Though there has been meaningful momentum, the world is not on track to achieve the goal enshrined in the Paris Agreement of limiting warming to well below 2°C or ideally 1.5°C. To meet that goal, countries and companies have committed to reaching net-zero emissions of CO2 and reducing emissions of other greenhouse gases. But there has not been enough progress. The share of primary energy produced by renewable sources, for example, has risen slowly, from 8 percent in 2010 to 12 percent in 2021. If emissions stay on their current trajectory, estimates from various sources suggest, net zero would not arrive even by the end of the century.
A successful net-zero transition will require achieving not one objective but four interdependent ones: emissions reduction, affordability, reliability, and industrial competitiveness. A poorly executed transition could make energy, materials, and other products less affordable, compromising economic empowerment. It could also make the supply of energy and materials less secure and resilient, and it could render some countries and companies less competitive. If that happened, progress toward net zero itself could stall.
Our research has found practical ways to address those objectives simultaneously. Seven principles can help stakeholders successfully navigate the next phase of the transition. For example, deploying lower-cost solutions and driving down the cost of more expensive ones could bolster affordability. Managing existing and emerging energy systems in parallel could make access to energy more reliable. Seeking opportunities by using comparative advantage as a guide could help countries bolster their competitiveness.
Following those principles could substantially improve the world’s current trajectory. We examined the potential implications of applying two principles: deploying more lower-cost solutions and using R&D and other measures to double the expected rate of cost declines. Our illustrative analyses found that doing so could substantially improve the current trajectory of emissions and help limit warming to what the Paris Agreement envisions. Capital spending on low-emissions technologies would potentially be one and a half to two times as large as it is now—as opposed to about three times, as might be the case if the two principles were applied less extensively.
Embracing a change of mindset can help the world move closer to net zero. In addition to global commitments to reach net zero in the future, stakeholders should commit to making more and more progress every year and doing so in a way that addresses all four objectives.
Today, the world is undertaking the net-zero transition, an ambitious effort to reach net-zero emissions of CO2 and reduce emissions of other greenhouse gases (GHGs). The goal of the transition is outlined in the Paris Agreement adopted at the United Nations in 2015: to limit global warming above preindustrial levels to well below 2.0°C, and ideally to 1.5°C. Doing so would reduce the odds of initiating the most catastrophic impacts of climate change.1See Global warming of 1.5°C, Intergovernmental Panel on Climate Change (IPCC), 2018. According to the Intergovernmental Panel on Climate Change (IPCC), limiting warming to 1.5°C would require reducing GHG emissions by 43 percent between 2019 and 2030 and cutting net emissions of CO2 to zero by around 2050.2Climate change 2022: Mitigation of climate change, IPCC, 2022.
A donut-style pie chart plots the sector share of global annual carbon dioxide equivalent emissions in 2019. Energy and materials systems account for 76%, including industry, power, transportation, and buildings. Land-use and other systems make up the remaining 24%, including agriculture, forestry and other land use, and waste.
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The problem is not just the scale of spending on low-emissions technologies but also what it would fund. Our past research has found that partly because many low-emissions technologies will not be cost competitive by 2030 under current policy frameworks, only 50 percent of the capital spending on those technologies needed by then to eventually achieve net zero could occur without additional societal commitment.20From poverty to empowerment: Raising the bar for sustainable and inclusive growth, McKinsey Global Institute, September 2023. That 50 percent includes both a continuation of today’s spending levels and increased spending likely under current policy frameworks. Examples of such commitment include new public spending (which may be difficult) and additional policy measures, such as carbon prices.
A diagram shows four equally sized illustrations, with arrows connecting each one to all of the others, representing the four interdependent objectives of a successful net-zero transition discussed in the text of the article: emissions reduction, affordability, industrial competitiveness, and reliability.
A poorly executed transition could also compromise the reliable supply of energy and the resiliency of energy systems, and it could affect the inputs needed for the transition itself. For example, when solar and wind power are low—such as at night or on windless days—poorly designed energy systems might not provide regions with enough storage, firming capacity, or other ways to meet demand reliably. Also, the transition will require many physical inputs: materials and manufactured goods, water, land, infrastructure, and labor. If the transition is not well executed, especially in the near term, the supply of those inputs could be insufficient for what is needed, leading to shortages and slowing the growth of new energy systems. Past McKinsey research has found that shortages of many minerals used in making EV batteries, wind turbines, and other low-emissions technologies could begin before 2030, caused by rapidly growing demand from the transition and the long time it takes to bring new mines on line (five to 15 years, in some cases).32Patricia Bingoto, Michel Foucart, Maria Gusakova, Thomas Hundertmark, and Michel Van Hoey, The net-zero materials transition: Implications for global supply chains, McKinsey & Company, July 2023. The shortages could also have price implications; research estimates that if they are not addressed, the price of nickel, cobalt, and lithium could increase by several hundred percent from 2020 levels in a net-zero scenario over the next decade.33Nico Valckx, Andrea Pescatori, and Lukas Boer, “Metals may become the new oil in net-zero emissions scenario,” VoxEU, November 5, 2021. Furthermore, the supply of raw materials is often concentrated, creating potential risk from supply chain disruptions. Three countries or fewer account for the extraction of 80 percent or more of several critical minerals. Refining is often even more concentrated.34Mineral commodity summaries 2023, US Geological Survey, January 2023. And long approval times can slow deployment; in the United States, the typical electrical power project requesting connection to the grid took an average of five years in 2022.35Joseph Rand et al., “Queued up: Characteristics of power plants seeking transmission interconnection as of the end of 2022,” Lawrence Berkeley National Laboratory, April 2023.
