouldalsobeothercostsincurredandinvestmentneededbeyondthosementionedinthisreport,forexamplerelatedtothereskillingofworkers,oreconomicdiversificationefforts.Akeyareawhereadditionalspendwouldbeneededisrelatedtoadaptationinvestments.Adaptationactionisneededtomanageacontinuallyincreasinglevelofphysicalrisk,irrespectiveofthedecarbonizationmeasuresrequiredtoachievenet-zeroemissions.Keyadaptationmeasuresincludeactionstoprotectpeopleandassets,forexampleinstalling“gray”infrastructuresuchasseawalls,buildingresilienceandbackupsinsystemswithactionslikeincreasingglobalinventoriesanddiversifyingsupplychains,andreducingexposurewherenecessary,forexamplebyrelocatingassetsfromregions.Toillustratethedifferencebetweentransitionpathways,weanalyzedtwoNGFSscenariosconsistentwithlimitingwarmingtolessthan2.0°Cfrompreindustriallevels.Inthe“Below-2°Cscenario,”whereemissionsreductionsstartimmediatelyonapathwayto2.0°Cofwarming,ouranalysissuggeststhatonlyarelativelysmallamountofadditionalcoalpowercapacityisadded,about$150billionbetween2020and2050.Ofthis,$100billionwouldbeprematurelyretiredorunderutilized.Butinthescenariowhereemissionsreductionstoward2.0°Cwarmingstartlater,asubstantiallylargeramountofcapacitywouldbeadded;asmuchas$600billionwouldbeinvestedincoal-powercapacity,withasmuchas$400billionprematurelyretiredorunderutilized.Perhapsthegreatestriskfromdelayingemissionsreductionsisphysicalclimaterisk.Thelongerittakestoinitiateemissionsreduction,themoreoftheworld’sremainingcarbonbudgetwouldbeusedup—leavinglesstimetocutemissionsandincreasingtheriskthatwarmingisnotrestrictedto1.5°Coreven2.0°C.Whilesignificant,theseeconomicadjustmentswouldcreategrowthopportunitiesandpreventfurtherbuildupofphysicalriskThechangingdemandoutlookcombinedwiththe$3.5trillioninincrementalannualspendingonphysicalassetsintheNGFSNetZero2050scenario,notedabove,wouldcreatesubstantialgrowthopportunitiesforcompaniesandcountriesinthenearterm.Wedescribetheopportunitiesforcountrieslaterinthissummary.Theopportunitiesforcompaniesareinthethreemainareasdescribedbelow.32Forexample,see“Therawmaterialschallenge:Howthemetalsandminingsectorwillbeatthecoreofenablingtheenergytransition,”McKinsey&Company,January2022.Theresearchdescribesascenariobasedonthecurrentpipelineofprojectsandwithoutmeasurestoincentivizefurthersupply,inwhichcopperandnickeldemandin2030couldexceedsupplyby5millionto8millionand700,000toonemillionmetrictons,respectively.Seealso2022globaloutlook:Thrivinginanewmarketregime,BlackrockInvestmentInstitute,2022.29Thenet-zerotransition:Whatitwouldcost,whatitcouldbringDecarbonizedformsoflegacyproductsandprocesses:Companiesthatreducetheemissionsintensityoftheirprocessesandproductscouldgainadvantagesasthetransitionprogresses.Insomecases,decarbonizingprocessesandproductscanmakethemmorecost-effective.Forexample,improvingtheenergyefficiencyofheatingsystemsinsteelplantslowersbothemissionsandoperatingcosts.Evenwhendecarbonizingaddstooperatingcosts,companiescanbenefitfromtakingthisstep—forinstance,ifconsumersarewillingtopaymoreforlow-carbonproductsorifcompaniesaresubjecttocarbon-pricingmandates.Low-emissionsproductsandprocessesthatreplaceestablishedhigh-emissionsoptions:CarmakersmightproduceEVsinsteadofICEvehicles,forexample.Steelmakerscanimplementlow-carbonproductionprocessessuchasdirectreducediron–electricarcfurnaces(DRI-EAF)poweredbygreenhydrogen.33Utilitiesmightsetupwindorsolarfarmstogeneraterenewableelectricity,whileenergycompaniescouldintroducebiofuelsandhydrogen.Inputs,physicalcapital,infrastructure,andsupportservices:Newofferingswillbeneededtosupportproductionintheothertwocategories.Theseofferingsincludeinputssuchaslithiumandcobaltforbatterymanufacturing,physicalcapitalsuchassolarpanelsandbatteries,andinfrastructuresuchasEVchargingstationsandhydrogenrefuelingstations.34Technicalservicessuchasforestmanagement,engineeringanddesign,andpower-systemintegrationwillhelpwiththemanagementoflow-carbonassets.Servicessuchasfinancing,riskmanagement,certification,emissionsmeasurementandtrackingsolutions,andworkertrainingwillalsobeneeded.Theincrementalcapitalspendingonphysicalassets,whichweestimateatabout3percentofGDPannuallythrough2050,asdiscussedpreviously,andthebroadereconomictransformationsunderanet-zerotransitionwouldhaveanotheressentialfeature:mostimportantly,reachingnet-zeroemissionsandlimitingwarmingto1.5°Cwouldpreventthebuildupofphysicalrisksandreducetheoddsofinitiatingthemostcatastrophicimpactsofclimatechange,includinglimitingtheriskofbioticfeedbackloopsandpreservingtheabilitytohaltadditionalwarming.3533DRIisproducedfromthechemicalreductionofironoreintoironbyeitherareducinggasorelementalcarbonproducedfromnaturalgasorcoal,whichcanbeusedasaninput,alongwithhigh-gradesteelscrap,intheEAFmethodofsteelproduction.Steelproductioninintegratedblastfurnacesorbasicoxygenfurnacestodayusesironoreandrequirescoalasareductant.SeeChristianHoffmann,MichelVanHoey,andBenediktZeumer,“Decarbonizationchallengeforsteel,”McKinsey&Company,June2020.34Forexample,see“Therawmaterialschallenge:Howthemetalsandminingsectorwillbeatthecoreofenablingtheenergytransition,”McKinsey&Company,January2022.Theresearchfindsthatrequirementforadditionalsupplywillcomenotonlyfromrelativelylarge-volumerawmaterials—forexample,copperforelectrificationandnickelforbatteryEVs,whichareexpectedtoseesignificantdemandgrowthbeyondtheircurrentapplications—butalsofromrelativelynichecommodities,suchaslithiumandcobaltforbatteries,telluriumforsolarpanels,andneodymiumforthepermanentmagnetsusedbothinwindpowergenerationandEVs.Somecommodities—mostnotablysteel—willalsoplayanenablingroleacrosstechnologies,asadditionalinfrastructureisneeded.35SeeBoxE3intheexecutivesummary,chapter1,andthebibliographyforadetailedlistoftheacademicliteratureandbroaderdiscussionrelatedtophysicalclimaterisks.Rapidlyscalingupdemandforlow-emissionsassetsandotherproductsneededforthetransition,withoutcorrespondingscale-upofsupply,couldleadtosupplyshortagesandpriceincreases.30McKinsey&CompanySectorsareunevenlyexposedtothetransition;thosewithhigh-emissionsproductsoroperationswouldbeespeciallyaffectedWefindthat,whileallsectorsoftheeconomyareexposedtoanet-zerotransitionbecauseoftheirparticipationinenergyandland-usesystems,somearemoreexposedthanothers.Thesectorswiththehighestdegreeofexposuredirectlyemitsignificantquantitiesofgreenhousegases(forexample,thecoalandgaspowersector)orsellproductsthatemitgreenhousegases(suchasthefossilfuelsector).Approximately20percentofglobalGDPisinthesesectors.Afurther10percentofGDPisinsectorswithhigh-emissionssupplychains,suchasconstruction.Othersectorsaccountingforabout70percentofGDPhavelesspronounceddirectexposure.Theyareneverthelessdependentonthehighlyexposedsectors,forexamplethroughinterconnectedeconomicandfinancialsystems,andthereforecouldbeaffectedbythetransition.Inthissection,wedescribetheeconomicshiftsforsomeofthemostaffectedsectors.Togethertheyaccountforabout85percentofglobalGHGemissionsthroughtheiroperationsorproducts,andwepresentouranalysisoftheeconomicchangestheywouldlikelyexperienceintheNetZero2050scenario.36Fossilfuels.Asnotedearlier,combustionoffossilfuelsproduces83percentofglobalCO₂emissions.Thesectorisseekingtodecarbonizeitsownemissionsthroughenergyefficiency,electrification,andmanagingfugitivemethaneemissions.37Atthesametime,itfacessignificantdemandshiftsfrompotentialshiftsintheenergymixunderanet-zerotransition,withareductionindemandforfossilfuelsandgrowingdemandforotherenergysourcessuchaselectricity,hydrogen,andbiofuels.Inthescenarioanalyzedhere,oilandgasproductionvolumesin2050wouldbe55percentand70percentlower,respectively,thantoday.Coalproductionforenergyusewouldbenearlyeliminated.Underthenet-zerotransition,demandforjobswithinthefossilfuelextractionandproductionsectorcouldbelowerbyaboutninemilliondirectjobsby2050.Inresponse,McKinseyresearchsuggeststhatanumberofoilandgascompaniesareadaptingtothelow-carbontransitionbybecomingresourcespecialists,becomingdiversifiedenergyplayers,orturningthemselvesintolow-carbonpureplays.38Power.Todecarbonize,