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.
This sounds more like wistful optimism. Because there comes a time when renewable resources are too depleted to maintain an extraction economy, itself based on renewability. It would be more reassuring for a mega-delusional company like McKinsey to acknowledge this and analyze the long term accordingly. But no. They don’t. Except to state the obvious and hope it goes under the radar, “As reliance on renewables grows…. tight supply for raw material inputs… may compound energy price volatility and long lead times in the capital intensive mining sector.” As in “screeching halt?” Well, duh. So is it possible that after 30 years at 10tr$ a year we find ourselves effectively stranded with no resources left to maintain this miracle of renewability. How very ironic. But by then McKinsey and other like-mindlessness will have accumulated multiple trillions of tokens of former value. I wonder how many tokens of anticipated value could be salvaged by timely action in world-wide recycling and conservation?
I read the summary linked to below, but not the underlying report (it requires some sign up, perhaps Il try later), only
From that, I get a somewhat different idea than I got from the OilPrice article, but it might be a matter of interpretation. The 9.2 trillion figure is MK’s estimate of all capex spending in the sectors that they studied, regardless whether it is related to “net zero” or not. It breaks down to:
2.7 continued investment in “high emission assets” (seems mostly fossil fuel equipment and ICE cars)
2 continued investment in “low emission assets” (they have long list of what they count as such)
1 trillion “redirected” ( like people buying an electric car in 2030, who would have bought an ICE car in 2020)
3.5 extra investment in “low emission assets” .
The headline number of $9.2 trillion a year is misleading. The global economy already spends several trillion dollars a year on new and replacement infrastructure. The bottom-line number that matters is the incremental $3.5 trillion a year that McKinsey mentions in passing. Assuming modest growth in the global economy between now and 2050, we’re talking more like an incremental 2% of global GDP being diverted from something else to the generational task of saving global civilization. That’s in line with similar meta-estimates I’ve seen over the last few years. I’m not saying we’ll actually try to save global civilization. But in the greater scheme of things, 2%+ of global GDP is a bargain.
The bigger issue is that it only works if borrowing rates reflect the idea that having a future matters. We literally can’t afford it if everybody expects a 15% annual return on their decarbonization investment. It would be supremely ironic if civilization failed due to predatory financing.
Not ironic. moronic.
It ain’t called ‘disaster capitalism’ for nothing. Wait, isnt that ironic. “Dont ya think”.
I recall Econ prof’s often talking ‘assumptions’… ‘assume a basket of goods…’
I recall ‘Assume a 10% savings rate’ …
If Yves global gross GDP number is accurate at 90+ Trillion, an assumed 10% savings rate delivers the 9 trillion for infrastructure.
Since savings is a hedge toward the future (assume a future) we should be just fine? One would think
“Assume rational self-interest…” — infallibly delivering in the marvelous world of Mr. Market…
Frogs boiling in a simmering bath. Freedom Frogs!
Another factor to keep in mind: yearly spending on fossil fuels is several trillion/year (depending on the prices of that year). Some significant fraction of that would be saved as part of the net-zero effort.
Not all of that should count as real savings. Part of it is already counted in the capex figure (because fossil fuel revenue pays for fossil fuel capex). Some chunk of fossil fuel money ends up as goverment income somewhere, and would be replaced by other means. Part of it will be offset by increased opex on the “low emission” side.
But some remainder is real, reflecting a move from operational spending to upfront investment spending. That makes the numbers look worse if we only look at the investment side.
“net zero” means that by 2050 whatever we emit is balanced somehow. Doesnt mean any reduction at all. In fact it means we will emit more than today because of growth assumptions. So if more carbon means more heat then we’ll still be much hotter. Net zero is a scam to justify 30 more years of the current high extraction endlessly expanding economic system…
isn’t “net zero” basically “assume carbon capture tech works”?
always assumed it was a more technologically sounding ruse than carbon credits/cap & trade which are simple accounting scams and not fraudulently “rebuilding” forests in some place that those paying for said rebuilding will never visit to verify that it is genuinely occurring.