Affordability, reliability, and industrial competitiveness are independently important objectives. But if the transition risks compromising them, a separate problem could result: a derailing of momentum toward net zero (Exhibit 4). Affordability may be the most important objective in that respect. Citizens may be less willing to embrace the transition if energy becomes less affordable. Some consumers and companies may not want to switch to low-emissions products if they are unfamiliar or more expensive. Conversely, the more cost competitive the technologies needed for net zero become in relation to traditional, established alternatives, the easier it will be to fund and build them. But reliability and competitiveness matter too. If the transition were to challenge the secure supply of energy and materials, or the availability of jobs and economic opportunity, it could be harder to sustain momentum toward net zero.
4
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A pair of flow-chart diagrams repeats the four illustrations from the previous exhibit depicting the four interdependent objectives. The first diagram starts with emissions reduction and depicts that objective introducing compromising effects on the other three objectives. Arrows flow out from those three, then merge into a single arrow that circles back around to the beginning, representing derailed momentum for emissions reduction. The second diagram is set up in the same way, except with emissions reduction introducing complementary effects on the other objectives. And the arrow that circles back to the beginning represents boosted momentum for emissions reduction.
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If, however, emissions can be reduced while affordability, reliability, and industrial competitiveness are advanced, the transition’s momentum could be boosted. For example, if more low-emissions technologies become cost competitive, capital will be likelier to flow to them. And if investing in the transition creates more opportunities for countries and companies to compete, they could be more likely to embrace the transition. A successful net-zero transition will therefore require achieving not one objective but four interdependent ones.
A well-managed transition would follow seven principles
How can the world reduce emissions in line with the Paris Agreement and do so while maintaining—and potentially improving—affordability, reliability, and industrial competitiveness? To start answering that question, we have identified seven principles that describe how decision-makers should approach this next phase of the net-zero transition (Exhibit 5).
5
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A diagram arranges the seven principles into a circle. The first three are about allocating spending effectively: Create incentives to deploy lower-cost solutions; drive down costs of expensive solutions; and build effective financial mechanisms to drive capital where it is needed. The next two are about redesigning physical and energy systems: Anticipate and remove bottlenecks for materials, land, infrastructure, and labor; and revamp energy markets and planning approaches for an electrified world. And the last two are about navigating risks and oppotunities: Manage existing and emerging energy systems in parallel; and compete for opportunities created by the transition, using comparative advantage as a guide.
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The first three of those principles show how the world can undertake actions now to reduce the spending needed for a given amount of abatement and thus make the transition more affordable. The next two show how to redesign physical and financial systems in ways that can protect affordability and reliability over time. And the last two show how preparing for risks and opportunities can further all three objectives.
The principles do not provide one-size-fits-all answers to all the questions that stakeholders will confront. Rather, they provide a framework that can guide stakeholders as they navigate the next phase of the transition.
Allocating spending effectively
Our first three principles involve ways to allocate spending on the net-zero transition as effectively as possible. Deploying inexpensive solutions now would result in faster abatement of GHG emissions now. Driving down the cost of expensive solutions would make them ready to deploy when the time comes. And building effective financial mechanisms would help move capital where it is needed to fund the transition.
Later in this report, we describe an experiment that we performed to explore the possible results of applying the first two principles. Doing so, we find, might be able to improve the world’s current emissions trajectory and help limit warming to what the Paris Agreement envisions. Capital spending on low-emissions technologies would potentially be one and a half to two times as large as it is now—as opposed to about three times, as might be the case if the two principles were applied less extensively. Such an approach may therefore warrant closer examination and more exploration.
A bar chart plots the potential contribution to net carbon dioxide equivalent reduction in 2030 for 15 different solutions. Listed first are solar power; carbon dioxide abatement in agriculture and land use; and wind power, each of which could abate more than 3 gigatons for less than $20 per metric ton. Listed next are solutions that could each abate 1–3 gigatons for that cost: transportation efficiency and modal shift; non-carbon dioxide abatement in waste and industry; methane abatement in coal, oil, and gas operations; energy efficiency in buildings; and energy efficiency, materials efficiency, enhanced recycling in industry. The rest could abate less that 1 gigaton for that cost: other low-emissions power capacity (such as nuclear and geothermal); nitrous oxide and methane abatement in agriculture and land use; biofuels; building electrification and other decarbonization measures; industrial electrification; carbon capture in power and industry; and electric vehicles.
