Global momentum toward decarbonization continues to grow. The 2021 UN Climate Change Conference of the Parties (COP26) in Glasgow—the fifth COP meeting since the historic 2015 Paris Agreement treaty—produced stronger national climate action plans, a landmark pledge to cut methane emissions, and an agreement to phase out coal and fossil-fuel subsidies. Despite recent geopolitical turmoil, corporate net-zero pledges continue to increase, and the hard work of redirecting global investment dollars toward sustainable investments is fully under way.
Broad consensus among developed countries, leading companies, and other organizations has evolved regarding the types of swift and comprehensive actions necessary to get to net zero in areas such as electric-vehicle adoption, electrification of building heating, low-carbon steel production, and zero-carbon electricity generation. Beyond those, however, many other technical solutions exist that could help a region or country achieve a sufficiently swift decarbonization trajectory. Determining the right steps to take—and when to take them—is key not just for policy makers and public-sector organizations, but also for private-sector leaders trying to determine their companies’ emissions-reduction strategies.
Many organizations have performed sophisticated full-system modeling using extensive libraries of expected future technology cost trajectories to design comprehensive pathways that aim to minimize aggregate costs while maximizing overall benefits. McKinsey, for example, has published cost-optimal decarbonization pathways for the European Union and for individual countries such as Japan and the Czech Republic. In 2021, Princeton University’s Andlinger Center for Energy and the Environment introduced the Net-Zero America plan for the United States, and in 2020 the World Resources Institute released one for Hong Kong.1 The International Energy Agency’s Net Zero by 2050 is a road map for the global energy sector to eliminate net energy-related CO₂ emissions by the middle of the century.2
These kinds of analyses often inform government and corporate planners as they seek to shape and navigate the net-zero transition. But while they serve as valuable starting points, these pathways are vulnerable to critical system-level changes not being reached in time (Exhibit 1). In addition, their focus on cost-optimizing the transition can leave little margin for error. Here, we offer some considerations for policy makers and decision makers looking to reduce the risk of failure while maximizing the chances of achieving the Paris Agreement goals.
The fragility of current net-zero pathways
With the remaining carbon budget to limit global warming to below 1.5°C rapidly running out, the consequences of significant delays or detours on the road to net zero would be drastic. And the consensus pathways, while technically feasible and largely cost-optimal, may be more brittle than many realize. They are contingent on critical requirements being in place and the successful and timely achievement of many ambitious system-level changes. Some plans may be so cost-optimized that they leave little room for deviation from the plan.
In fact, some assumptions and preconditions may not be achieved, such as the assumed hydrogen technology cost and readiness evolutions, the renovation rate for home heating system replacements, and the substantial changes to land-use permitting and vehicle ownership laws. This could mean failing to achieve these crucial emission reductions (Exhibit 2). We are still far off the required emissions trajectory, and due to the interdependent nature of the changes required, delays in one place could have cascading systemic consequences. For example, a slowdown in the roll-out of new electricity transmission lines could hamper the deployment of wind and solar power, which could postpone investments in green hydrogen supply hubs, which are required to decarbonize sectors such as steel and aviation.
Adaptive risk management in three steps
Given the societal importance of achieving net-zero emissions and the clear possibility of failing to achieve specific target pathways, stakeholders in the public and private sectors could be best served by taking an adaptive risk-management approach to shaping and executing net-zero measures. Decision makers cannot afford to slow down their decarbonization efforts as the specter of runaway climate change looms ever starker. However, this doesn’t have to be at odds with taking the time to identify potential failure points within their chosen pathways, mitigate those risks, and identify backup plans. Doing so is an important consideration for designing and executing net-zero pathways for nations, regions, companies, and other organizations.
Policy makers and decision makers could consider taking three actions to fortify their decarbonization pathways (Exhibit 3).
1. (Re)design the central pathway to account for key risk factors
Many pathways have been designed to prioritize cost optimization with little regard for resilience. However, just as we saw lean supply chains disrupted during the pandemic, excessively cost-optimized net-zero pathways could also break down catastrophically. Decision makers may therefore wish to look beyond costs to build some redundancy or room for error into their plans. A key step is considering any uncertainty associated with a given lever and co-optimize for that risk.
One approach could be to assign risk premiums to levers with a higher risk of failure, such as a technology still in the early design phase or measures involving complex stakeholder coordination. Thus, it could be preferential to target a decarbonization pathway that, in some instances, relies on a more mature technology or a solution requiring fewer moving parts, even if that pathway is somewhat more expensive. For example, one might pursue resistance heating, a proven technology, over heat-pump air technology, which is still in development, to reduce the emissions associated with heating buildings.
Alternatively, certain levers with a high risk of failure could be assigned more generous timelines to allow for delays without jeopardizing the achievement of the overall goal of emissions reduction. For example, baseline net-zero pathways for aviation require the development of workable hydrogen aircraft engines on a more aggressive timeline than engines have historically been developed. In the meantime, a modified pathway may allow more time for this breakthrough technology to develop while relying more heavily on biofuels or behavioral changes to limit air travel.
For stakeholders looking to identify prerequisites implicitly or explicitly underpinning specific decarbonization plans, McKinsey’s research on the nine requirements for net-zero pathways may provide a helpful starting point.
2. Put fallback options in place
Once a risk-optimized base pathway is laid out, planners may want to identify the remaining risk factors that could derail the transition and the points beyond which it is not possible to alter plans without jeopardizing the achievement of the emissions-reduction goal. Then they could develop and invest in contingent pathways or backup plans for when a critical element is not achieved. For example, in parallel to an aggressive scale-up of renewables on the main path, a country might invest in port infrastructure and partnership agreements for bulk hydrogen imports to compensate for any shortfall in building out renewables.
Consider building heating pathways for a cold climate. A country assuming that fully electric heating will succeed will likely not invest in alternative options like hydrogen combustion. However, if the cold-climate heat-pump technology fails to advance or the grid-peaking capacity for cold snaps fails, it will most likely be too late to take ten-plus years to develop, qualify, and roll out a hydrogen distribution infrastructure. A safer option may be to invest in the backup hydrogen option to the point where it could be scaled up quickly should the electric option prove untenable. The additional investments into backup plans could be regarded as insurance premiums against the failure of the main pathway.
3. Continuously monitor progress and adapt
Managing the risks of decarbonization pathways will be an ongoing challenge. Adaptability will likely need to be institutionalized with a transition monitoring and management capability that tracks current and future milestones and identifies necessary interventions quickly and effectively. It could also demand a regular review of the validity of critical assumptions, such as technology costs and developments.
The precise organizational design of this function will vary by organization, but it’s likely to contain distributed elements focusing on specific sectors and housed within specific ministries, say, as well as centralized elements taking a holistic view of the overall transition and its myriad interdependencies. Whatever the design, it is important that the monitoring function has sufficient independence to provide transparency on progress and concerns about pathways at risk regardless of the impacts on favored approaches, political factors, or careers.
The imperative of decisive and comprehensive action toward achieving the goals of the Paris Agreement is widely recognized. Early pathways have proven to be powerful tools for overcoming initial uncertainty or inertia in creating clear plans to achieve ambitious decarbonization goals. An important consideration is to ensure that plans are designed in a way that recognizes and manages potential failure points. This will likely give them a much better chance of achieving their intended outcomes of stabilizing the climate and avoiding catastrophic outcomes.
