This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.
Author: Mekala Krishnan, Senior Fellow, McKinsey Global Institute, McKinsey & Company, Humayun Tai, Senior Partner, Electric Power & Natural Gas, McKinsey & Company
- Several key issues must be addressed to accelerate our efforts to reach net zero.
- This includes innovative energy solutions, driving down technology costs and developing new financing mechanisms, to name a few.
- Entirely new opportunities will also be created by the transition.
The refrain has become disturbingly familiar: though there has been meaningful momentum, the net-zero transition is not on track.
Faced with the enormous complexity of this task, where should CEOs and policymakers focus their efforts? We have identified seven essential steps – areas where accelerating progress in the next decade is critical – for global climate goals to be met.
First, deploy lower-cost solutions to reduce emissions. The world currently emits more than 55 metric gigatons of greenhouse gases annually. Yet by 2030, relatively cheap solutions — costing less than $20 per metric ton of gas abated — could potentially decrease as much as 19 metric gigatons annually. Examples include improving energy efficiency, reducing methane emissions in fossil fuel extraction, and stopping deforestation.
Despite this, the investment needed for many of these solutions falls short. Incentives that could boost investment include tighter energy and fuel efficiency standards, rebates or tax incentives to reduce energy use, and financial incentives to protect forests.
Second, drive down the costs of expensive solutions. Many technologies needed to reach net zero are not yet mature and cost-competitive. Various analyses suggest that only 10-20% of the emissions reductions required by 2050 could come from technologies that are already commercially mature.
The good news here is that most of the remaining technologies exist in some form already. The power of the private sector must be unleashed to improve their viability, reduce their cost, and scale them up. In some cases, boosting funding for research and development (R&D) can help. Market-stimulating mechanisms will be important for technologies that are starting to mature.
Third, build effective financial mechanisms to drive capital where it is needed. Reaching net zero by 2050 would require trillions of dollars spent on low-emissions technologies. Many of those technologies are new, making it harder for investors to evaluate their viability and risk. Again, many of these are not yet cost-competitive likewise holding back the flow of capital. Developing countries, especially, may find raising financing particularly challenging.
Public funds and ordinary loans will not be enough. Entirely new asset classes may be necessary. These would include industrial venture capital funds, growth infrastructure funds, and “brown-to-green” funds. Scaling up blended finance, which combines public and private capital, could help increase capital flows by reducing the risk faced by private capital providers. Incentives to reallocate companies’ capital resources from high- to low-emissions businesses could also be useful.
Fourth, anticipate and remove physical bottlenecks. The transition at its core is a massive physical transformation. The transition requires an enormous supply of minerals, manufactured goods, land, new infrastructure (for example EV charging networks, electrical grids, and hydrogen pipelines), and a great deal of labour to build and operate all those assets.
Bottlenecks could limit access to these inputs, especially between now and 2030. Long lead times are often a problem. For example, starting a new mine can take five to 15 years. The availability of necessary skills or concentration of minerals and manufacturing capacity in a handful of countries also poses challenges.
Stakeholders can address bottlenecks by unlocking supply and reducing demand for these inputs. Examples include recycling materials, training workforces, developing new battery chemistries that rely less on highly scarce materials, and streamlining permitting processes for new infrastructure.
Fifth, revamp energy markets and planning approaches for an electrified world. In a world of net zero emissions, electricity systems could provide about three times as much energy as they do today, and the share of all electricity generated by wind and solar power would also likely grow.
This would require the redesign of electricity markets and planning approaches to build flexible capacity. Such assets must be able to provide electricity when wind and solar cannot and would include batteries and nuclear plants. Incentives will also be needed to build transmission and distribution infrastructure. Another issue is accounting more carefully for weather, both because of the increase in wind and solar generation (which depend heavily on weather conditions) and the changing climate.
Sixth, manage existing and emerging energy systems in parallel. As the net zero transition unfolds, the world will need to run two energy systems in parallel: Smoothly ramping down the old, fossil fuels–based one while scaling up the new.
It will be critical to scale up the new energy system as quickly as possible. But even according to demand scenarios in which global warming is kept at 1.5°C, fossil fuels will continue to play a part in the energy mix in the next few years. An important step, therefore, is to reduce Scope 1 and 2 emissions from fossil fuel operations as much as possible.
And any future investments in the fossil fuel system must be made carefully. We must ensure a robust energy supply and prevent price volatility while sustaining the net zero transition.
Seventh, compete for opportunities created by the net zero transition using comparative advantage as a guide. As demand for high-emissions products falls, jobs and output in some parts of the economy may be impacted. This will require reskilling and support to workers and affected communities.
Importantly, entirely new opportunities will also be created by the transition. As countries and companies begin to explore these areas, they should be guided by their potential to gain comparative advantages. Some countries could benefit from their natural endowments like access to sunshine or critical minerals. Other countries and companies may have technical know-how to help them manufacture the goods needed for the transition.
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