Therefore, as stakeholders consider scaling up future spending for the next phase of the transition, they should ask themselves what opportunities exist to accelerate the deployment of lower-cost solutions. Various obstacles stand in the way, however. Some of the solutions would need to be executed at an enormous scale to have a meaningful impact on emissions; improving energy efficiency in millions of homes is a good example. Others call for changes to daily routines or lifestyles, such as altering modes of travel. Still others, particularly the transition solutions, may be perceived as temporary fixes and therefore ineffective.
Principle 2: Drive down costs of expensive solutions. At the same time, many of the technologies that the world needs to reach net zero are not yet cost competitive. The IPCC estimates that by 2030, more than 20 metric gigatons of GHGs could cost more than $20 per metric ton to abate, and 14 metric gigatons could cost more than $50 per metric ton.49Climate change 2023 synthesis report, IPCC, 2023.
A stacked bar chart breaks down the share of carbon dioxide emissions reductions from technologies needed to reach net zero by 2050. Technologies in the concept, prototype or demonstration stage account for 35–45% of the emissions reduction, technologies in the early market stage account for about 45%, and commercially mature technologies account for 10–20%. A second chart plots the evolution of one representative technology, solar photovoltaic modules, through each of those thee stages. A sequence of circles is arranged from left to right in a timeline, starting in 1975 with a large circle representing the technology's $106 cost per watt. The circles shrink steadily, to $30 in 1980 and $5 in 2000, with color coding signaling a shift from the demonstration stage to the early market stage in the early 2000s. The circles continue shrinking to 20 cents in 2020, when another color-coding change signals the beginning of a shift to commercial maturity.
Even commercially mature technologies may need help if they are still seen as risky or if moving to them from older technologies causes consumers to incur switching costs. One way to accelerate their deployment is to drive financial flows to them; see our next principle for more.
For companies looking to systematically drive down costs, a crucial step is setting ambitious goals that can help focus their attention and efforts. Consider Tesla’s master plan, which has set an ambitious agenda to reduce battery costs by 56 percent between 2020 and 2025.57“Battery day presentation,” Tesla, September 2020. And society and industry need to be focused on reducing the cost not just of individual technologies but of entire systems.
Principle 3: Build effective financial mechanisms to drive capital where it is needed. Financial markets and institutions are key actors in effectively allocating capital. They do so by channeling money efficiently from providers of capital to investments. But those markets and institutions face two challenges in facilitating a capital reallocation as large and complex as the net-zero transition.
First, low-emissions technologies are still nascent in some sectors and not yet cost competitive in others, and their risk-return profiles differ from those of traditional alternatives. Providers of capital may therefore have a hard time evaluating their viability and risk and may be hesitant to lend to them or invest in them. Second, consumers and companies may have a limited appetite to move to these new technologies, which can affect demand for climate finance.
Innovation, as we noted earlier, can play an important role by ensuring that low-emissions alternatives continue to become cost competitive. But a number of additional solutions could help accelerate the necessary reallocation of capital. Those solutions would reduce the risk of investments, better match capital providers with the investment needs that are most suitable for them, or unlock demand for climate finance.
Another opportunity is expanding and revamping existing sources of capital, such as project finance. In developed markets, environmental, social, and governance indexes, climate indexes, green bonds, and sustainability-linked loans have also gained popularity. However, concerns are growing that these instruments are not working well. Improving the functioning of such instruments—for example, by crafting better standards or formulating better ways of verifying that the standards are actually met—can help increase their effectiveness.
Entirely new asset classes and funds could be built as well. Industrial venture capital funds, which tend to play an active role in a technology’s early stages, and growth infrastructure funds, which can be instrumental in bringing a mature technology to scale, could be developed to drive capital to climate solutions. Special-purpose vehicles, which manage financial resources for a clearly defined purpose and period, could help companies continue funding high-emitting assets that remain necessary in the near term—but for a specified period and with a clear plan for winding them down. Sustainable land and forestry funds could help preserve forests, and “brown-to-green” funds could help carbon-intensive companies decarbonize.
Scaling up blended finance could also help increase capital flows. Blended finance combines public and private capital, reducing the risk faced by private capital providers. Philanthropic capital can play a part as well. Because public capital is often limited, it is important that it be carefully channeled into areas where the need is most acute, such as supporting the transition in lower-income or lower-middle-income countries. For example, those countries may be investing in raising energy access, but doing so with low-emissions technologies could incur high capital costs. Various reforms are also being considered to ensure that blended finance, grant funding, and loans on concessional terms are used to their full potential, such as increasing the funding available via multilateral institutions and adjusting the terms on which it can be provided.60By multilateral institutions, we mean those that are funded by the governments of more than one country. See Scaling up blended finance in developing countries, OECD, 2022; and Strengthening multilateral development banks: The triple agenda, Independent Expert Group commissioned by Indian G-20 Presidency, 2023. Also, implementing blended-finance projects can be slow; to address that problem, financial institutions and multilateral institutions could develop “off-the-shelf” guidance on general financing structures and frameworks that could then be tailored to different needs.
