The transition to net zero will cost the world $275 trillion by 2050

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

Increased capital expenditure on physical assets for energy and land use equates to an average of $9.2 billion per year, an increase of $3.5 billion from current annual expenditures, McKinsey found in its latest study: The net zero transition: what it would cost, what it could bring.

The transition will also lead to significant labor reallocations, with an estimated 200 million direct and indirect jobs added to the labor market by 2050, offsetting the 185 million positions lost over the same period, according to the report, which assessed sectors that produce 85 percent. percent of global emissions, with a detailed assessment of 69 countries.

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

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

The $3.5 billion increase in spending is equivalent to half of global corporate profits in 2020, a quarter of total tax revenue or 7% of household spending in the same year, according to McKinsey.

While today 65% ​​of energy and land expenditures are spent on high-emitting products, in the future this trend will reverse, with 70% being spent on low-emitting products and enabling infrastructure.

“Taking into account expected spending increases as incomes and population grow, as well as currently legislated transition policies, the required increase in spending would be less, but still approximately $1 billion,” he said. added McKinsey.

Spending shifts would also take priority, according to the report, rising from 8.8% of global gross domestic product today to 6.8% of GDP between 2026 and 2030 before falling.

While these spending needs are significant and funding has yet to be established, many investments have positive return profiles and should not simply be viewed as costs, McKinsey said,

“Additionally, technological innovation could reduce investment costs for net-zero technologies faster than expected,” the company added.

While the effects of the transition will be felt globally and sectorally, the impact will be uneven, with the sectors most at risk being those working with high-emitting products or operations.

Low-income countries and those with significant fossil fuel resources will also be hard hit, as well as communities whose local economies depend on exposed sectors.

The most exposed sectors currently account for around 20% of global GDP, and an additional 10% of GDP is in sectors with high emissions supply chains, such as construction.

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

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

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

The energy transition must accelerate to reach the 1.5°C cap levels agreed in the Paris Climate Agreement, but if measures to lower the temperature will increase global GDP, in total, by 1, 6% by 2050, the necessary actions could reduce production by 3.6%. cent, resulting in a net decline of about 2% by 2050.

McKinsey said a poorly managed transition comes with risks, such as energy supply shortages and price increases, especially if the move to net zero is delayed or abrupt, which could lead to “grounding of assets and the dislocation of workers”.

A well-coordinated transition. on the other hand. could offer long-term rewards, such as lower energy costs, better health outcomes, and conservation of natural capital.

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

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

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

Ultimately, the transition to net zero will depend on the commitment of businesses, governments, institutions and individuals across the world, McKinsey said, with “a step change in mindset” required.

“The question now is whether the world can act boldly and scale up the response and investments needed over the next decade,” said Dickon Pinner, senior partner at McKinsey and co-director of McKinsey Sustainability.

Updated: January 25, 2022, 5:01 a.m.