McKinsey – Decarbonizing economy requires over USD 9 trillion per year

Achieving the goal of net zero emissions by 2050 implies global investments of USD 9.2 trillion a year, 3.5 trillion more than today, consulting firm McKinsey said in a report.

While governments and companies around the globe pledge to achieve decarbonization of the economy, McKinsey analyzed the necessary moves to achieve the ambition by 2050 in its report The net-zero transition: What it would cost, what it could bring.

The transition prevents further increase in climate risks

The transition would prevent a further increase in climate risks, the consulting firm found and added it would reduce the odds for the most catastrophic consequences of climate change. And decarbonization would also create new opportunities for economic growth, as it opens markets for low-emission products and services, the report said.

Complete changes in the economy

McKinsey lists the key stages and elements of the transition until 2050. All energy systems and every other sector must change universally and comprehensively.

The investments in the transformation of the economy are estimated at USD 275 trillion by 2050

The transformation of the economy towards carbon neutrality requires USD 9.2 trillion to be invested every year or USD 275 trillion in total by 2050, McKinsey points out. The sum is equivalent to 7.5% of the world’s gross domestic product, says the report. The consultants expect the largest increase between 2026 and 2030, to as much as 8.8% of GDP.

McKinsey envisions a further increase in energy prices

In McKinsey’s scenario, the delivered cost of electricity, or entire expenses, could increase by about 25% from 2020 to 2040. The firm also predicts that in 2050 the delivered cost of electricity could be about 20% higher than in 2020.

“In the long run, it is conceivable that the delivered cost of electricity could be on par or potentially less than 2020 levels because renewables have a lower operating cost – provided that the power system can find ways to overcome the intermittency of renewable power and build flexible, reliable, low-cost grids,” the consulting firm said.

The demand for electricity in 2050 will be twice as high as today

The report estimates the demand for electricity in 2050 would be more than twice as high as today and that the production of hydrogen and biofuels would increase tenfold from 2021.

Decarbonization is changing labor relations

Through the decarbonization process, many of the industrial sectors will have a production cost increase, so McKinsey estimates that the price of steel would rise by about 30%, and cement by 45% from the current prices.

The transition could lead to a redistribution of labor, the report said. About 200 million new jobs are expected in the renewable energy sector by 2050 alongside an estimated loss of about 185 million jobs, mainly in the fossil fuel industry. McKinsey points out the shift would be less significant in size and more in concentration and unevenness.

Low-income countries will be more affected by the transition

Lower-income countries and those that depend heavily on fossil fuel production and resources will be more affected by the transition, the authors underscored. The level of investment in the said market, expressed as a percentage of GDP, will have to be higher to achieve the goal of net-zero emissions by 2050, McKinsey said.

“Sub-Saharan Africa, Latin America, India, and some other Asian countries would require capital spending of about 10 percent or more of GDP, approximately one and a half times more than the capital spending in other regions such as Europe, the United States, and Japan, and deploying the capital may be more challenging for these regions,” the report adds.

Decarbonization as an economic opportunity

The analysis shows the transition to net zero emissions would have uneven effects on sectors, geographical regions, and communities, but that it would affect all countries and all sectors of the economy, directly or indirectly.

McKinsey points out in the report that the transition must be seen not as only onerous but also as an economic opportunity.

“The required economic transformation will not only create immediate economic opportunities but also open up the prospect of a fundamentally transformed global economy with lower energy costs, and numerous other benefits – for example, improved health outcomes and enhanced conservation of natural capital,” it said in the report on the transformation of the global economy.