Companies can use the various sources of capital discussed above, such as project finance or brown-to-green funds. But they could also reallocate their own capital resources from high- to low-emissions businesses. That often involves making large capital investments or transforming large physical assets. The step is not a straightforward one, and it will require creating incentives for companies to make the investments. Long-term purchase agreements, for example, provide companies with a guaranteed source of revenue over an extended period, giving them an incentive to invest in new technologies.
All these solutions would need to be supported by more transparency and a better understanding of the potential demand, costs, and risks of specific new technologies and projects. Climate-related disclosures could help, and so could efforts by companies and financial institutions to build capabilities to better assess new risk-return profiles and identify new opportunities.
Redesigning physical and energy systems
The net-zero transition calls for far-ranging changes to many existing systems. Some of those systems provide the physical inputs necessary to build low-emissions assets; others provide energy. If not performed well, the changes could compromise affordability, reliability, and the pace of emissions reduction. The next three principles show how to make the changes effectively.
Principle 4: Anticipate and remove bottlenecks for materials, land, infrastructure, and labor. The transition will call for increases in the supply of certain minerals, such as lithium and nickel, and of manufactured goods, such as wind turbines and electrolyzers. It will require substantial amounts of water for mining, hydrogen production, and other uses. It will also require a great deal of land for solar panels, wind farms, transmission infrastructure, forests, and crops that could be turned into biofuels. Infrastructure, such as EV charging networks, electrical grids, and hydrogen pipelines, will need to be scaled up. And a great deal of labor will be needed to build and operate new physical assets.
The potential supply of those inputs will generally not be a limitation. For example, enough mineral reserves exist to meet the demand expected under the net-zero transition. But various bottlenecks could limit access, especially in the near term. This is not an unprecedented problem; bottlenecks have threatened high-emissions supply chains in the past, and they have been managed effectively. But if the bottlenecks threatening the transition are not also managed effectively, material shortages and price spikes could result, impairing affordability, reliability, and the pace of the transition.
Another potential bottleneck is concentration. For example, China produces more than 70 percent of the world’s silica-based solar photovoltaic modules and two-thirds of battery cells.65Energy technology perspectives, International Energy Agency, March 2023. While concentration can bring efficiency gains, it can create supply-chain bottlenecks if supply from the few sources is affected—say, by natural disasters or trade restrictions.
A multitude of constraints can affect the supply of land. Those constraints do not include the amount of land available in the world, but they do include the natural endowments of a given region (such as sunniness, windiness, and forests), competing priorities for land (for example, agriculture), local regulations, and public sentiment. As for labor, the availability of necessary skills is a potential challenge. Nuclear power could face shortages of workers with the required expertise because many are now reaching retirement age.66“Nuclear industry census reveals positive signs of growth alongside workforce challenges,” Nuclear Industry Association, January 25, 2022. Similar challenges could exist for other jobs related to the manufacture and installation of low-emissions technologies.67World energy employment 2023, International Energy Agency, November 2023.
Stakeholders should therefore conduct analyses of where bottlenecks could emerge and take measures to remove them. Some ways of doing so would increase the supply of inputs. Long-term supply contracts, such as those that are forming between auto manufacturers and minerals producers to provide lithium used for battery technologies, help individual manufacturers secure supply of key inputs over long periods while supporting the scale-up of capacity for new materials.68“LG Energy Solution and Toyota sign long-term battery supply agreement to power electric vehicles in the U.S.,” Toyota, October 4, 2023. And workforce retraining programs could increase the supply of workers with the necessary skills quickly. For example, teaching technicians who already install heating, ventilation, and air-conditioning systems how to install heat pumps could be a fast way of building a capable workforce.
Other measures would reduce the demand for inputs. Examples include recycling materials, developing new battery chemistries that rely less on raw materials that are in short supply, and replacing dated wind turbines in existing windmills with newer, more efficient ones, thus reducing the amount of land needed for a given supply of electricity.
The first is that companies may not have incentives to build and operate all the necessary generation capacity. Many markets currently use marginal costs (which are typically driven by the cost of using a fuel, such as gas or coal) to set electricity prices, and those prices serve as incentives to build capacity. But that arrangement will not work in a system in which generation assets have no marginal costs or low ones—examples are wind and solar power—because the resulting electricity prices would be very low and volatile, and generators would receive almost no payments for the power they supplied, on average (Exhibit 8).
8
The second challenge is that wind and solar power are intermittent. That is, they provide electricity only when the wind is blowing or the sun is shining. Therefore, planners and market designers need to ensure that the right plans and market signals exist to drive investment in assets, such as energy storage and gas plants, that can support wind and solar power.
A number of steps could start addressing these challenges in both regulated and deregulated markets for electricity. To build low-emissions assets affordably, power companies in regulated markets could either take on the job themselves, reducing costs through internal efficiency improvements, or issue competitive bids for other companies to do it. In deregulated markets, auctions for supply agreements will probably still be critical. In both kinds of markets, solar and wind power (or other forms of capital-intensive power) need to be able to compete on a level playing field with generation technologies that have relatively low capital costs but high fuel costs.
To help keep supply aligned with demand, a system depending on solar and wind power will also need to build a great deal of flexible capacity—that is, capacity that can provide electricity when wind and solar cannot.74Note that flexible capacity does not necessarily call for fossil fuels; renewable resources often provide some capacity during critical times. Similarly, fossil fuels are not a sure bet at such times, as Texas’s experience in 2021 demonstrates. (Flexible capacity is sometimes called resource adequacy, depending on the location and the length of time that the capacity covers.) Some of that flexible capacity would support wind and solar over the course of a day; for example, batteries could store solar power during the day and release it in the evening. In regulated markets, a procurement authority could require generators to make available a certain amount of such capacity. In deregulated markets, it could be attained by requiring assets to compete against each other to provide it.
Compensation mechanisms would have to change to give companies incentives to provide this kind of capacity. In regulated markets, planners could determine the amount of capacity needed and allow companies to build or maintain more assets to cover the need, compensating them with a regulated return on those assets. In deregulated markets, other compensation mechanisms, such as a price paid per gigawatt of flexible capacity, would provide incentives for companies to build or maintain assets well in advance of the need, because power capacity cannot be built overnight. Acceptable system risks would also need to be defined.
Flexibility will be critical regardless of the generation mix as more and more parts of the economy become electrified. Planning mechanisms will be necessary to determine the need—for example, which seasons and types of events present the greatest challenges and how much electricity will be needed to maintain reliability. A particularly important planning tool in determining how much capacity a resource can provide during critical times is probabilistic modeling, which can account for variations in demand for electricity and for intermittent supply.
Not only the generation of electricity but also its transmission faces a challenge: the transmission capacity necessary for the transition needs to be built. The challenge exists both for large-scale, high-capacity lines that would cover long distances and for smaller lines that would connect them to generators. There is no shortage of capital seeking to build large-scale transmission in many developed countries. The problem, rather, is planning procedures that assess only the reliability value of a single line. More modern planning procedures—which evaluate a portfolio of transmission lines and value several benefits, such as resiliency, access to clean energy, and economic development—are increasingly being adopted. Such procedures should balance costs and benefits among jurisdictions to account for their different approaches. Another reason for not building transmission capacity is permitting, as this report discussed earlier.
The distribution of electricity likewise faces a challenge in the transition. In many places, regulations provide utilities with most of their returns on the basis of their nondepreciated capital assets. That system gives the utilities an incentive to deploy more capital than they otherwise might. Several countries, such as Italy, are therefore planning to shift to models that reward total spending, not just capital spending. Such models could give utilities an incentive to be more capital efficient, which could lead to shifts in behavior, such as repairing assets (which does not always count as capital spending) rather than replacing them (which does).
Another area that could require market changes and planning focus is distributed energy resources, such as rooftop solar panels. Such resources could potentially reduce spending on transmission and distribution, and they could also provide small-scale flexible capacity. However, as use of distributed energy grows, its users will naturally depend less on utilities, requiring the utilities to plan carefully. Establishing clearer standards for compensating consumers for these resources will be vital.
Navigating risks and opportunities
If the world is to protect affordability and reliability during the net-zero transition, it will also have to navigate risks while moving from an old energy system to a new one. And to become more competitive, countries and companies will have to prepare for the many opportunities offered by the transition.
Principle 6: Manage existing and emerging energy systems in parallel. The net-zero transition will entail revamping how the world produces and uses energy. As that happens, the world will need to run two energy systems in parallel, smoothly ramping down the old, fossil fuels–based one while scaling up the new. Doing so well can help reduce emissions to net zero while ensuring reliable and affordable access to energy.
Three line charts show demand scenarios through 2050 for oil and other liquid fossil fuels, natural gas, and coal. The oil chart plots actual demand of about 90–100 million barrels a day from 2010 to 2020, where it splits into 11 lines following different demand scenarios from McKinsey GEP, the IEA, and the IPCC, which range from about 35–105 by 2050. The gas chart plots actual demand of about 3.5–4 trillion cubic meters a year over the 2010s, after which the 11 scenario lines begin and spread from 1–5 trillion by 2050. The coal chart plots actual demand of about 5.5 billion metric tons of coal equivalent a year over the 2010s, after which the 11 scenario lines begin and descend to 0.5–4.5 billion by 2050.
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For oil demand, some of the scenarios show growth during the next few years, but then the picture changes. In all of the scenarios examined here, demand eventually starts to fall, and in most, it is lower by 2050 than it is today, though to varying extents. A key driver of the variation in projected demand for oil is the transportation sector—specifically, the use of EVs and the efficiency of transportation.
Gas demand is also expected to grow in the near term in some of the scenarios we examined. Over time, though, some scenarios show increases in demand between now and 2050, while others show declines. The overall impact on demand would depend on how various factors pushed it up or down. Faster declines could be caused by a more rapid increase in the use of renewable energy for power generation, growing electrification to replace the use of gas (particularly in heating systems in buildings), and a shift away from natural gas in industrial processes. But some transition-related solutions could push gas demand up: using gas to produce hydrogen, switching from coal to gas to generate electricity, and using gas power to provide firming capacity for renewable power generation. Using gas as a feedstock for chemicals could also increase demand.