Well The Mckinsey plan is one way. Another, and more probable, way is do nothing efective.
” 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). ”
If one could convincingly demonstrate to borderline-greenish-maybe Americans how getting with that program could significantly degrade or even destroy the lives of the anti-green pro-fossil-fuel Americans who hate life and hate those who love life, perhaps one could get several million to several ten million borderline-greenish-maybe Americans to get with that program, if they could be realistically convinced that program could be weaponised against the enemies of life and survival.
we owe them money and they sometimes give us jobs to pay that money back.
until one can unloop from that system, good luck on “doing less, consuming less, creating less waste” cycle.
a certain small percentage doing the unlooping would just be a sad retread of the hippies doing back-to-the-land, and falling into the same problems which those hippies did.
sadly, i too dream of a parallel system developing to undermine the OverLords.
I didn’t say do nothing, consume nothing, create zero waste. I said ” do less of each”. One can certainly practice doing forms of that in the meantime unless and until a chance emerges to begin crafting a Real Parallel System.
In the meantime, those who want to can do the little they can do. And those who want to do nothing can do nothing. It is a choice.
choices, choices, choices
a matter of priorities–
Let’s not forget:
People also ask
How much is the military budget for 2022?
The budget funds five branches of the U.S. military: the Army, Navy, Marine Corps, Air Force, and Space Force. In May 2021, the President’s defense budget request for fiscal year 2022 (FY2022) is $715 billion, up $10 billion, from FY2021’s $705 billion.
10 years x $715b DoD budget = $7.15 trillion
to do it without depleting all the stuff we need to do it we need Radical Conservation and a Change in Capitalistic Driven Consumption
Energy consumption can be reduced with existing technology, with little investment, and with little real effort.
Here’s how –
Lighting is estimated to be about 25% of the electrical load. Widespread installation of LED light sources can reduce this by half. And not to mention the longer life, lower maintenance costs, lower installation costs.
Many large facilities operate the heating, ventilation, and cooling (HVAC) systems 24/7 365. Thus conditioning unoccupied spaces where HVAC is unneeded. Note that modern building automation systems can operate zones in the same building with differing conditioning/temperature requirements.
Gas turbine generating stations could be used for electrical generation AND supply low grade heat for agricultural drying, greenhouses, lumber drying, and so forth.
These can reduce cost, directly positively impact the effort to achieve “net zero”
Why is progress so slow on environmental issues?
Western companies couldn’t wait to off-shore to low cost China, where they could make higher profits.
Maximising profit is all about reducing costs.
China had coal fired power stations to provide cheap energy.
China had lax regulations reducing environmental and health and safety costs.
China had a low cost of living so employers could pay low wages.
China had low taxes and a minimal welfare state.
China had all the advantages in an open globalised world.
Environmentally friendly measures cost money and reduce profit.
The goal is to maximise profit.
Why do firms move to Mexico and export into the US?
Companies prefer Mexico with its cheap labour, lax health and safety standards, and lack of environmental regulations.
They can expose workers to hazardous chemicals and just pump toxic waste straight out into the environment, without incurring the costs associated in dealing with them in an environmentally friendly way.
Every avenue must be explored to reduce costs.
The lower the costs, the higher the profit.
The more environmentally friendly you are, the less internationally competitive you will be.
“ ….. today, authorities in Inner Mongolia approved restarting production at 38 open-pit coal mines to boost China’s supplies ….”
“Meanwhile, Chinese banks are financing a blizzard of new coal plants across South East Asia as part of the Belt and Road”
Coal is one of the cheapest forms of energy.
It will help them keep costs down.
As we shut down coal fired power stations in the West, new ones opened up in South East Asia.
“Show me the incentive and I’ll show you the outcome” Warren Buffet’s partner Charlie Munger
Environmentally friendly measures cost money and reduce profit.
That’s the problem.
The incentives push everyone towards being environmentally unfriendly.