McKinsey: fundamental transformation of global economy needed for net zero

Reaching net zero climate emissions by 2050 will require a “fundamental transformation of the global economy”, according to a report by McKinsey, one of the world’s most influential consulting firms.

It estimates that $9.2tn will need to be invested every year for decades to limit the global temperature rise to 1.5C and end the climate emergency. The sum is a 40% increase on current investment levels and equivalent to half of global corporate profits.

The report warns that the economic transformation will affect every country and every sector, with those most reliant on fossil-fuel-burning experiencing the most change. McKinsey, which advises many governments and large companies, also says the transition will be front-loaded with, for example, the cost of electricity rising before falling later.

However, the report says reaching net zero is vital to avoiding the most catastrophic impacts of global heating, which would harm billions of people, and that many low-carbon investments are opportunities for economic growth and would lead to a lower-cost, more efficient economy. It also says the transformation becomes more expensive the longer action is delayed.

“$9.2tn is a very big number – big enough for anybody to pay attention to,” said Jonathan Woetzel at the McKinsey Global Institute, the consultancy’s in-house thinktank, and an author of the report. “But it’s not an impossible number. It’s not like we haven’t [made transformations] before in other ways”, such as the global shift to urban living.

The economic transformation is from an economy that did not include the costs of environmental and social damage to one that does, according to Woetzel. “There will only be a sustainable economy, we won’t have any other kind.”

The report says the front-loaded transformation raises a “critical question” of who will pay and whether higher costs of electricity, steel and cement are passed on to people or whether those on low-incomes are protected by governments.

The goal of the report is to assess the scale of the economic transition required to reach net zero, assuming action is taken quickly, and concludes: “Achieving net zero would mean a fundamental transformation of the world economy.”

It estimates that investment in energy, transport, buildings, industry and agriculture would need to rise by $3.5tn, with an additional $1tn of today’s spending switching from high-carbon to low-carbon goods, such as electric cars and heat pumps. As a proportion of global GDP, the total investment required would be 6.8%, rising to as much as 8.8% between 2026 and 2030 before falling.

The McKinsey scenario suggests electricity costs could rise by 25% by 2040 before falling below today’s levels after 2050, because of the lower operating cost of renewable energy. Steel and cement face cost increases of about 30% and 45% respectively, it says.

Bob Ward, a policiy director at the Grantham Research Institute on Climate Change at the London School of Economics, UK, said: “The McKinsey investment figures are not the net costs of reaching net zero globally, but instead the upfront annual costs without taking into account the benefits.

“Investments in clean infrastructure will generate jobs, growth and huge savings, particularly by eliminating the need to buy ruinously expensive fossil fuels, and [will] yield much bigger returns when taking into account the avoided loss of lives and livelihoods from air pollution and climate change.”

The insurance firm Swiss Re recently estimated that the damage caused by a 2.6C rise in global temperature by 2050 would reduce global GDP by 14%. In October, the climate economist and life peer Nicholas Stern said: “The move to net zero can be the great driver of a new form of growth – the growth story of the 21st century.”

Related: Cop26: world on track for disastrous heating of more than 2.4C, says key report

“While the immediate tasks ahead may seem daunting, human ingenuity can ultimately solve the net zero equation, just as it has solved other seemingly intractable problems over the past 10,000 years,” the McKinsey report says. “The key issue is whether the world can muster the requisite boldness and resolve.”

If it does, the report says, the rewards would far exceed the avoidance of climate impacts alone because countries would have to work together and would then be better positioned to address other “age-old” geopolitical issues.

“That is a hopeful message, we believe, for people to realise that there’s a need to – and a capacity to – create greater global collaboration,” Woetzel said.