And for coal demand, all scenarios show declines. The steepness of the declines depends in particular on how demand in India and China, the world’s biggest consumers of coal, evolves.
Stakeholders approaching the management of two energy systems in parallel should therefore consider two implications. First, in scenarios in which warming is kept to the levels envisioned by the Paris Agreement, the process of shifting from the old energy system to the new means that oil, gas, and coal will play at least some part in the energy mix in the next few years. So it is vital that direct emissions from their operations be as small as possible.
Second, these numerous scenarios show that although demand for oil and gas will be lower in 2050 than it is today—substantially lower, on a 1.5°C trajectory—the decline will not be immediate. In the interim, it will be important for demand to be met with enough supply so that access to energy is reliable and affordable. At the same time, however, it will be absolutely critical to ensure that reliance on the old system, to the extent needed, does not slow momentum toward the new.
A combination chart uses area to plot supply projections and lines to plot demand scenarios for crude oil and natural gas liquids. The supply plot starts in 2020 at about 88 million barrels a day, peaks at about 92 million in 2023, and then descends to about 45 million by 2040. The demand scenario plot includes 11 lines, the same scenarios from the previous exhibit, starting in 2020 at about 90–100 million and spreading out to a range of 50–100 million by 2040 and 25–100 million by 2050.
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And depending on how demand for gas evolves, new infrastructure may be needed, in particular for pipelines and for facilities that transform gas into liquefied natural gas (LNG) and then back. In the United States, for example, new pipeline infrastructure may be needed in parts of the country to supply gas to support renewable power systems. Likewise, Asia has only modest gas reserves of its own, so it may need new facilities to service LNG imported from abroad.
These analyses point to a number of solutions that could help manage two energy systems effectively in parallel. First and foremost, it will be critical to scale up the new energy system as quickly as possible. This could be done by expanding alternative energy sources, changing end-use sectors, and improving energy efficiency, as we have described in depth elsewhere in this report. But more is needed.
Another step is for decision-makers to undertake fossil fuel–related investments in ways that provide as much energy as necessary and prevent price volatility but also maintain momentum toward net zero and do not risk locking in the use of fossil fuels. Increasing the efficiency and effectiveness of existing operations to maximize production—for instance, through improved management of reservoirs—is one opportunity. Another, to the extent new projects are needed, is deploying capital in a modular fashion. That is, rather than investing in projects that require large, up-front capital outlays in return for long useful lifetimes, companies could identify opportunities for which capital can be deployed in segments. Also, projects with low emissions intensity could be prioritized.
But even as the transition reduces demand and affects some parts of the economy, it will also create new opportunities for countries and companies to participate in a net-zero economy. Some of those opportunities are direct ones involving low-emissions products and processes: improving the energy efficiency of heating systems, building wind and solar farms, manufacturing EVs, and so on. Those opportunities will in turn create others, such as extracting and refining new materials needed for the transition, crafting new financing mechanisms, and building infrastructure, such as EV charging stations. As we discussed above, many net-zero technologies are already commercially mature, while others are in the early market stage and ripe for further development. Building and scaling up new green businesses can boost jobs, exports, and economic output (in both developed and developing countries); they can also create value for companies.
Customizing net-zero strategies for different countries
A line chart plots global per capita carbon dioxide equivalent emissions from 2000 to 2019, with different lines separating grouping countries by income: High income countries had the highest emissions but trended downward, from 17 to 14 metric tons per capita. Upper-middle countries trended upward, from 5 to 9. Lower-middle and low income countries remained flat at 1.5–2.5. Additional charts compare the income categories further, with donut style pie charts showing upper-middle income countries leading with a 50% share of global emissions, and circle area charts showing upper-middle income countries leading with 24 metric gigatons of carbon dioxide equivalent emissions. And stacked bar charts show a breakdown of emissions by sector for each group, with industry holding the largest share for high, upper-middle, and lower-middle income countries, and agriculture holding the the largest share for low-income countries.
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The nature of emissions also varies from country to country. A large share of high-income countries’ emissions is from energy production, buildings, and transportation. In upper-middle-income countries, emissions resulting from energy production and industrial use are high. In low-income countries, emissions are relatively low from energy use but high from agriculture. Therefore, the priority for some countries may be energy-related emissions; for others, emissions from agriculture. But all countries will need to consider where there are opportunities to deploy underused lower-cost solutions and where transition solutions may be most appropriate (see principle 1).
All countries will also need to consider their opportunities to pursue three priorities simultaneously—emissions reduction, economic development, and adaptation to the risks posed by climate change—as well as tensions among those three priorities. For example, for the many low-income countries that have relatively low emissions today, the key priority might be driving economic growth and job creation now and striving to do so in ways that could also keep future emissions low.
A stylized bar chart uses side-by-side rectangles to represent the world's economies, with width representing population and height representing final energy consumption per person in 2020. The economies are arranged from left to right in ascending order of consumption, resulting in a plot that is vertically shallow on the left and rising sharply on the far right. A vertical line near the middle of the plot marks the division between the 4.6 billion people in economies consuming less than 50 gigajoules per day, including Brazil at 46, Indonesia at 24, India at 18, Ethiopia at 15, and Democratic Republic of the Congo at 9, and the 3.2 billion people in economies consuming more than 50 gigajoules, including Mainland China at 65, Japan at 91, and the United States at 192. Color coding categorizes each economy by income level, with low and lower-middle income countries mostly on the lower-consuming side of the 50 gigajoules dividing line and upper-middle and high income countries on the other side.