theglobalpowersectorwouldneedtophaseoutfossilfuel–basedgenerationandaddcapacityforlow-emissionspowertomeettheadditionaldemandarisingfrombotheconomicdevelopmentandthegrowingelectrificationofothersectors.Itwouldrequiresubstantialannualcapitalspendingfrom2021to2050,whichweestimateatabout$1trillioninpowergeneration,$820billioninthepowergrid,and$120billioninenergystorageintheNGFSNetZero2050scenario.Opportunitieswouldarisenotonlyforpowerproducersbutalsoforprovidersofequipment,electricity-storagehardware,andrelatedservices.Ouranalysissuggeststhatby2050,underanet-zerotransition,approximatelysixmilliondirectjobscouldbeaddedinoperationsandmaintenanceforrenewablepowerandapproximatelyfourmilliondirectjobscouldbe36Weestimatehowmuchexposurethesesectorshavetothetransitionbymeasuringtheirdirectemissions(scope1emissions,whichindicateexposuretopotentialdemandshifts,investmentneeds,andcostchangesfromhavingtoalterproductionprocesses),emissionsfromproducts(downstreamscope3,whichmayaffectdemand,forexample,ifconsumersshifttheirpreferences,andinturnalsoaffectthecapitalinvestmentsmadebythesectoranditscosts),supplychainemissions(upstreamscope3,whichmayexposethesectortocostshiftsasitscoreinputsareaffectedbythetransition),andemissionsfrompurchasedelectricity(scope2forelectricityuse,whichcouldindirectlyexposethesectortotheeffectsofchangesintheworld’senergymix).37SeePaulGargett,StephenHall,andJayantiKar,“Towardanet-zerofuture:Decarbonizingupstreamoilandgasoperations,”McKinsey&Company,December2019.38ChantalBeck,DonatelaBellone,StephenHall,JayantiKar,andDaraOlufon,“Thebigchoicesforoilandgasinnavigatingtheenergytransition,”McKinsey&Company,March2021.31Thenet-zerotransition:Whatitwouldcost,whatitcouldbringlostinfossilfuel–basedpower.Thebuild-outofpowerinfrastructureandthecapitalspendingassociatedwiththenet-zerotransitioncouldproduceasmanyas27milliondirectjobsintheearlyyearsofthetransition,andabout16milliondirectjobsassociatedwithconstructionandmanufacturingactivityin2050.Assetstrandingcouldbelarge.Ouranalysissuggeststhatabout$2.1trillionofthesector’scapitalstockcouldbestrandedby2050intheNetZero2050scenario.39Eightypercentofthisamountistoday’scapacity,while20percentiscapacitythatwouldbebuiltbetween2021and2050.40Mobility.Ouranalysisofmobilityfocusesontheroadtransportationsegment,whichaccountsforabout75percentofallmobilityemissions.41DecarbonizationwouldinvolvereplacingICEvehicleswithbattery-electricvehiclesorvehiclespoweredbyhydrogenfuelcells.IntheNetZero2050scenario,annualspendingwouldbe$3.5trilliononbothvehiclesandtobuildchargingandfuelinginfrastructurebetween2021and2050.About13milliondirectICE-relatedjobswouldbelostintheNetZero2050scenario,althoughsomeofthislosswouldbeoffsetbygainsofaboutninemilliondirectjobsrelatedtoEVmanufacturingby2050withthedifferencebetweenlossesandgainsdriveninlargepartbytherelativelyhigherproductivityofzero-emissionsvehiclemanufacturing.Industry.Wefocusontwosectors,steelandcement,thattogetheraccountforapproximately14percentofglobalCO₂emissionsand47percentofindustry’sCO₂emissions.42Whiletechnologypathwaysarestillemerging,steelandcementproductioncouldbedecarbonizedbyinstallingCCSequipmentorswitchingtoprocessesorfuels—suchashydrogen—thatcanhavezeroorlowemissions.Productioncostsinbothsectorscouldincreasebymorethan30percentby2050comparedwithtoday,thoughthiscouldbelowerwithcontinuedinnovation.Buildings.Inthenet-zeroscenario,thebuildingssectorwoulddecarbonizebyimprovingenergyefficiency—forexample,throughtheuseofinsulation—andbyreplacingfossilfuel–poweredheatingandcookingequipmentwithlow-emissionssystems.Theaverageannualspendingonphysicalassetsbetween2020and2050wouldbe$1.7trillionperyear.Decarbonizationofbuildingscouldresultinanetgainofabouthalfamilliondirectjobsby2050underanet-zerotransition,drivenbyretrofittingbuildingswithinsulation.Thebuildingssector’sbiggestadjustmentduringthistransitionwouldbemanagingtheup-frontcapitalcostsforendconsumerstoretrofitequipmentandaligningincentivesacrossvariousstakeholders(suchasbuildingownerswhoinvestcapitalandtenantswhomayseethebenefitsofreducedoperatingcosts).43Agricultureandfood.Inthenet-zeroscenarioanalyzedhere,agriculturalemissionswouldbereducedasaresultofproducersdeployingGHG-efficientfarmingpractices,andsomeconsumersshiftingtheirdietsawayfromruminantanimalsthatgeneratesignificantquantitiesofmethane.44Thescenariowouldalsoentailanincreaseinproductionof39Ourdefinitionofstrandedassetsrepresentsthecumulativevalueofprematurelyretiredandunderutilizedassetsin2020–50,undiscounted.WeestimateitbyfirstidentifyingthelevelofyearlydepreciationthatisexpectedgivenassetlifeandassumedeconomiclifeusingdatafromtheWRIGlobalPowerPlantdatabaseasinput.Thatfigurewasmultipliedbythefractionofassetsthatareunderutilizedrelativetopastaverageutilizationrates(between2005and2020)andsummedacrossyears.40Formoreonthepowersector,seeJasonFinkelstein,DavidFrankel,andJesseNoffsinger,“Howtodecarbonizeglobalpowersystems,”McKinsey&Company,May2020;andRoryClune,KseniaKaladiouk,JesseNoffsinger,andHumayunTai,“A2040visionfortheUSpowerindustry:Evaluatingtwodecarbonizationscenarios,”McKinsey&Company,February2020.41EMITdatabase,McKinseySustainabilityInsights,September2021;datafor2019.Formoreonthemobilitysector,see“Whytheautomotivefutureiselectric,”McKinsey&Company,September2021;TimoMoller,AsutoshPadhi,DickonPinner,andAndreasTschiesner,“Thefutureofmobilityisatourdoorstep,”McKinseyCenterforFutureMobility,December2019;andEricHannon,TomasNauclér,AndersSuneson,andFehmiYuksel,“Thezero-carboncar:Abatingmaterialemissionsisnextontheagenda,”McKinsey&Company,September2020.42EMITdatabase,McKinseySustainabilityInsights,September2021;datafor2019.Formoredetailsondecarbonizationofthesteelsector,seeChristianHoffmann,MichelVanHoey,andBenediktZeumer,“Decarbonizationchallengeforsteel,”McKinsey&Company,June2020.Forcement,seeThomasCzigler,SebastianReiter,PatrickSchulze,andKenSomers,“Layingthefoundationforzero-carboncement,”McKinsey&Company,May2020;andThomasHundertmark,SebastianReiter,andPatrickSchulze,“Greengrowthavenuesinthecementecosystem,”McKinsey&Company,December2021.43Formoreonthebuildingsector,seePaoloD’Aprile,HaukeEngel,GodartvanGend,StefanHelmcke,SolveighHieronimus,TomasNauclér,DickonPinner,DaanWalter,andMaaikeWitteveen,“HowtheEuropeanUnioncouldachievenet-zeroemissionsatnet-zerocost,”McKinsey&Company,November2020.44Agriculturalpracticesarealsotiedtoforestryemissions,asmuchofdeforestationisdrivenbyexpansionofagriculturalland.Seediscussiononforestryelsewhereinthereport.32McKinsey&Companyenergycropstoproducebiofuels.Asaresultoftheseshifts,thenet-zerotransitionwouldresultinabout34milliondirectjobslost(predominatelyduetodiminishedproductionofruminantmeat)and61milliongained(relatedinlargeparttoincreasedproductionofenergycropsandpoultry)by2050.Thisnetgainofabout27milliondirectjobsduetothetransitionisabout4percentofthe720millionorsodirectagriculturejobstoday.Thesejobshiftsneedtobeconsideredagainstalong-standingtrendintheagriculturalsectorofworkersshiftingtononfarmworkinadditiontoproductivity,population,andincomegrowth.Through2050,morethan$60billionofannualcapitalspendingwouldbeneededtoenablemoreemissions-efficientfarming.Suchinvestmentneednotallbenewfunds;repurposingexistingsubsidiesandspendingcouldcoverasubstantialamountofthiscost.45Forestryandotherlanduse.ThissystemcontributestoanincreaseinCO₂emissionstodayfromlandclearinganddeforestation.Reachingnetzerointhisscenariowouldinvolvehaltingdeforestationandacceleratingeffortstorestoreforestsandothernaturalenvironmentstoserveasanetsinkofemissions.Makingthesechangeswouldrequirecapitalspendingof$40billionperyearbetween2021and2050inthescenarioanalyzedhere,about75percentofwhichwouldbespentinthenextdecade,primarilyonacquiringandprotectingland.Reducingdeforestationwouldalsorequiremanagingadjustmentstobothcommercialandsubsistence-levelfarmingactivity(asubstantialportionofdeforestationisdrivenbyexpansionofagriculturalland).46Opportunitiesforeconomicgainmightcomefromvoluntarycarbonmarketsandindustriesbasedonecosystemservices.47Newenergysectors(hydrogenandbiofuels).Theexpansionoflow-emissionsenergytechnologieswillcreateopportunities.Expandingcapacityandinfrastructureforotherlow-carbonfuelswouldrequireadditionalcapitalspendingofabout$230billionperyearbetween2021and2050,inthescenarioanalyzedhere.Weestimatethatthehydrogenandbiofuelsectorswouldcreateapproximatelytwomilliondirectjobsby2050.Thetransitionwouldunevenlyaffectlower-incomeandfossilfuelresource–producingcountries—andlow-incomeconsumerseverywhereOurin-depthanalysisof69countriesfocusesonfourareasthatcancollectivelyhelpdefineaclimateagenda:decarbonizationactionsandinvestment;managingtransitionexposures;capturingtransitionopportunities;andaddressingphysicalrisks.Asdiscussedpreviously,low-incomehouseholdsacrosscountriesandregionswouldbemostaffectedbyanet-zerotransition.Moreover,ouranalysissuggeststhatwhileallcountriesfacesomeexposuretothetransition,itseffectswouldbeunevenlydistributed.RegionswithlowerGDPpercapitaandthosewithgreaterfossilfuelresourceswouldneedtoinvestmore,relativetoGDP,toreducetheiremissions,buildalow-emissionseconomy,andsupporteconomicdevelopment.45Formoreinformation,seeIncentivizingfoodsystemstransformation,WorldEconomicForumandMcKinsey&Company,January2020.Formoreontheagricultureandfoodsector,seeJustinAhmed,ElaineAlmeida,DanielAminetzah,NicolasDenis,KimberlyHenderson,JoshuaKatz,HannahKitchel,andPeterMannion,“Agricultureandclimatechange:Reducingemissionsthroughimprovedfarmingpractices,”McKinsey&Company,April2020.46Thestateoftheworld’sforests2020:Forests,biodiversity,andpeople,FAO,2020.47See“Valuingnatureconservation,”McKinsey&Company,September2020.33Thenet-zerotransition:Whatitwouldcost,whatitcouldbringThesecountriesalsohaverelativelygreatersharesoftheirjobs,GDP,andcapitalstockinsectorsthatwouldbemostexposedtothetransition.Andsomeofthemwillfaceadoubleburden—beingexposedbothtothetransitionadjustmentsandtorisingphysicalrisks.48Thiscouldchallengeprogressoneconomicdevelopmentgoalsintheseregions,bolsteringthecaseforglobalcooperation.Atthesametime,thetransitioncouldcreatepotentialforeconomicgrowthinmanygeographies.Tobetterunderstandexposureandopportunities,wetakeacloserlookatthe69countriesinoursamplebydividingthemintosixarchetypesbasedonthedistributionoftheirmostsignificantexposureacrosssectorsandhouseholds.Tomanageexposure,eachcountrycanconsidertakingactionsofitsown,suchasinvestinginassets,fundingworker-retrainingprograms,andsupportingthegrowthoflow-emissionssectors.Somecountriesarelikelytofacemoredifficulteconomicandsocietaladjustmentsthanothers.Collectiveactionandsolidaritywouldthereforehelpcountriesmeetchallengesandensurethattheeconomicandsocietaladjustmentsneededforthenet-zerotransitionareaddressed.Enablinginstitutionswouldlikelyplayanessentialroleincoordinatinganysuchefforts.Developingcountriesandthosewithlargefossilfuelsectorswouldlikelyspendmoreonphysicalassets,relativetoGDP,ondecarbonizationandlow-carbongrowthIntheNGFSNetZero2050scenario,everycountryandregionwouldspendtoreduceemissionsanddeveloplow-emissionsenergysourcestopowertheireconomicgrowth.49Theneedforcapitalexpendituresvariesconsiderablyacrossgeographiesgivendifferencesintheireconomies,andtheirdecarbonizationtrajectoriesvaryintheNGFSNetZero2050scenario.Theworld’slargesteconomies—theUnitedStates,China,theEuropeanUnion,Japan,andtheUnitedKingdom—wouldaccountforabouthalfofglobalspendonphysicalassetsandwouldspendabout6percentoftheircombinedGDPfrom2021to2050.Indevelopingregions,spendonenergyandlandwouldformasubstantiallylargershareofnationalGDP:about10percentinsub-SaharanAfrica,IndiaandsomeotherAsiancountries,andLatinAmerica(ExhibitE10).Fordevelopingcountries,higherprojectedratesofeconomicgrowthnaturallycreatehigherinvestmentneedsrelativetoGDPthanindevelopedcountries.50InouranalysisoftheNGFSCurrentPoliciesscenario,spendinginIndia,sub-SaharanAfrica,andLatinAmericawouldtotalmorethan9percentofGDP.Spendingwouldincreasetosomeextentfromtheselevelsinthenet-zeroscenarioanalyzedhere.Forexample,intheNetZero2050scenario,India’scapitalrequirementswouldbe11percentofGDP,comparedtotheglobalaverageofabout7.5percentofGDP.ItwouldmoreoverbespentdifferentlythanintheCurrentPoliciescase.Some60percentofannualaverageinvestmentsinIndiawouldbeonlow-emissionsassetsundercurrentpoliciescomparedto80percentintheNGFSNetZero2050scenario.Muchofthatcapitalwouldbeusedtoreducetheuseofexistingcoalpowerandexpandlow-emissionselectricitycapacity.48Forexample,Indiafacesthedoubleburdenoftransitionexposureandelevatedphysicalrisks.Ourpreviousresearchsuggeststhatby2030inIndia,160millionto200millionpeoplecouldbelivinginurbanareaswithanonzeroannualprobabilityofexperiencingalethalheatwave,inascenariowherenoadaptationormitigationmeasuresareimplemented.WillIndiagettoohottowork?McKinseyGlobalInstitute,November2020.49OuranalysislooksatbothindividualcountriesandmulticountryregionsbecausetheNGFSscenariosprovidesomedecarbonizationtrajectoriesattheregionallevelandothersatthenationallevel.50Sub-SaharanAfricaandIndia,forexample,areexpectedtoseerealGDPgrowthofabout4–5percentperyearonaverageoverthenext30years,comparedwith3percentgrowthforChinaand1–2percentgrowthfordevelopedregionsintheNGFSscenarioexaminedhere.34McKinsey&CompanyExhibitE10AsapercentageofGDP,fossilfuel–producingregionsanddevelopingcountrieswouldspendmorethanothersonphysicalassetsforenergyandland-usesystems.1.Estimationincludesspendforphysicalassetsacrossvariousformsofenergysupply(forexample,powersystems,hydrogen,andbiofuelsupply),energydemand(eg,forvehicles),andlanduse.Thisincludesbothwhataretypicallyconsidered“investments”innationalaccountsandspend,insomecases,onconsumerdurablessuchaspersonalcars.ScenariobasedontheNGFSNetZero2050scenariousingREMIND-MAgPIE(phase2).Basedonanalysisofsystemsthataccountfor~85%ofoverallcarbondioxideequivalent(CO₂e)emissionstoday.Ouranalysisincludesamorecomprehensiveviewofspendingbyhouseholdsandbusinessesonassetsthatuseenergy,capitalexpendituresinagricultureandforestry,andsomecontinuedspendinhigh-emissionsphysicalassetslikefossilfuel–basedvehiclesandpowerassets.Forfurtherdetails,seetechnicalappendix.2.Ouranalysisdivideshigh-emissionsassetsfromlow-emissionsassets.High-emissionsassetsincludeassetsforfossilfuelextractionandrefining,aswellasfossilfuelpowerproductionassetswithoutCCS;fossilfuelheatproduction,gray-hydrogenproduction;steelBOF;cementfossilfuelkilns;ICEvehicles;fossilfuelheatingandcookingequipment;dairy,monogastric,andruminantmeatproduction.Low-emissionsassetsandenablinginfrastructureincludeassetsforblue-hydrogenproductionwithCCS;green-hydrogenproductionusingelectricityandbiomass;biofuelproduction;generationofwind,solar,hydro-,geothermal,biomass,gaswithCCS,andnuclearpoweralongwithtransmissionanddistributionandstorageinfrastructure;heatproductionfromlow-emissionssourcessuchasbiomass;steelfurnacesusingEAF,DRIwithhydrogen,basicoxygenfurnaceswithCCS;cementkilnswithbiomassorfossilfuelkilnswithCCS;low-emissionsvehiclesandsupportinginfrastructure;heatingequipmentforbuildingsrunonelectricityorbiomass,includingheatpumps;districtheatingconnections;cookingtechnologynotbasedonfossilfuels;buildinginsulation;GHG-efficientfarmingpractices;foodcrops,poultryandeggproduction;andlandrestoration.Seetechnicalappendix.3.CISreferstotheCommonwealthofIndependentStates.4.Includes,amongothers,SouthKoreaandSoutheastAsia.5.Includes,amongothers,the27EuropeanUnioncountries,Norway,Switzerland,Turkey,andtheUnitedKingdom.Note:Figuresmaynotsumto100%becauseofrounding.Spendingonphysicalassetsforenergyandland-usesystemsunderNGFSNetZero2050scenario,1%of2021–50GDP251002051510.87.5Japan21.0Sub-SaharanAfricaLatinAmericaRussia,Ukraine,andtheCIS3MiddleEastandNorthAfricaIndiaOtherAsia4Europe5UnitedStatesAustralia,Canada,andNewZealandChina4.2Theworld16.36.210.89.49.26.56.45.2High-emissionsassets2Low-emissionsassetsandenablinginfrastructure2Shareofglobalspending,%AverageshareofregionalGDP,%57281510018.09.85.9Source:NetworkforGreeningtheFinancialSystem2021(NetZero2050scenarios)REMIND-MAgPIEmodel;VividEconomics;McKinseyCenterforFutureMobilityElectrificationModel(2020);McKinseyHydrogenInsights;McKinseyPowerSolutions;McKinsey–MissionPossiblePartnershipcollaboration;McKinseySustainabilityInsights;McKinseyAgriculturePractice;McKinseyNatureAnalytics;McKinseyGlobalInstituteanalysis35Thenet-zerotransition:Whatitwouldcost,whatitcouldbringFossilfuel–basedeconomieswouldalsohavesubstantialspendonphysicalassetsasashareoftheirGDP:above15percentintheMiddleEastandNorthAfrica,Russia,Ukraine,andCommonwealthofIndependentStatessuchasKazakhstan.Muchofthisspendingwouldbecontinuedspendingonfossilfuelassetsinthenearterm.However,eventheseeconomieswouldallocatehalformoreoftheirspendingtolow-emissionsassetsunderanet-zerotransition.Whiletherelativescaleofthespendingonphysicalassetsissubstantiallyhigherfordevelopingandfossilfuel–basedeconomies,thisaloneisnotanindicatorofhowdifficultitwillbefortheseregionstoreachalow-emissionseconomy.Indeed,asmentionedpreviously,muchofthisspendistobeexpectedastheygrowtheireconomiesandincreaseenergyaccess.However,specificaspectsoftheirnet-zerotransitioncouldmakedeployingcapitalchallengingfortheseregions.First,developingregionsmightfacechallengesinaccessingcapitalmarkets.Thismaybeparticularlyacuteastheylooktoinvestinlow-emissionstechnologies,whichmaybehardertofinanceandcomewithdifferentrisk-returnexpectations.Second,asmentionedabove,existinghigh-emissionsassetsintheseeconomiesarestillrelativelyyoung;thustheremaybelessincentivetoundertakelow-carboncapitalspendingamidconcernsaboutstrandedassets.Third,theremaynotalwaysbesufficientknow-howandcapacityonthegroundtoimplementprojects.Fourth,concernsofothersocioeconomicconsequencesfromanet-zerotransition,forexample,jobdislocations,couldexist.Finally,becausetheeconomiesofthesecountriesrelyonemissions-intensivesectors,governmenttaxrevenuesandpublicspendingmaybemoreconstrainedunderanet-zerotransition.51Developingcountriesandfossilfuel–producingregionshaverelativelylargeexposuretothetransition,raisingconcernsaboutgrowthandinequalityBeyondspendingondecarbonizingtheirexistingassetsandbuildinglow-emissionsassets,economieswillalsoneedtotransformunderanet-zerotransition.Weassessedeachcountry’sexposuretothetransitionbymeasuringtheproportionofemployment,economicproduction,andphysicalcapitalstockinexposedsectorstoday.Itisimportanttonotethatcurrenteffortsundertakenbycountriescouldreducethisexposuregoingforward.52Accordingtoouranalysis,allcountriesnowhavesomeexposuretothetransition—and,asdiscussedearlier,low-incomehouseholdseverywherewouldbemostexposedtoanycostincreasesthatfeedthroughtoconsumers.ThehighestlevelsofexposureareincountrieswithrelativelylowerGDPpercapita,suchasBangladesh,India,andKenya.Thesetendtobecountrieswithrelativelyhighersharesofjobs,GDP,andcapitalstockinsectorsthataremoreexposedtothetransition—whichistosay,sectorswithemissions-intensiveoperations,products,andsupplychains(ExhibitE11).Significantfossilfuelresourceproductionalsocreateshighexposureforsomecountries,suchasQatar,Russia,andSaudiArabia.Secondaryeffectsfromdirectexposurecouldalsoextendtogovernmenttaxrevenuesandexports,whichareoftenlinkedwithexposedsectorslikefossilfuelextractionorsteel(seeBoxE6,“Potentialimplicationsofthenet-zerotransitionfortradeflows”).Bycontrast,countrieswithhigherGDPpercapitatendtobelessexposedbecauseamajorityoftheireconomiesareinservicesectors,whichhaverelativelylowerexposure.51SimilarconclusionswerealsoreachedbytheIEA.SeeforexampleFinancingcleanenergytransitionsinemerginganddevelopingeconomies,InternationalEnergyAgency,June2021.52Togaugeeachnationaleconomy’sexposuretothetransition,wecalculatedascorerangingfrom0(noexposure)to100(fullexposure).Thescorereflectstheshareofeacheconomy’semployment(jobs),productionactivity(GDP),andcapitalstockinsectorsthataremostexposedtotheeffectsofthetransition—forexample,sectorswithhighemissionsintheiroperations,intheuseoftheirproducts,orintheirsupplychains.Fordetails,seechapter4andthetechnicalappendix.36McKinsey&CompanyThus,formanylower-incomeandfossilfuel–producingcountries,challengesassociatedwithclimatechangecouldcompound.Thesecountrieswouldneedtobalancemultipleimperatives:decarbonizingtheireconomiesandfundingassociatedcapitalexpenditures,managingexposureoflargepartsoftheireconomiestoanet-zerotransition,andenablingeconomicdevelopmentandgrowth,particularlybyexpandingaccesstoaffordable,secureenergy.And,asnotedearlier,thesechallengeswillbeaggravatedforsomelower-incomecountriesbyheightenedphysicalclimaterisk,suchasthegrowingprobabilityoflethalheatwavesinpartsofIndia.53Inequityconcernswouldgrowasanissue,particularlyasdevelopingeconomiesarguethattheyhavecontributedlessthanotherstoemissionsandyetarebeingaskedtoshoulderalargeburdeninthenet-zerotransition.53WillIndiagettoohottowork?McKinseyGlobalInstitute,November2020.1.Forfurtherdetails,seeClimateriskandresponse:Physicalhazardsandsocioeconomicimpacts,McKinseyGlobalInstitute,January2020.2.Basedonaverageshareofjobs,GDP,andcapitalstockinexposedsectors.Thesesectorsareidentiedbasedontheirscope1,2,and3emissionsintensity.Forfurtherdetails,seetechnicalappendix.Source:OxfordEconomics;OECD;ILO;WorldInput-OutputDatabase;IHSConnect;WorldBank;InternationalEnergyAgency;USBureauofLaborStatistics;IndiaNSSEmploymentsurvey;ChinaNationalBureauofStatistics;UN;InternationalRenewableEnergyAgency(IRENA);MINSTAT;INDSTAT;GlobalSolarAtlas;GlobalWindAtlas;USGeologicalSurvey;WEF;McKinseyNatureAnalytics;EmissionsDatabaseforGlobalAtmosphericResearch;McKinseyGlobalEnergyPerspectives;IPCC;OECD;IHSGlobal;PennWorldTables;McKinseyGlobalInstituteanalysisGDPpercapita,$thousandTransitionexposurescore(0=noexposure,100=fullyexposed)HotterSignicantlyhotterandmorehumidHotterandmorehumidIncreasedwaterstressDiverseclimateLowerriskCirclesize=populationinmillionsArchetypeofphysicalrisk1,20060020090303160402015cCorrelationcoecient,r=–0.69BangladeshNigeriaPakistanJapanSaudiArabiaSouthKoreaUnitedArabEmiratesNorwayAustraliaMexicoQatarIndonesiaKenyaIndiaSpainBrazilChinaUnitedStatesCanadaFranceGermanyRussiaUnitedKingdomExhibitE11CountrieswithlowerGDPpercapitaandfossilfuelresourceproducershavehighertransitionexposures.Archetypeofphysicalrisk1throughtransitionexposurevsGDPpercapitabycountry2(logarithmicscale)37Thenet-zerotransition:Whatitwouldcost,whatitcouldbringBoxE61SeeRisk,resilience,andrebalancinginglobalvaluechains,McKinseyGlobalInstitute,August2020.2DanielMoranetal.,Thecarbonloopholeinclimatepolicy:Quantifyingtheembodiedcarbonintradedproducts,ClimateWorksFoundation,August2018.Potentialimplicationsofthenet-zerotransitionfortradeflowsValuechainshavegrowninlengthandcomplexityinrecentdecades,andglobaltradehasincreased.Since2000,thevalueofintermediategoodstradedgloballyhastripledtomorethan$10trillionannually.1Increasingproductionofgoodsforexporttendstoincreaseacountry’sowncarbonemissionssincemostmanufacturingstillinvolvescarbon-emittingprocessesorenergyuse.Forexample,otherresearchershaveestimatedthatinsomemanufacturingsectors,suchaschemicals,textiles,leather,andapparel,30to65percentoftheemissionsinChinaandIndiaareinducedbyforeignfinaldemand.2Anotherwaytothinkaboutthisphenomenonistoregardexportedgoodsashavingtheirproductionemissionsembeddedorembodiedinthem.AlookattheemissionsthatareembodiedingoodstradedacrossbordersrevealsthatconsiderablequantitiesofCO₂are,ineffect,movedinternationallyeveryyear(ExhibitE12).Asdemandforhigh-emissionsgoodsfallsanddemandforlow-emissionsgoodsincreases,tradeflowsmightshiftascountries’comparativeadvantageschange.Forexample,shiftsinconsumerpreferencesorthepresenceofcarbontaxesorotherregulatorymeasurescouldproduceadvantagesforcountriesthatmakeproductswithlowemissionsintensity.Countriescouldalsopursueopportunitiestomeetgrowingoverseasdemandfornewkindsoflow-emissionsgoodsoremergingdecarbonizationtechnologies.Insomecases,decarbonizationcouldraiseproductioncosts,whichcouldmakeexportsfromcountriesthattakedecarbonizationactionlesscompetitive.Allofthesefactorscouldresultinshiftingtradepatternsinsectorssuchaselectricvehicles,solarpanels,andminerals,andtheywouldneedtobesystematicallyaddressed.Theoutlookforglobaltradeflowsthusremainsuncertain,andoutcomescoulddependonmanyfactors,includinghowconsumerpreferencesandregulationevolveandwhatopportunitiesdifferentregionsdecidetopursue.Inmakingstrategicdecisions,businessesmaywanttoaccountfortheongoingdiscussionamongcountriesofwhethertoimplementborder-adjustmenttaxesthatpricecarbonemissionsintothevalueoftradedgoodsandaccountfordevelopmentsinbroaderregulation,consumerpreferences,andevolvingmarkets.Insomecases,marketsmaywellgofromglobaltolocal;forexample,globalenergymarketsforoilandgascouldtransformtomorelocalorregionalmarketsforpowerorhydrogen.Forsomecountries,thenet-zerotransitioncouldalsoprovideopportunitiestogrowdomesticindustriesandreduceimportsofcommoditieslikefossilfuels.38McKinsey&CompanyNote:Calculationsarebasedonconsumption-basedaccountingofemissions(alsocalledcarbonfootprints).Consumption-basedaccountingaccountsforemissionsassociatedwithimportedandexportedgoodsandreportsthetotalemissionsassociatedwithnaldemandineachcountry.ExhibitaboveshowsowsofembodiedCO₂fromeachorigin/emittercountrytoeachdestination/consumercountry.Source:Eoraglobalsupplychaindatabase;McKinseyGlobalInstituteanalysisItalyGermanyFranceUKSpainThailandMexicoJapanCanadaSouthKoreaRussiaIndiaUSChina627814912777310810864995378511189775464456916042105451846499537851118977546445691604210545184ExhibitE12Goodstradedinternationallyrepresentsignicantcross-borderowsofembeddedCOemissions.Largestinterregionalowsofcarbonembodiedintrade,2021,metrictonsofcarbondioxideequivalent39Thenet-zerotransition:Whatitwouldcost,whatitcouldbringCountriescanusenaturalendowmentsortechnological,human,andphysicalresourcestoharnessthetransition’sgrowthpotentialAllcountrieshaveopportunitiestotapintothetransition’spotentialforgrowthandsecureadvantages,throughtheirendowmentsofnaturalcapitalsuchassunshineandwindandthroughtheavailabilityoftechnological,human,andphysicalcapital.54Countriescouldbenefitfromthetransitioniftheypossessrichstocksofnaturalcapitalsuchasamplesunlightandwind,forestland,mineralresources,andCO₂sequestrationpotential(seeExhibitE13foroneexampleforsolarandwindpowerpotential,andchapter4forotherexamples).Generallyspeaking,manydevelopingcountrieshavethenaturalresourcestoaccommodatesolarpowerproductionandforestryprotectionorrestorationefforts,whichcouldbesupportedbyflowsofcapitalthroughmechanismssuchasvoluntarycarbonmarkets.Andmostcountries,developingorotherwise,haveatleastsomeofthenatural-capitalendowmentsthatwouldlikelybeindemandduringthetransition.Forexample,AustraliaandSaudiArabiahaveextensivesolarresources,ArgentinaandtheUnitedKingdomhavehighwindpowerpotential,andChileandChinahavelargereservesofminerals.Somecountrieshavealreadygainedstrongpositionsinthemarketsforsophisticatedlow-carbongoods,suchassolarpanelsandEVs.Evenso,thesemarketsofferconsiderablegrowthpotential,whichshouldbeaccessibletocountrieswithadequatetechnologicalcapital.Forexample,SouthKoreahasapproximately6,600patentsontechnologiesrelatedtoclimate-changemitigationandhumancapital.CountrieslikeChinaandSingaporehaveahighshareofSTEMgraduatesinthepopulation,whichprovidesanindicationoftheworkforce’stechnicalskill.Thisinturnmightbeappliedtodevelopingsolutionsfortheclimatetransition.Acountry’sphysicalcapital,intheformoflow-emissionsinfrastructureandindustrialsystems,couldalsocreategrowthpotentialinanet-zerotransition,forexample,ifconsumersshifttheirpreferencesorcarbonbordertaxesareapplied.Evencurrentlyhigh-emissionsinfrastructurecouldbeabenefitifitcanreadilyberetrofitted,forexample,withalternatelow-emissionsfuelsources.54Foramoredetailedlistofpotentialendowmentscountriescantapintoanddataonthesame,seechapter4.Allcountrieshaveopportunitiestotapintothetransition’spotentialforgrowthandsecureadvantages,throughtheirendowmentsofnaturalcapitalsuchassunshineandwindandthroughtheavailabilityoftechnological,human,andphysicalcapital.40McKinsey&CompanyExhibitE13Countriescouldcapturepotentialgrowthopportunitiesfromthetransitiontonet-zeroemissions:Renewablepowerexample.Note:TheboundariesandnamesshownonthismapdonotimplyofficialendorsementoracceptancebyMcKinsey&Company.Source:GlobalSolarAtlas;GlobalWindAtlas;McKinseyGlobalInstituteanalysis1.CalculatedasthepoweroutputachievablebyatypicalconfigurationoftheutilityscalePVsystem,takingintoaccountGHI(globalhorizontalirradiation,orthetotalsolarradiationthatreachesahorizontalsurface),theairtemperatureaffectingthesystemperformance,thesystemconfiguration,shadingandsoiling,andtopographicandland-useconstraints.2.Calculatedbydownscalinglarge-scaleforecastingdatafromtheEuropeanCentreforMedium-RangeWeatherForecasts.ThesedataarethenenteredintotheDTUWindEnergymodelingsystemtomodellocalwindclimatesfora250mgridacrosstheglobe.<2.0>6.4Meanwindpowerdensityof10%windiestareasat100mheight,²wattpersquaremeter<25>1,300Averagetheoreticalsolarpotential,1kilowatt-hourpersquaremeterperday41Thenet-zerotransition:Whatitwouldcost,whatitcouldbringWeidentifysixmainarchetypesofcountries,basedonthecommonnatureoftheirtransitionexposureTohelpillustratehowthenet-zerotransitionmightplayoutdifferentiallyacrosstheglobe,wehavedefinedsixarchetypesofcountriesaccordingtothenatureandmagnitudeoftheirexposureacrosssectorsandhouseholds.Weusesectorexposuretodefinecountryarchetypesasawaytohighlightthedistincteconomicandsocietaladjustmentsthatcountriesmayneedtomakeunderanet-zerotransition,whilenotingthatcountrieswillfacemyriadspecificissuesthatarenotreducibletoasinglearchetype.Ineachcase,wealsodescribeendowmentsthatcountriespossesstohelpthemcapturetransitionopportunities,aswellastheirexposuretophysicalrisks,whererelevant.(SeeExhibitE14forthearchetypesbasedontransitionexposureandchapter4forfurtherdetailrelatedtoopportunitiesforcountriestobenefitfromthetransitionandtheirphysicalriskexposure.)55Thefollowingarethesixarchetypes:Fossilfuelresourceproducers.CountriesinthiscategoryincludeAustralia,Bahrain,Canada,Egypt,Kuwait,Nigeria,Norway,Oman,Qatar,Russia,SaudiArabia,theUnitedArabEmirates,andVenezuela.Fossilfuelresource–producingsectorsaccountforasignificantportionofGDPinthesecountries,rangingfrom3percentinAustraliato39percentinKuwait,andalargeshareofphysicalcapital—anaverageofabout15percentcomparedto2percentintherestofthecountries.Themagnitudeofexposurevariesamongcountriesinthisgrouping.Forexample,SaudiArabiahasabout25percentofitsGDPinfossilfuel–producingsectors,andQatarhasaboutone-thirdofitsGDPanditscapitalstockinthosesectors.Thatcompareswithabout3percentofGDPand13percentofcapitalstockinAustralia.Forthecountrieswithhighersharesinparticular,variouschallengescouldexist:thepotentiallossofgovernmentrevenuesfromexposedsectors,thereallocationofcapitalspendingfromhigh-tolow-emissionsassets,andthepotentialneedtodiversifytheireconomies.Manycountriescouldalsoexperiencerisingphysicalrisks;countriesinthisgroupingthatareneartheequatorwillbecomehotterandmorehumidaswarmingincreases.Atthesametime,anet-zerotransitionoffersopportunitiesthatthesecountriescantapinto,thoughcapturingthemandsufficientlycompensatingforlossinrevenuesandexportscouldalsocomewithchallenges.Theygenerallyhavehighsolarpowerorwindpowerpotential,whichtheycouldusetodevelopcapacityforrenewable-energygenerationandmakegreenhydrogen.Somefossilfuelproducers,forexamplethoseintheMiddleEast,alsohaverelativelylowlevelsofcarbonintensityassociatedwiththeiroilandgasextractionandhaverelativelylowercosts;thus,theycouldbethelaststandingprovidersoftheremainingfossilfuelsneededinanet-zeroeconomy,inthescenariomodeledhere.Emissions-intensiveproducers.CountriesinthiscategoryincludeBangladesh,China,India,Indonesia,Pakistan,SouthAfrica,Thailand,Turkey,Ukraine,andVietnam.ThesecountriesderivesizableportionsoftheirGDP,about18percentonaverage,fromhighlyexposedsectorssuchashigh-emissionsmanufacturing,fossilfuel–basedpower,andagriculture.Jobstendtobeconcentratedinagriculture(morethan20percent),whilemuchoftheircapitalstockisinmanufacturingandfossilfuel–basedpower.Thesecountrieswouldlikelyadjusttothetransitionmainlybydecarbonizingindustrialprocesses,expandingrenewable-powercapacity,andhelpingfarmersadoptlow-carbonpracticesortransitionawayfromagriculture.Asdiscussedabove,manyofthesecountrieswillneedtomakesubstantialinvestmenttodecarbonizetheireconomiesandsecurelow-carbongrowth.Ouranalysissuggeststhatthesecountriesfaceaparticularriskofassetstranding.Capitalstockinthesecountries(coal-firedpowerplants,forexample)isoftennewerthaninadvancedeconomies.TheaverageageofcoalpowerplantsinChinaandIndiaislessthan15years,comparedwithmorethan30intheUnitedStates.56Lower-incomecountriesmayalsofindthatsomelow-carbontechnologies(forexample,electric-arcfurnacesforsteelproductionandCCSequipmentforsteelorcementfactories)remaintooexpensivetodeployor,insomecases,unreadyforlarge-scaledeployment.55Climateriskandresponse:Physicalhazardsandsocioeconomicimpacts,McKinseyGlobalInstitute,January2020.56SeeWorldEnergyOutlook2021,InternationalEnergyAgency,December2021.42McKinsey&CompanyWithoutcarefulplanning,however,theyruntheriskthatcontinuedspendingonlower-cost,high-emissionsassetscouldresultintheneedtoprematurelyretireorreduceutilizationoftheseassetsafteronlyafewyearsastheworldtransitionstoanet-zeropath.Atthesametime,thesecountrieswillhavepotentialtoservethegrowingmarketsforlow-emissionsgoods.Asiancountries—manyofwhichareincludedinthisarchetype—morebroadlypossessresourcesthatcouldbeconducivetolow-emissionsinnovation.57Capitalspendingforthetransitionwouldneedtobecomplementedbyinvestmentinadaptationmeasures,sincemanycountriesinthisarchetypewouldbecomehotter,morehumid,andmorepronetofloodingaswarmingincreases.Agriculture-basedeconomies.CountriesinthisgroupincludeGhana,Kenya,Morocco,thePhilippines,Senegal,andSriLanka.Agricultureistheprimarysourceofemploymentandincomeforalargeshareofthepopulationinthesecountries,accountingforuptoabout55percentofjobsanduptoabout30percentofGDP.Animportantadjustmentforthesecountrieswillbeadoptinglow-emissionsfarmingpractices,whichwouldrequiremobilizingmillionsofstakeholders.Asdiscussedabove,manyofthesecountriesareexpectedtoinvestsubstantiallyinnewassetsastheygrowtheireconomies,particularlyrelatedtothepowersector;securingfinancingwouldthusbeakeypriorityunderanet-zerotransition.Thesecountriesalsohavesignificantpotentialtoproducesolarpoweranduseforestlandtogeneratecarboncredits.58Almostallofthesecountriesareexposedtophysicalclimateriskbecauserisingheatandhumidityaffecttheiragriculturalworkforces,andalsoincreasevolatilityofagriculturalyields.Land-use-intensivecountries.ThisgroupincludesArgentina,Bolivia,Brazil,Chile,Colombia,CostaRica,Ecuador,Honduras,Malaysia,Panama,Peru,andUruguay.59Inthesecountries,whichhavegenerallyreachedtheearlyormiddlestagesofindustrialization,theagricultureandforestrysectorstogetherrepresentsignificantsharesofGDP(morethan5percent),jobs(morethan10percent),andcapitalstock(morethan5percent).Theywouldhavetobalanceland-useneedswithprotectionofforestsandwouldhavetosupportcommunitieswhoselivelihoodsdependonthem.Thecontributionofothersectorssuchasfossilfuelproduction,power,andindustrytoGDP,jobs,andcapitalstockisalsosizableforsomecountriesinthearchetype,likeBrazil,whichcouldalsothereforebeexposedtoissuesdescribedforotherarchetypes.Withtheirstocksofnaturalcapital,thesecountrieswouldhavegrowthpotentialinsectorssuchasrenewableenergy,mineralsneededforthetransition,andforestmanagement;reforestationandafforestationprojectscouldgeneratevaluablecarboncreditsandecosystemservices.Downstream-emissionsmanufacturers.CountriesinthisgroupincludeAustria,Bulgaria,CzechRepublic,Germany,Hungary,Italy,Japan,Mexico,Poland,Romania,Slovakia,SouthKorea,andSweden.Themainexposureforthesemiddle-to-high-incomecountriesrelatestothemanufacturingofgoods,suchasautomobilesandindustrialmachinery,thatcouldexperiencefallingdemandintheircurrentformbecausetheyusefossilfuel–basedenergy.Countriesinthiscategorycouldmanagetheirexposuretoshiftsindemandfortheseproductsbyreinventingproductsandsupplychains.ManymakelargeinvestmentsinR&D,whichpositionthemwelltodevelopandcommercializelow-emissionstechnologies.57SeeClimateriskandresponseinAsia,McKinseyGlobalInstitute,November2020.58ForadditionalopportunitiesforAfricancountries,seealsoLynnBouchene,ZiyadCassim,HaukeEngel,KartikJayaran,andAdamKendall,“GreenAfrica:Agrowthandresilienceagendaforthecontinent,”McKinsey&Company,October28,2021.59Asdescribedabove,countriescouldfallintomultiplearchetypes.AlargeshareoftheeconomyofBrazil,forexample,isrelatedtofossilfuels,andwouldalsobeexposedtothetypesofissuesdescribedforthatarchetype.43Thenet-zerotransition:Whatitwouldcost,whatitcouldbringExhibitE14Countries’transitionexposurebyarchetype,scoreBasedonthenatureoftheirexposuretothenet-zerotransition,countriescanbegroupedintosixarchetypes.(1of2)AreaofexposuremostrelevanttoarchetypeLowHighSource:OxfordEconomics;OECD;ILO;WorldInput-OutputDatabase;IHSConnect;WorldBank;InternationalEnergyAgency;USBureauofLaborStatistics;IndiaNSS-Employmentsurvey;ChinaNationalBureauofStatistics;MINSTAT;INDSTAT;McKinseyGlobalInstituteanalysis1.Averagesrowswithineacharchetypearebasedonasimpleaverageofeverycountrywithinthatarchetype,boththoseshowninrowsandothercountriesinthearchetype.Forfossil-fuelproducers,othercountriesincludeAustralia,Bahrain,Egypt,Kuwait,Norway,Oman,UAE,andVenezuela;foremissions-intensiveproducers,Bangladesh,Pakistan,SouthAfrica,Thailand,andTurkey;foragriculture-basedeconomies,MoroccoandthePhilippines;forland-use-intensivecountries,Bolivia,Chile,Colombia,CostaRica,Ecuador,Honduras,Malaysia,Panama,andUruguay;fordownstreamemissionsmanufacturers,Austria,Bulgaria,CzechRepublic,Hungary,Italy,Poland,Romania,Slovakia,andSweden;andforservices-basedeconomies,Belgium,Denmark,Finland,Ireland,Israel,Netherlands,Portugal,Singapore,Spain,andSwitzerland.2.SimpleaverageoftheshareofGDP,jobs,andcapitalstockinthesectorswithhighestexposuretothenet-zerotransition.Note:Colorsineachcolumnbasedonrelativequartileswithineachcolumnratherthanacrosscolumns.Countriesareallocatedtoanarchetypetoillustratespecifictransitionexposurestheymayexperience.However,anygivencountry—especiallythosewithlargediversifiedeconomies—couldfacesomeoftheexposureshighlightedforotherarchetypes.Low=below1stquartile;high=above3rdquartile.Forexposedsectorsincluded,seetechnicalappendix.TransitionexposurearchetypesExamplecountries1Transitionexposurescore2Producersoffossilfuelenergy2Fossilfuel–dependentproducts2EmittersincoreoperationsUsersofinputsfromemitters2Householdscope1emissionspercapitaPowerandindustry2Mobility2Agriculture,forestry,andotherlanduse2FossilfuelresourceproducersQatarNigeriaSaudiArabiaRussiaCanadaAverageEmissions-intensiveproducersVietnamIndiaChinaUkraineIndonesiaAverageAgriculture-basedeconomiesKenyaGhanaSriLankaSenegalAverage44McKinsey&CompanyExhibitE16Countries’transitionexposurebyarchetype,scoreTransitionexposurearchetypesExamplecountries1Transitionexposurescore2Producersoffossilfuelenergy2Fossilfuel–dependentproducts2EmittersincoreoperationsUsersofinputsfromemitters2Householdscope1emissionspercapitaPowerandindustry2Mobility2Agriculture,forestry,andotherlanduse2Land-use-intensivecountriesPeruBrazilArgentinaAverageDown-stream-emissionsmanu-facturersMexicoSouthKoreaJapanGermanyAverageServices-basedeconomiesNewZealandGreeceUnitedKingdomUnitedStatesFranceAverageBasedonthenatureoftheirexposuretothenet-zerotransition,countriescanbegroupedintosixarchetypes.