Our in-depth analysis of 69 countries suggests that the challenges of the net-zero transition by 2050 are universal: all regions would need to decarbonize, all would have some exposure to the transition, all would face some degree of physical risk, and all would have growth potential resulting from the transition. But the exposure and its effects would be unevenly distributed (see sidebar, “Our research methodology: Sources, scenarios, limitations, and uncertainties”).
Regions with lower GDP per capita and those with greater fossil fuel resources would need to invest more, relative to GDP, to reduce their emissions and build a low-emissions economy. These countries also have relatively greater shares of their jobs, GDP, and capital stock in sectors that would be most exposed to the transition. And some of them will face a double burden—being exposed both to the transition adjustments and to rising physical risks. This could challenge progress on economic development goals in these regions, bolstering the case for unprecedented global cooperation in solving an unprecedented global problem. The uneven exposure may have implications for trade (see sidebar, "Potential implications of the net-zero transition for trade flows"). At the same time, the transition could create potential for economic growth in many geographies.
To better understand exposure and opportunities, we take a closer look at the 69 countries in our sample by dividing them into six archetypes based on the distribution of their most significant exposure across sectors and households.
Developing countries and those with large fossil fuel sectors would likely have to spend the most on physical assets, relative to GDP, on decarbonization and low-carbon growth
In the NGFS Net Zero 2050 scenario, every country and region would spend to reduce emissions and develop low-emissions energy sources to power their economic growth. The need for capital expenditures varies considerably across geographies, given differences in their economies, and that they do not all decarbonize at the same rate in the NGFS scenario.
Potential implications of the net-zero transition for trade flows
Value chains have grown in length and complexity in recent decades, and global trade has increased. Since 2000, the value of intermediate goods traded globally has tripled to more than $10 trillion annually. Increasing production of goods for export tends to increase a country’s own carbon emissions since most manufacturing still involves carbon-emitting processes or energy use. For example, researchers have estimated that in some manufacturing sectors, such as chemicals, textiles, leather, and apparel, 30 to 65 percent of the emissions in China and India are induced by foreign final demand. Another way to think about this phenomenon is to regard exported goods as having their production emissions embedded or embodied in them. A look at the emissions that are embodied in goods traded across borders reveals that considerable quantities of CO2 are, in effect, moved internationally every year (exhibit).
As demand for high-emissions goods falls and demand for low-emissions goods increases, trade flows might shift as countries’ comparative advantages change. For example, shifts in consumer preferences or the presence of carbon taxes or other regulatory measures could produce advantages for countries that make products with low emissions intensity. Countries could also pursue opportunities to meet growing overseas demand for new kinds of low-emissions goods or emerging decarbonization technologies. In some cases, decarbonization could raise production costs, which could make exports from countries that take decarbonization action less competitive. All of these factors could result in shifting trade patterns in sectors such as electric vehicles, solar panels, and minerals, and they would need to be systematically addressed.
The outlook for global trade flows thus remains uncertain, and outcomes could depend on many factors, including how consumer preferences and regulation evolve and what opportunities different regions decide to pursue. In making strategic decisions, businesses may want to account for the ongoing discussion among countries of whether to implement border-adjustment taxes that price carbon emissions into the value of traded goods and account for developments in broader regulation, consumer preferences, and evolving markets. In some cases, markets may well go from global to local; for example, global energy markets for oil and gas could transform into more local or regional markets for power or hydrogen. For some countries, the net-zero transition could also provide opportunities to grow domestic industries and reduce imports of commodities like fossil fuels.
The world’s largest economies—the United States, China, the European Union, Japan, and the United Kingdom—would account for about half of global spending on physical assets and would spend about 6 percent of their combined GDP from 2021 to 2050. In developing regions, spending on energy and land would represent a substantially larger share of national GDP: about 10 percent in sub-Saharan Africa, India and some other Asian countries, and Latin America (Exhibit 1).
Our research methodology: Sources, scenarios, limitations, and uncertainties
We assess the net-zero transition along two dimensions: sectors and geographies. For the first, we examine energy and land-use systems that account for about 85 percent of global emissions: power, mobility (in particular, road transportation), industry (steel and cement production), buildings, agriculture and food, and forestry and other land use. We also looked at fossil fuels that supply energy to many of these systems. For the geographic dimension, we analyze effects in depth for 69 countries, which make up about 95 percent of global GDP.