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In developing countries, therefore, designers of future energy systems must consider not only the emissions of such systems but also how to deliver affordable access to energy, address the lack of firming capacity, and tackle the risk of stranded assets. But the mix of energy solutions could vary substantially among countries. Steps to consider include switching cooking fuels from wood or charcoal to gas and electricity; building low-cost solar and wind power, either as part of electric grids or as distributed energy resources, and especially in places where the need for firming capacity would not substantially raise costs; building gas power, including gas power that could replace coal power where feasible, and ideally in a way that can provide long-term firming or clean capacity as well as near-term energy access; and considering other low-emissions alternatives, such as geothermal power and hydropower.
Also, after analyzing a scenario from the Network for Greening the Financial System, we found that developing countries would need to spend up to three times as much as developed ones, measured as a share of GDP, on low- and high-emissions assets for energy, materials, and land use systems (both for the transition and for economic development) to reach net zero by 2050.6The net-zero transition: What it would cost, what it could bring, McKinsey Global Institute, January 2022. That spending is largely used to build power systems. Yet financing is harder for those countries. So scaling up blended finance could be a particularly important solution (see principle 3).
Developed countries, by contrast, have more power assets that can provide firming capacity. So their priorities might include removing constraints on the supply of inputs needed for the transition (see principle 4) and revamping energy markets (principle 5).
Economic activity and endowments. Existing economic activity and jobs may be put at risk by the transition. Developing countries and fossil fuel–rich regions are the most vulnerable to both kinds of losses.7The net-zero transition: What it would cost, what it could bring, McKinsey Global Institute, January 2022. But all countries will need to consider how to support affected workers and industries. They will also need to consider how they can benefit from transition-related opportunities by taking advantage of their natural endowments (see principle 7) and reducing technology costs (principle 2). For example, India, which has 300 days of sunshine per year, is prioritizing building a solar power industry, and some estimates suggest that it could become the second-largest producer of solar components by 2026.8India’s photovoltaic manufacturing capacity set to surge, Institute for Energy Economics and Financial Analysis and JMK Research & Analytics, April 2023.
As countries and companies begin to explore these areas, they should be guided by their potential to gain comparative advantage. For example, some countries may have outsize access to sunshine or wind; those countries might choose to produce green hydrogen, which relies on access to low-cost renewable power, or to follow energy-intensive courses, such as running data centers. Other countries may have deposits of mineral resources needed in the transition. Others may be able to take advantage of their geographic location to participate in new global trade networks, such as those for low-emissions fuels. In other cases, countries and companies may have technical know-how that can help them manufacture the goods that the transition will require. A good example is South Korea, which has taken advantage of its expertise in battery manufacturing to become a leader in grid-scale energy storage, capturing 50 percent of the global market in 2018 with support from government initiatives.86Korea’s energy storage system development: The synergy of public pull and private push, World Bank Group Korea Office, January 2020. (For more on how priorities during the transition could vary, see sidebar, “Customizing net-zero strategies for different countries.”)
Numerous measures can help countries capture opportunities. Investing in education and training programs could equip workforces with skills that green industries need. Creating ecosystems that enable local innovation could encourage the development of new ideas, products, and services within a country. And designing new initiatives carefully and holistically, with an eye toward how they interact with one another, will be important, because climate policy is intertwined with many other kinds of policy, including national security policy, industrial policy, innovation policy, and labor market policy.
An illustration shows how following those principles could accelerate the world’s current trajectory
As the world embarks on the transition’s next phase, applying the principles described above could help reduce emissions while ensuring affordability, reliability, and industrial competitiveness.
A few words about our methods are in order. (For more detail, see the technical appendix.) To measure the implications of the two principles for affordability, we used capital spending on low-emissions assets, not operating spending. We did so for a number of reasons. First, the current challenge facing the world is to deploy capital toward low-emissions technologies; as we mentioned earlier, the amount of capital currently being spent on the transition remains far short of what is necessary to limit warming to 1.5°C. As we also mentioned earlier, even if the capital cost of low-emissions technologies declines as quickly as expected, only 50 percent of the capital spending on those technologies needed by 2030 to eventually achieve net zero is likely to take place under current policy frameworks; any additional spending would therefore depend on greater societal commitment, such as increased public spending or additional policies.89From poverty to empowerment: Raising the bar for sustainable and inclusive growth, McKinsey Global Institute, September 2023. That 50 percent includes both a continuation of today’s spending levels and increased spending likely under current policy frameworks. Second, capital spending is more relevant to low-emissions technologies than operating spending is, because many of those technologies cost more to build than to operate; the reverse is true for high-emissions technologies. In reality, some spending on operating costs would also be needed, particularly in the illustrative analyses that include greater use of high-emissions assets, which tend to have higher operating costs.