(2of2)AreaofexposuremostrelevanttoarchetypeLowHighSource:OxfordEconomics;OECD;ILO;WorldInput-OutputDatabase;IHSConnect;WorldBank;InternationalEnergyAgency;USBureauofLaborStatistics;IndiaNSS-Employmentsurvey;ChinaNationalBureauofStatistics;MINSTAT;INDSTAT;McKinseyGlobalInstituteanalysis1.Averagesrowswithineacharchetypearebasedonasimpleaverageofeverycountrywithinthatarchetype,boththoseshowninrowsandothercountriesinthearchetype.Forfossil-fuelproducers,othercountriesincludeAustralia,Bahrain,Egypt,Kuwait,Norway,Oman,UAE,andVenezuela;foremissions-intensiveproducers,Bangladesh,Pakistan,SouthAfrica,Thailand,andTurkey;foragriculture-basedeconomies,MoroccoandthePhilippines;forland-use-intensivecountries,Bolivia,Chile,Colombia,CostaRica,Ecuador,Honduras,Malaysia,Panama,andUruguay;fordownstreamemissionsmanufacturers,Austria,Bulgaria,CzechRepublic,Hungary,Italy,Poland,Romania,Slovakia,andSweden;andforservices-basedeconomies,Belgium,Denmark,Finland,Ireland,Israel,Netherlands,Portugal,Singapore,Spain,andSwitzerland.2.SimpleaverageoftheshareofGDP,jobs,andcapitalstockinthesectorswithhighestexposuretothenet-zerotransition.Note:Colorsineachcolumnbasedonrelativequartileswithineachcolumnratherthanacrosscolumns.Countriesareallocatedtoanarchetypetoillustratespecifictransitionexposurestheymayexperience.However,anygivencountry—especiallythosewithlargediversifiedeconomies—couldfacesomeoftheexposureshighlightedforotherarchetypes.Low=below1stquartile;high=above3rdquartile.Forexposedsectorsincluded,seetechnicalappendix.ExhibitE14(continued)45Thenet-zerotransition:Whatitwouldcost,whatitcouldbringServices-basedeconomies.CountriesinthisgroupincludeBelgium,Denmark,Finland,France,Greece,Ireland,Israel,theNetherlands,NewZealand,Portugal,Singapore,Spain,Switzerland,theUnitedKingdom,andtheUnitedStates.ThesecountrieshavehighGDPpercapitaandderivemostoftheireconomicoutputfromservicesectors,sotheiroverallexposuretonet-zerotransitionadjustmentsislow.However,incertainregionsandsectors,exposurecouldbehigh.Thesecountriesalsotendtohavehighconsumeremissions—1.6tonspercapitaonaverage,comparedto0.9tonspercapitaonaverageforothercountries—andwillthereforeneedtoinducebehavioralchangesintheirpopulationsandincurup-frontcapitalcostsinordertodecarbonize(although,asdiscussedpreviously,thiscouldcomewithlong-termbenefits,suchaslowertotalcostofownership).Thesecountriescouldusetheiramplenatural,technological,andhumancapitaltodevelopnewlow-emissionsindustriesorprovideservices,suchasfinancialorinformationservices,insupportofthetransition.Stakeholderswillneedtoactwithsingularunity,resolve,andingenuity,andtowardequitable,long-termoutcomestosupporttheeconomictransformationanet-zerotransitionentailsThetransitiontonetzerowehaveoutlinedinthisreportwillrequireeconomiesandsocietiestomakesignificantadjustments.Manyoftheseadjustmentscanbebestsupportedthroughcoordinatedactioninvolvinggovernments,businesses,andenablinginstitutions,andbyextendingplanningandinvestmenthorizons.Thisactionwouldneedtobetakeninaspiritofunityfortwokeyreasons:first,theuniversalnatureofthetransitionmeansthatallstakeholderswillneedtoplayarole.Everycountryandsectorcontributestoemissions,eitherdirectlyorindirectly,throughitsroleinglobalproductionandconsumptionsystems.Second,theburdensofthetransitionwillnotbeevenlyfelt,and,forsomestakeholders,thecostswillbemuchmoredifficulttobearthanforothers.Thisisallthemorechallengingbecausecontributionstoemissionshavenotbeenevenacrossstakeholdergroups.Thus,withoutarealefforttoaddresstheseeffectsinaspiritoffairness,itappearsunlikelythatthemostaffectedstakeholderswouldbeeitherableorwillingtodotheirsharetoadvancethetransition.Challengescouldcompoundformanylower-incomeandfossilfuel–producingcountries,whichwouldneedtobalancemultipleimperatives.46McKinsey&CompanyThefollowingthreecategoriesofactionstandout:60—Catalyzingeffectivecapitalreallocationandnewfinancingstructures,includingthroughscalingupclimatefinance,developingnewfinancialinstrumentsandmarkets,includingvoluntarycarbonmarkets,deployingcollaborationsacrossthepublicandprivatesectors,andmanagingrisktostrandedassets—Managingdemandshiftsandnear-termunitcostincreasesforsectorsthroughbuildingawarenessandtransparencyaroundclimaterisksandopportunities,loweringtechnologycostswithR&D,nurturingindustrialecosystems,collaborationacrossvaluechainstoreduceorpassthroughcostincreasesfromthetransition,andsendingtherightdemandsignalsandcreatingincentivesforthetransition—Establishingcompensatingmechanismstoaddresssocioeconomicimpacts,througheconomicdiversificationprograms,reskillingandredeploymentprogramsforaffectedworkers,andsocialsupportschemesAstheseactionsareundertaken,individualleaderswillneedtobothconsiderrisksandopportunitiestotheirorganizationsandtotheirstakeholders,anddeterminetheroletheycanplayinsupportingthenecessaryadjustmentsforall.Weconsidermoredetailedactionsandtheroleofstakeholdersbelow.Companiescanconsiderintegratingclimateconsiderationsintotheirstrategiesandtheirdecision-makingframeworks.Companieshavebeguntodevelopcomprehensiveplansforachievingnet-zeroemissionsandtointegratethoseplansintotheirstrategies,combiningelementsofwhatmightbecalled“offense”(suchasenteringnewmarkets,fundingR&D,andparticipatingininnovationecosystems)and“defense”(divestingbusinessesandretrofittinghigh-emissionsassetstolowertheiremissions).61Astheyembarkonthisjourney,theycanconsiderthefollowingsteps:—Articulateandcommunicateacoherentcaseforchangeandupskillemployeestohelpdrivetheirorganizationstowardnet-zerogoalswhilealsosupportingbroadereconomicandsocietaladjustments.Astheyinitiateaction,mostCEOswillwanttocommunicateacoherentcaseforchangeandtakevisibleownershipofthesustainabilityagenda.—Developongoingcapabilitiestomakegranular,holistic,anddynamicassessmentsoftransition-relatedrisksandopportunitiesinordertocaptureshiftsinregulations,investorpreferences,consumerbehaviors,andcompetition.Tostayabreastofnewdevelopmentsandemergingpossibilities,organizationsarelikelytoneednewcapabilities,data,infrastructure,andtalent.Akeypartofthiswillalsobebettertrackingofscope1,2,and3emissions,includingthroughtheuseofdigitaltoolstoincreasetransparencyofemissionsincompanies’ownoperationsandintheirsupplychains.60Theactionsdescribedinthissectionspecificallyrelatetotheeconomicandsocietaladjustmentsneededforthetransition,giventhescopeofthisresearch.Aneffectiveresponsetoclimatechange,webelieve,willinvolvenotonlymakingeconomicandsocietaladjustmentstodealwiththeeffectsofthenet-zerotransition,butalsomeetingtheotherfundamentalrequirementsdescribedpreviously.Weidentifysevencategoriesofactions.Leaderscanunderstandandcommittothetransition,includingunderstandingthefundamentalsofclimatescienceandthetransitionandmakingpersonalandprofessionalcommitments;assessandplantheiractions,includingthroughbuildingriskassessmentcapabilitiesandestablishingdecarbonizationplans;reduceandremoveemissionsinaccordancewiththeseplans;conserveandregeneratenaturalcapitaltosupportdecarbonization;adaptandbuildresiliencetomanagethephysicalriskthatisalreadylockedin;andreconfigureandgrow,forexamplebyreallocatingcapitalandrampingdownhigh-carbonbusinesseswhilescalinglow-carbonones;andseektoengageandinfluencetheircommunities,acrosstheirinvestors,customers,suppliers,peers,andregulators.Whiletheactionsdescribedinthissectionarespecifictotheeconomicandsocietaladjustmentsneededforthetransition,theyfallintothevariouscategorieslistedabove.SeeMekalaKrishnan,TomasNauclér,DanielPacthod,DickonPinner,HamidSamandari,SvenSmit,andHumayunTai.“Solvingthenet-zeroequation:Ninerequirementsforamoreorderlytransition,”McKinsey&Company,October2021.61DanielPacthodandDickonPinner,“Timeisrunningoutforbusinessleaderswhodon’thavea‘netzero’strategy,”Fortune,April22,2021.47Thenet-zerotransition:Whatitwouldcost,whatitcouldbring—Definedecarbonizationandoffsettingplansandupdatethemascompetitive,financial,andregulatoryconditionschange.Thiswouldincludescope1and2emissions(withprioritygivento“noregret”actionssuchasimprovingenergyefficiencyandmakingdecarbonizationinvestmentwithpositivereturns).Wherefeasible,needed,andmaterial,anddependingonthenatureoftheiroperations,businessescanexpandtheseplanstoincludescope3emissions.62—Createaportfolioofagilebusinessstrategiesconsistentwiththesedecarbonizationplansandwiththerisksandopportunitiesemerginginanet-zeroeconomy.Theycanthenputtheseplansinplaceasconditionschangeandopportunitiesarise.Forcompanies,repositioningthemselvescouldinvolveinvestinginnewphysicalassetsandreallocatingcapital,redesigningproducts,orbuildingnewlow-emissionsbusinesses.