World leaders are facing the challenge of turning ambitious climate commitments into action. They are naturally focused on the essential goal of rapidly reducing global emissions. However, the critical work to ensure the success of the zero-emissions transition will require taking into account three additional objectives: affordability, reliability and industrial competitiveness.
Why? Because consumers and businesses may be less willing to embrace emissions reductions if energy becomes less accessible, and they may not want to switch to low-emission products if they are more expensive. Likewise, it will be difficult to sustain momentum towards net zero if the security of energy supply, the viability of domestic industry, or the availability of local jobs are at risk.
Start with affordability. If battery costs do not decrease sufficiently, or if electricity grids are not thoughtfully designed, the cost of electricity supplied could increase. Decarbonization of steel and cement production could increase production costs by around 15% or more by 2050.
The transition would also be at risk if the world failed to maintain a reliable supply of energy. An obvious example is that solar and wind energy are intermittent; without sufficient backup capacity, customers could experience blackouts. Poor execution could also compromise the reliable supply of inputs needed for the transition itself, such as minerals, clean manufacturing capacity, infrastructure, land and worker skills. Shortages of many minerals in the quantity needed for the transition could begin by 2030 or earlier due to the long time needed to bring new mines online. The approval and construction of nuclear power plants can take many years; the same applies to electricity transmission and distribution projects.
The third objective, industrial competitiveness, is also fundamental. During the transition to net zero, as happens during any major transition, some legacy industries and natural endowments will lose relevance, while others may see increased production costs. Managing these impacts will require careful planning. And without such planning, workers may struggle to acquire new skills and move to new jobs.
Contrary to all expectations, therefore, advancing the climate agenda means doing more than simply addressing climate change directly.
Cheap
First, we must address affordability by implementing low-cost climate solutions now and working to reduce the costs and increase the maturity of more expensive ones. Many solutions that cost less than $20 per ton of emissions abated don’t get the investment and attention they need. Among the major opportunities to consider, where advantageous and feasible: making the use of energy and materials more efficient; reduce methane emissions from fossil fuel extraction; implement so-called transition solutions, such as switching from coal to gas energy; and implement solutions, such as stopping deforestation, that reduce emissions and positively impact nature in other ways. Overall, low-cost solutions could reduce around 20 gigatons of greenhouse gases per year. (The world currently emits more than 55 gigatons per year.)
In parallel, the world must redouble its commitment to approaches that can unleash the power of the private sector to innovate and dramatically scale up new technologies: investment in research and development, venture financing, early market stimulation and sending the right demand signals, including others. Only about 10-20% of the emissions reductions needed by 2050 are expected to come from technologies that are currently fully commercially mature.
Together, these measures could have a significant impact on affordability. For example, consider that trillions of dollars will need to be spent each year to build low-carbon assets for the transition, potentially increasing pressure on government spending and raising challenges, especially for developing countries. We estimate that if the world today dramatically accelerated the implementation of low-cost solutions and doubled the expected rate of cost reduction of more expensive ones, the capital spending required to limit global warming to the levels envisioned by the Paris Agreement of 2015 could potentially be lower. , by a third or more, than it would otherwise be.
Reliability
Additionally, the world must redesign today’s physical and financial systems to safeguard affordability and reliability and realize tomorrow’s zero-emissions economy. A starting point is to systematically anticipate and address bottlenecks in the key inputs needed for the transition. Electricity systems will need to be rethought to reduce permitting and construction times, build and manage backup power capacity, expand transmission and distribution capacity, and improve resilience for a net-zero emissions world that runs on electricity. And financial systems will need to be created to reallocate capital to new climate technologies and direct capital to developing countries. In the short term, the world will also have to plan how to run two energy systems in parallel, gradually reducing the old, fossil fuel-based one, while enhancing the new one.
Industrial competitiveness
The climate agenda must include not only environmental policy but also labor and industrial policy. Many countries and companies are exploring the opportunities presented by the transition: building wind and solar farms, manufacturing electric vehicles, mining and refining new materials, and so on. In doing so, they should carefully consider their comparative advantage. For example, countries with exceptional access to sun or wind would presumably be the best candidates for producing green hydrogen, which relies on access to low-cost renewable energy.
The time is ripe for politicians and CEOs to lead the development of a path to zero emissions that is also affordable, reliable and competitive. This is the way to consolidate the progress made so far. Through human effort, ingenuity and collaboration, we can find a way out of the solution we have created and deliver better outcomes for all.
Mekala Krishnan is a partner at McKinsey Global Institute. Daniel Pacthod is a senior partner at McKinsey and global co-leader of McKinsey Sustainability. Sven Smit is a senior partner at McKinsey and president of the McKinsey Global Institute.
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