McKinsey report offers a comprehensive assessment of the economic transformation needed to reach net-zero emissions

AS commitments to reach net-zero greenhouse gas emissions by 2050 increase across the globe, the question of how these commitments can be met and the corresponding economic transformation managed becomes ever more central.

A new report from McKinsey & Company released today provides a more extensive view than other studies to date of the nature and magnitude of the economic changes needed to achieve that goal. The report, The net-zero transition: What it would cost, what it could bring, takes a look at the implications for demand, capital spending, production costs, and jobs in sectors that produce 85 percent of overall emissions, with an in-depth analysis of 69 countries.

“The net-zero transition will amount to a massive economic transformation. Actions by individual companies and governments, along with coordinated support for more vulnerable sectors, countries, and communities, would facilitate the economic and societal adjustments that will be required,” said Mekala Krishnan, a partner at the McKinsey Global Institute and lead author of the report.

The report assesses the transition along two dimensions: sectors and geographies. The analysis takes as its starting point and pathway to net-zero emissions the hypothetical Net Zero 2050 scenario from the Network for Greening the Financial System (NGFS). Findings include:

• The transition would be universal. All economic sectors and countries would be affected as the energy and land-use systems that underpin economies everywhere and generate emissions are overhauled.
• The scale of economic transformation would be significant. Capital spending on physical assets would total around $275 trillion through 2050—approximately $9.2 trillion per year – or an increase of $3.5 trillion on the annual spending today, as high-emissions activities are ramped down and low-emissions activities ramped up. For example, today 65 percent of energy and land spending goes to high-emissions products. In the future 70 percent would go to low-emissions products and enabling infrastructure, reversing today’s trend. Accounting for expected increases in spending, as incomes and populations grow, as well as for currently legislated transition policies, the required increase in spending would be lower, but still about $1 trillion.
• Extensive labor reallocations would be needed, with about 200 million direct and indirect jobs gained and 185 million lost by 2050 from the net-zero transition.
• The changes would be front-loaded. The next decade will be decisive. Spending would rise to 8.8 percent of GDP between 2026 and 2030, from 6.8 percent today, before falling.
• The impact of the transition would be felt unevenly across sectors, countries, and communities. Most exposed would be sectors with high-emissions products or operations; lower-income countries and those with large fossil fuel resources; and communities whose local economies depend on exposed sectors. The most exposed sectors currently account for about 20 percent of global GDP. Another 10 percent of GDP is in sectors whose supply chains have high emissions, such as construction. Low-income households everywhere would be most affected, for example due to up-front capital costs they would need to incur for low-emissions products like new heaters or electric cars.
• Economic shifts would be substantially higher under a disorderly transition. The transition comes with risks, including of energy supply shortages and price increases if it is not well managed. If it is delayed or abrupt, the transition would raise the risk of asset stranding and worker dislocations.
• For all the accompanying costs and risks, the economic adjustments needed to reach net zero would come with opportunities and prevent further buildup of physical risks. While the impacts will be unevenly distributed, a well-coordinated transition would pay dividends including the potential for a long-term decline in energy costs, improved health outcomes, and natural capital conservation. Areas for growth would be more efficient operations from decarbonization and the creation of new markets for low-emissions goods. Most importantly, reaching net-zero emissions and limiting warming to 1.5°C would prevent the most catastrophic impacts of climate change, including limiting the risk of feedback loops and preserving our ability to halt additional warming.

“A more orderly transition would not only avoid the worst impacts of climate change, but also have enormous benefits such as lower energy and production costs in the longer run. And the unity of intent and action it will require bodes well for solving other global problems. At the same time, the short-term risks of a poorly-thought transition must be reckoned with,” said Hamid Samandari, a McKinsey Senior Partner.

Achieving the net-zero transition will depend on the engagement of businesses, governments, institutions and individuals around the globe, requiring a wholesale shift in mindset, including preparing for uncertainty and near term risks, acting with greater resolve, unity, and ingenuity, and extending planning and investment horizons.

Stakeholders would also need to accelerate current efforts to decarbonize, capture opportunities, and adapt to physical risk.

“The economic transition to achieve net-zero will be complex and challenging, but our findings serve as a clear call for more thoughtful, urgent, and decisive action, to secure a more orderly transition to net zero by 2050,” said Dickon Pinner, Senior Partner at McKinsey and co-leader of McKinsey Sustainability. “The question now is whether the world can act boldly and broaden the response and investment needed in the upcoming decade.”

The research released today builds on McKinsey’s framework paper, Solving the net-zero equation: Nine requirements to for a more orderly transition, and is a follow-up to the 2020 publication Climate risk and response: Physical hazards and socioeconomic impacts, a yearlong cross-disciplinary research effort at McKinsey that focused on physical risk and the potential effects on people, communities, natural and physical capital, and economic activity, and the implications for companies, governments, financial institutions and individuals.

The full report from McKinsey Sustainability, the firm’s Global Energy and Materials and Advanced Industries Practices, and the McKinsey Global Institute will be available at: mck.co/netzerotransition.

The McKinsey Global Institute (MGI), the business and economics research arm of McKinsey, was established in 1990 to develop a deeper understanding of the evolving global economy. MGI's mission is to provide leaders in the commercial, public, and social sectors with the facts and insights on which to base management and policy decisions. MGI research combines the disciplines of economics and management, employing the analytical tools of economics with the insights of business leaders. Its "micro-to-macro" methodology examines microeconomic industry trends to better understand the broad macroeconomic forces affecting business strategy and public policy.

McKinsey Sustainability is the firm's client-service platform with the goal of helping all industry sectors transform to get to net zero by 2050 and to cut carbon emissions by half by 2030. McKinsey Sustainability seeks to be the preeminent impact partner and advisor for our clients, from the board room to the engine room, on sustainability, climate resilience, energy transition, and environmental, social, and governance (ESG). We leverage thought leadership, innovative tools and solutions, top experts, and a vibrant ecosystem of industry associations and knowledge partnerships to lead a wave of innovation and economic growth that safeguards our planet and advances sustainability. www.mckinsey.com/sustainability

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