—Integrateclimate-relatedfactorsintokeybusinessdecisionsforstrategy,riskmanagement,financeandcapitalplanning,R&D,operations(includingsuppliermanagementandprocurement),organizationalstructureandtalentmanagement,pricing,marketing,andinvestorandgovernmentrelations.—Considerifandwheretotakealeadershippositioninthecompany’sindustryanditsecosystemofinvestors,supplychains,customers,andregulators.Financialinstitutionscansupportlarge-scalecapitalreallocation,evenastheymanagetheirindividualrisksandopportunities.Inthenearterm,theywillneedtoconsiderassessinganddisclosingtheirrisksandmeasuringandcommittingtoreducetheirfinancedemissions.Overtime,theywillneedtotranslatethesecommitmentsintoactionsthatloweremissions.Relevantpracticesforfinancialinstitutionstoconsiderincludethefollowing:—Rethinkingconventionsforrisksandreturns.Somedecarbonizationprojectsarelikelytohavelonger-than-normalpaybackperiods.Thispossibilitymaycompelfinancialinstitutionstoadjusttheircriteriaforwhichprojectstheyfinance.—Assessinganddisclosingclimaterisks.Forexample,variousregulatorsandsupervisorsalreadyrequirebankstoconductclimate-riskassessments,andmoreareplanningtostarttheseassessments.—Measuringandreducingfinancedemissions.Financialinstitutionsareincreasinglymakingpledgestoaligntheirportfolioswith1.5°Cor2.0°Cwarmingtargetsortoachievenet-zerofinancedemissionsbyacertaindate.Theyhavestartedtranslatingthesecommitmentsintotargetsforsectorsandgeographies.Giventhatemissionsultimatelyarefromcounterparties,financialinstitutionsmayfindithelpfultosupportthetransitionplansofthosecounterparties—forinstance,byofferingnewfinancialsolutions,advisingthemonemissions-abatementmethods,andintroducingpartnershipopportunities.—Overtime,translatingthesecommitmentsintoactionsthatloweremissions,includingexpandingtherangeofclimate-financeproductsandservices(forexample,fundingforlow-emissionspowerprojects,newfinancialinstrumentstosupportnegativeemissionsornature-basedsolutions,andwell-governedvoluntarycarbonmarkets).6362Forpurposesofthisreport,“scope1”emissionsaredirectgreenhouseemissionsthatoccurfromsourcesthatarecontrolledorownedbyanorganization;“scope2”emissionsareassociatedwiththepurchaseofelectricity,steam,heat,orcooling.“Scope3”emissionsaretheresultofactivitiesfromassetsnotownedorcontrolledbythereportingorganizationbutthattheorganizationindirectlyimpactsinitsvaluechain;thus“scope3”emissionsresultfromemissionsacrossanorganization’svaluechainthatarenotwithintheorganization’sscope1and2boundary.SeeGreenhousegasesatEPA,UnitedStatesEnvironmentalProtectionAgency.63Voluntarycarbonmarketswouldincludemarketsforavoidancecredits(forexample,topreventforestsfrombeingcutdown)andforremovalcredits(forexample,fromafforestationordirectaircapture).Forfurtherdetails,seeFinalreport,TaskforceonScalingVoluntaryCarbonMarkets,January2021.48McKinsey&CompanyGovernmentsandmultilateralinstitutionscouldconsidertheuseofexistingandnewpolicy,fiscal,andregulatorytoolstoestablishincentives,supportvulnerablestakeholders,andfostercollectiveaction.Public-sectororganizationshaveauniqueroleinmanaginguneveneffectsonsectorsandcommunities.Amongotheroptions,theycouldconsiderthefollowing:—Assessexposuretorisksandopportunities,developdecarbonizationplans,andcreatenet-zerostrategies(similartobusinesses).Thiswouldincludegovernmentsbringingclimateconsiderationsintodecisionsaboutsuchmattersasurbanplanning,infrastructuredevelopment,andtaxandsubsidyregimesinanefforttoanticipatefuturedynamics,aswellaseffortstoincreaseawarenessofandtransparencyaboutclimaterisksandopportunities.Onemajoradjustmentthatgovernmentsmayneedtomakeisdevelopingnewlow-emissionsindustriesasdemandwanesforfossilfuelsandemissions-intensiveindustries.—Usepolicymeasuresandregulationtoencouragedecarbonizationinvestmentacrosssectors(forexample,considerwhereandhowtobestusesubsidies,grants,demandsignals,andcarbontaxes,tonameafew).Theycanalsoplayaroleinacceleratingresearchanddevelopmentthatwouldlowertechnologycosts.—Governmentscouldestablishmultilateralandgovernmentfundstosupportlow-carboninvestment,andmanagestranded-assetrisk.—Institutereskilling,redeployment,andsocial-supportprogramsforworkersandmanagenegativeeffectsonlower-incomehouseholds.—Collaboratewithotherstakeholderstodrivecollectiveaction.Forexample,governmentscancatalyzeprivate-sectoractiontobuildnewlow-emissionsindustriesinvariousways;strategiesmightincludesettingroadmapsandconveningstakeholders.Enablinginstitutionssuchasstandardsetters,industrygroups,andcivil-societycoalitionswillbecriticalincoordinatingactionacrosssectorsandgeographies.Althoughindividualactionsbycompaniesandgovernmentscansupportawiderangeofstakeholdersduringthetransition,theseactionsmaynotbeenoughtomeetallstakeholderneeds.Thepaceandscaleofthetransitionmeanthatmanyoftoday’sinstitutionsmayneedtoberevamped,andnewinstitutionscreatedtodisseminateknowledge,supportcapitaldeployment,manageuneveneffects,andorganizecollectiveaction.Enablinginstitutionscouldplayvaluablerolesindevelopingandenforcinggoverningstandards,trackingandmarketmechanisms(forexample,relatedtothemeasurementofemissionsorclimatefinance),conveningstakeholdersandfacilitatingcollaboration(forexample,toarrangecollectiveinvestmentororganizethebuild-outofinfrastructure),andgivingavoicetovulnerableworkersandcommunities.Astheyinitiateaction,mostCEOswillwanttocommunicateacoherentcaseforchangeandtakevisibleownershipofthesustainabilityagenda.49Thenet-zerotransition:Whatitwouldcost,whatitcouldbringIndividualswillneedtomanagetheirownexposuretothetransitionandcanplaypowerfulrolesasconsumersandcitizens.Theycanbeginbycontinuingtolearnabouttheeffectsofbothongoingclimatechangeandthenet-zerotransitionthattheymayexperienceasconsumersorworkers.Thegoalofnet-zeroemissionscanonlybereachedifpeopleadoptnewbehaviorsandconsumptionpatterns,suchasswitchingtoelectricvehicles,andrenovatingorretrofittinghomesforenergyefficiency.Civicdiscoursehasanimportantroletoplay:aninformed,engagedpublicthatrecognizestheimperativeforanet-zerotransitioncouldspurdecisiveandtransformativeactiononthepartofgovernmentandbusinessleaders.Theeconomictransformationrequiredtoachievenet-zeroemissionsby2050willbemassiveinscaleandcomplexinexecution.Thetransitionwouldbringsubstantialshiftsindemand,capitalallocation,costs,andjobs,whichwillbechallengingtoawiderangeofstakeholders,notleastbecausetheywillbedistributedunevenly.Yetthecostsanddislocationsthatwouldresultfromamoredisorderlytransitiontonet-zeroemissionswouldlikelybefargreater,andthetransitionwouldpreventthefurtherbuildupofphysicalrisks.Thefindingsofthisresearchserveasaclearcallformorethoughtfulanddecisiveaction,takenwiththeutmosturgency,tosecureamoreorderlytransitiontonetzeroby2050.Itisimportantnottoviewthetransitionasonlyonerous;therequiredeconomictransformationwillnotonlycreateimmediateeconomicopportunitiesbutalsoopenuptheprospectofafundamentallytransformedglobaleconomywithlowerenergycosts,andnumerousotherbenefits—forexample,improvedhealthoutcomesandenhancedconservationofnaturalcapital.Actionsbyindividualcompaniesandgovernments,alongwithcoordinatedactiontosupportmorevulnerablesectors,geographies,andcommunities,couldhelpsupporttheneededeconomicandsocietaladjustments.Moreover,thelevelofglobalcooperationthatsuchatransitionwillultimatelyrequirecouldserveasbothamodelandabasisforsolvingabroaderarrayofglobalchallenges.Dauntingasthetaskmayseem,itisfairtoassumethathumaningenuitywouldultimatelyrisetothechallengeofachievingnetzero,justasithassolvedotherseeminglyintractableproblemsoverthepast10,000years.Thekeyissueiswhethertheworldcanmustertherequisiteboldnessandresolvetobroadenitsresponseduringtheupcomingdecade,whichwill,inalllikelihood,decidethenatureofthetransition.Itisimportantnottoviewthetransitionasonlyonerous;therequiredeconomictransformationwillnotonlycreateimmediateeconomicopportunitiesbutalsoopenuptheprospectofafundamentallytransformedglobaleconomywithlowerenergycosts,andnumerousotherbenefits.50McKinsey&CompanyThenet-zerotransition:Whatitwouldcost,whatitcouldbringbyMcKinseyJanuary2022Copyright©McKinsey&Companywww.mckinsey.com@McKinsey@McKinsey

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