Moving to ‘net zero’ will cost £6.8 trillion a year, report warns

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Village of Mora in the province of Toledo, Castilla la Mancha, Spain, Europe.
Switching to a net-zero economy will be more expensive than thought, a new report has warned (Getty)

Moving to a net-zero economy is expected to require investments of up to £6.8 trillion a year, according to a new report.

The increase is equivalent to half of all company profits worldwide, or a quarter of global tax revenue, the consulting group McKinsey who authored the report said.

The calculation is far higher than most estimates, but McKinsey has said that these investments could be lucrative, and the cost of doing nothing would be far higher.

Reaching net-zero carbon emissions by 2050 would give the world a chance of capping temperature rises at 1.5 degrees Celsius above pre-industrial levels.

Experts believe this would allow the world to the worst fall-out from climate change.

McKinsey says that to achieve this will require spending of around £200 trillion on physical assets for energy and land-use systems (around £6.8 trillion a year, an increase of £2.6 trillion on current levels).

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The report said: "We find that the transition would be universal, significant, and front-loaded, with uneven effects on sectors, geographies, and communities, even as it creates growth opportunities.”

The amount of cumulative spending would be equivalent to about 7.5% of world output from 2021-2050, far higher than the 2-3% of global output that climate economists polled by Reuters in 2021 estimated was needed each year.

McKinsey put the difference down to the fact that the new report includes a broad view of spending by households, businesses, agriculture and forestry as well as some continued spending on high-emissions assets like fossil fuel-based vehicles.

The report said: "While these spending requirements are large and financing has yet to be established, many investments have favourable return profiles and should not be seen as merely costs.”

Stack of fiberglass insulation material. Mineral wool insulator for heat and cold protection.
The report considered all aspects of spending needed to slow down climate change. (Getty)

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Gernot Wagner, a climate economist at New York University not involved with the report, welcomed its attempt to come up with a comprehensive view of the investments needed.

"Climate policy means massive investment, and a massive rejigging of market forces from the current high-carbon and low-efficiency path onto a low-carbon and high-efficiency one," said Wagner.

"We just spent trillions of dollars because of COVID relief. So, would it be feasible? Yes. Would it involve massive changes? Of course, that too. Where is the money coming from? Ratepayers, taxpayers or shareholders?"

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The McKinsey report noted large uncertainties relating to how such a transition would play out.

The report warns that some populations and sectors would be more exposed than others to disruption, notably poorer countries and those reliant on fossil fuels.

It added: "The economic and social costs of a delayed or abrupt transition would raise the risk of asset-stranding, worker dislocations, and a backlash that delays the transition.

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