These are only illustrative analyses, and much more work would be needed to comprehensively and rigorously evaluate the implications of the measures we have applied here, consider additional ones, perform a broader and more careful assessment of costs, and design robust transition scenarios. Also, the analyses are intended to be not options that a decision-maker could choose among but rather an illustration of how different actions can together achieve the goals of the Paris agreement. Nonetheless, we believe the exercise can help us understand the potential implications of applying the two principles in full measure.
Accelerate cost declines too. Next, we considered what would happen if average spending on low-emissions technologies were 25 percent higher than in the first analysis. Some of that increased spending would be allocated to the lower-cost solutions just described. Some would be allocated to investment in R&D and market stimulation, and some to the early deployment of some higher-cost solutions, to help drive down the cost of such solutions. We assumed that those efforts could reduce costs twice as quickly as in the first analysis.1That assumption is in line with the conclusions stated in Rupert Way et al., “Empirically grounded technology forecasts and the energy transition,” Joule, volume 6, number 9, September 2022. For more detail, see the technical appendix. We recognize that this is an ambitious assumption, but we have made it to test the potential impact that such a measure could have on overall spending needs and warming levels. As a result of these measures, emissions of CO2 would be further tempered: by 2050, they would be about 30 percent lower than 2020 levels. And warming could reach roughly 2.5°C above preindustrial levels by 2100.
And spend even more. Here, we considered what would happen if average spending on low-emissions technologies were 50 percent higher than in the first analysis. As in the previous analysis, some of that increased spending would be allocated to lower-cost solutions, and some would be allocated to driving down the cost of more expensive solutions, again making the reduction in the cost of technology twice as large as in the first analysis. As a result, emissions of CO2 by 2050 would be about 60 percent lower than 2020 levels, and warming by 2100 could be less than 2.0°C above preindustrial levels.
In the other case, average spending on low-emissions technologies each year would be twice as high as it is in the first analysis. Slightly more of the increased spending would be allocated to lower-cost solutions. And far greater efforts would be made to drive down the cost of more expensive solutions, so that that cost would fall twice as quickly as in the first analysis. As a result, once again, net-zero emissions of CO2 would be reached by about 2050 and warming could be limited to 1.5°C above preindustrial levels by the end of the century.
Though they are only illustrative, our analyses allow us to make four observations.
Third, limiting warming to 1.5°C would require spending two to three times as much as the world is spending today on low-emissions technologies. Here again, prioritizing lower-cost solutions and driving cost declines could help reduce low-emissions spending—potentially by as much as one-third, the difference between spending in our two illustrative analyses that limit warming to 1.5°C.
Finally, the total amount of spending on low- and high-emissions technologies together increases as we move from the first analysis to those with steeper emissions reduction, though much more slowly than does spending on low-emissions technologies alone. That indicates a substantial reallocation of spending from high- to low-emissions technologies.
Embracing a change of mindset can help the world move closer to its net-zero goals
The principles we have described could be applied in many other ways. But all of them depend on a needed change of mindset about the transition.
As stakeholders consider how to execute the next phase of the transition, in addition to making commitments to reach net zero in the future, they should commit to making more and more progress every year. By clearly defining near-term goals, they can illuminate the immediate next steps of the transition, helping turn the aspirations of the Paris Agreement into tangible action.
As we have discussed throughout this report, rather than considering emissions reduction alone, stakeholders should do so while bearing in mind affordability, reliability, and industrial competitiveness. Those objectives are important both in their own right and in accelerating progress toward net zero.
And stakeholders should approach the transition with a sense of participation and collaboration, because all of them have roles to play. Governments can create an environment that supports the transition to new technologies, develop an integrated view of how energy supply systems would transform in tandem with demand, and safeguard domestic competitiveness while also encouraging global cooperation. The social sector can help ensure that no single group is disproportionately burdened as the transition unfolds. Individual consumers, employees, and citizens will play a part. Companies will be the parties enacting the transition by building assets, developing products, and radically changing processes. Their strategy for value creation will have to include both guarding against risks and unleashing innovation to capture opportunities. All of these actors will have to work together to reimagine and execute the transition.
Guided by the principles described in this report, they might begin by asking a few provocative questions:
How can lower-cost solutions be deployed to abate ten metric gigatons of GHGs by 2030?
What would it take to double the rate at which expensive solutions become cheaper?
Where might the worst bottlenecks occur, and how could they be preempted?
How could a thoughtful portfolio of net-zero opportunities be constructed—and one that also mirrors each stakeholder’s comparative advantage?
The answers to such questions might dramatically increase the world’s likelihood of reaching global net-zero goals.
Mekala Krishnan is a McKinsey Global Institute partner in McKinsey’s Boston office; Humayun Tai and Daniel Pacthod are senior partners in the New York office; Sven Smit is a McKinsey senior partner in the Amsterdam office and MGI’s chairman; Tomas Nauclér is a senior partner in the Stockholm office; Blake Houghton is a partner in the Dallas office; Jesse Noffsinger is a partner in the Seattle office; and Dirk Simon is a consultant in the Boston office.