Yves here. To put the McKinsey energy transition estimate in the headline in context, world GDP for 2021 according to Statista’s estimate is $94.5 trillion. Reporting that net zero will require 1/10th of world GDP starting now is tantamount to saying “Na ga happen”.
I will confess to not having read the underlying McKinsey document, largely due to lacking the subject matter expertise to catch questionable assumptions. However, it isn’t hard to guess that the McKinsey base case attempts to preserve present lifestyles and hence relies far more on deployment of new energy infrastructure….which takes time to get in place and will rely heavily on current largely dirty sources to build…than on business and lifestyle changes to curb energy use.
The Big Lie, on which a great deal of commerce depends, is that rising consumption is necessary to keep the proles happy. But as of all people, Paul Krugman, pointed out in the early 2000s, Europeans were happy to consume more in government (as in paying more taxes), presumably because they were happy with the services they got (particularly health care). Krugman opined then that European might be better at public services than we were (merely assuming less corruption would make that possible). He also noted that Americans appeared to want to consume bigger houses (which also entails more stuff to put in them) while Europeans wanted more holidays and leisure time.
Just think how much energy consumption could be reduced if Americans got with the program of less lavish houses (smaller spaces to heat and cool, fewer furnishings), more free time, and more of that time spent with friends and neighbors (local sports, gardening, card games, cooking groups, charities, other community activities).
By Tsvetana Paraskova, a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. Originally published at OilPrice
- McKinsey: Net-Zero transition will cost $9.2 trillion in annual investment till 2050
- This annual average includes investment in the energy, mobility, industry, buildings, agriculture, and forestry and other land-use sectors
- McKinsey: The impact of the energy transition will be uneven across countries and sectors
The energy transition will be a very expensive and complicated endeavor in which different countries and regions will be unevenly impacted, analysts and forecasters have been saying for years. The world cannot just flip the switch off on the current energy systems and start running on renewables, however noble, emission-reducing, and climate-protecting this sounds.
As a growing number of countries are committing to net-zero emissions by the middle of the century, or a decade or two later, all must start acting now if the world has any chance of meeting the Paris Agreement goals by 2050.
Yet, it is easier said than done.
The world is already spending trillions of U.S. dollars on energy transition efforts every year, but it needs more trillions of dollars, again, every year, in order to achieve net-zero emissions by 2050, one of the latest reports on the cost of the net-zero transition showed this week.
The cost is not measured in required investments only. Some industries and countries will be paying a higher cost to transform to net-zero than others. There is also another cost in the near term—the risk of a rushed and messy transition that would make energy markets and prices even more volatile than they are now, leading to risks of disrupted energy supplies and slower economic growth. High commodity prices of key energy transition metals—lithium, nickel, aluminum, copper, and cobalt—could also unravel years of cost reductions and delay renewable projects and EV targets due to commodity price shocks.
A net-zero global economy will not only need a significant reduction of emissions from the energy sector. It will also need more than the environmentalists’ favorite phrase, “keep it in the ground” suggests. Net-zero will need investments in transforming energy-intensive industries such as steel and cement making, and the construction, agriculture, and forestry sectors, among others.
Net-Zero Transition Will Cost $9.2 Trillion A Year
The transition required for the world to reach net-zero emissions by 2050 would need spending of $275 trillion between 2021 and 2050, or $9.2 trillion in annual average spending on physical assets, McKinsey & Company said in its new report.
This annual average includes investment in the energy, mobility, industry, buildings, agriculture, and forestry and other land-use sectors.
The estimated spending on all those needs to be $3.5 trillion per year more than today if the world is to achieve net-zero by 2050, according to McKinsey.
“To put it in comparable terms, that increase is equivalent to half of global corporate profits and one-quarter of total tax revenue in 2020,” McKinsey said in the report.
Findings from all forecasters have pointed out in recent years that net-zero will need much more investment than what the economies are currently allocating every year.
Investments in low-carbon energy need to triple if the world is to meet its Paris Agreement targets, the Executive Director of the International Energy Agency (IEA), Fatih Birol, said at the end of last year.
“There is a gross mismatch, and the longer this mismatch persists the greater the risk of further sharp price swings and increased volatility in the future,” Birol told the Financial Times in October.
Uneven Cost And Impact
The impact of the energy transition will be uneven across countries and sectors, McKinsey noted.
All sectors will be exposed to the net-zero push, but some much more than others, including coal and gas and those that sell products that emit greenhouse gases, such as the fossil fuel sector and the automotive sector. Currently, some 20 percent of global gross domestic product (GDP) is in these sectors, McKinsey says in its hypothetical scenario, which, it noted, is neither a prediction nor projection.
“Many of these sectors would also incur cost increases as they decarbonize. For example, steel and cement production costs would rise by about 30 percent and 45 percent, respectively, by 2050, compared with today, in the scenario we analyze,” McKinsey said.
Spending on the net-zero economy will also be unevenly distributed around the world. Developing countries and producers of fossil fuels will have to spend more as a share of their GDP than other countries. In the case of sub-Saharan Africa, Latin America, India, and other Asian nations, this spending would be about 1.5 times as much as advanced economies—or more—according to McKinsey.
On a side note, the developing countries in Southeast Asia and Africa—those that cannot afford to splash trillions of U.S. dollars on anything—are also those most exposed to the effects of climate change.
Net-Zero Transition Is Exposed To Risks
“One of the most immediate risks is that of a disorderly energy transition, if the ramp up of low-emissions activities does not take place fast enough to fill gaps left by the ramping down of high-emissions activities,” McKinsey said.
Soaring energy prices could create a backlash that delays the transition, it added, noting the importance of the careful management of the transition to spare the world more shocks in energy supply and prices, as the energy crisis in Europe shows.
“As reliance on renewables grows and investment in fossil fuel-based power generation declines, tight supply for raw material inputs for technologies like solar panels and batteries may compound energy price volatility given long lead times in the capital-intensive mining sector,” McKinsey’s analysts say.
Renewables are breaking records in annual installed capacity, but they will still need to double new annual capacity over the next five years, the IEA said last month.
Despite the record additions in 2021, and an expected 50-percent increase in renewable capacity additions in 2021-2026 compared to 2015-2020, the industry needs even faster deployment of solar, wind, and all other renewable energy sources if the world still hopes to get on track to meet net-zero by 2050, the IEA said in its annual Renewables 2021 Market Report with a forecast to 2026.
The soaring prices of key metals used in batteries and in solar panels or wind turbine manufacturing—including copper, lithium, aluminum, PV-grade polysilicon, and steel—could delay some 100 GW of contracted renewable capacity due to commodity price shocks, the IEA warned in December.