We chose not to develop our own transition scenarios and rely instead on widely used scenarios created by other institutions. Specifically, we analyze potential effects under the Net Zero 2050 scenario defined by the Network for Greening the Financial System (NGFS). This hypothetical scenario mirrors global aspirations to cut emissions by about half by 2030 and to net zero by 2050 (exhibit). It reaches net-zero CO2 emissions by 2050 for the economy as a whole; this means there are some low residual gross CO2 emissions in hard-to-abate sectors and some regions that are counterbalanced by CO2 removals. We chose to work with the NGFS scenarios because they cover all major energy and land-use systems in a coherent manner, provide regional granularity, are designed for use in risk and opportunity analysis, and are becoming the standard scenarios used by financial institutions, regulators, and supervisors.
In some cases, as a counterfactual for comparison, we also use the NGFS Current Policies scenario. This scenario projects the greenhouse gas emissions that would occur if only today’s mitigation policies remain in place (based on an NGFS assessment of policies as of the start of 2020), and it anticipates a little over 3°C of warming by 2100. The comparison allows us to account for how other factors such as GDP growth or population growth could affect the economy between now and 2050. We also collaborated with Vivid Economics to use the two NGFS scenarios to generate more granular sector variables where needed (for example, sales of new automobiles), in a manner that was based on and compliant with the NGFS scenarios. In such cases, we still refer to the specific sector variable as being based on the relevant NGFS scenario.
We performed the analysis as follows. First, we used the NGFS scenarios and downscaling by Vivid Economics to quantify changes in important variables in each energy and land-use system (for example, changes in power production by source). The downscaling was done to provide sectoral or technological granularity where not available from NGFS. We used this to assess changes in demand and then assessed the implications for capital stock and investment, producer and consumer costs, and employment based on information about decarbonization technologies and their capital and operating costs, labor intensity, and effects on value chains. Where possible, we used region-specific costs and labor assumptions, as well as expected technology learning curves over time, based on McKinsey analysis.
Limitations of our approach and uncertainties. We recognize the limitations of the NGFS scenarios, as with any transition scenario, given that this is an emerging field of research. First, while some variables are explored at the sector level, the scenarios often do not provide enough detail to explore how different types of activities will be affected, thus requiring downscaling to achieve the necessary sectoral granularity. Second, the models underpinning the NGFS scenarios may not capture important dynamics or constraints within a sector. For example, the model we used favors more economy-wide use of biomass in energy and industry (for example, hydrogen production) than may be considered feasible in other sector-specific decarbonization pathways. Third, although the models do capture ongoing learning and technological innovation, they may fail to sufficiently anticipate the emergence of disruptive technologies that may change decarbonization pathways and lower cost trajectories faster than anticipated. Fourth, while some NGFS scenarios have begun to incorporate damages from physical risks in the economic modeling, further work is needed to fully integrate physical risks into the decarbonization pathways. As a result, we have focused here on scenarios that do not incorporate physical risk. This approach also allows us to focus our analysis on the effects of the transition alone. Finally, the scenarios reflect climate policies and technological trends in place before the COVID-19 pandemic and climate negotiations and pledges at COP26 in Glasgow in November 2021.
Our analysis largely consists of an analysis of first-order effects. Various uncertainties could influence the magnitude of outcomes highlighted here. While some of these factors could result in lower outcomes than those sized in this research, some factors suggest that additional costs and effects will likely occur as the transition unfolds. By the same token, the costs of physical climate risks could likely prove higher than those described here.
Key uncertainties include the following:
- Warming scenario and emissions pathway. A higher warming scenario (for example, 2.0°C) may lead to smaller transition effects than a 1.5°C warming scenario, given the lower degree of emissions reduction and deviation from today’s production and consumption patterns it entails.
- Sectors’ decarbonization actions and activity levels. Because the focus of our work is assessing the nature and magnitude of economic shifts and not identifying decarbonization actions, we used a prespecified net-zero scenario from NGFS. It is feasible that an alternate technology mix could result in lower costs and different shifts than those described here, and that further technological innovation could result in a different pathway with lower costs. It is also feasible that the path the world undertakes to decarbonize is different from the one described here. For instance, an alternate scenario may consist of substantially more use of carbon capture and storage (CCS) technologies and a focus on decarbonizing the hydrocarbon value chain. For example, this could happen if capture costs fall, regulatory frameworks are put in place to incentivize CCS use, and markets mature for recycled CO2 as a material feedstock.
- Magnitude of direct and indirect socioeconomic effects. Some effects could be larger than described here, for example, if executing the transition is more complex than the scenario here suggests, and additional capital spending is needed to maintain flexibility and redundancy in energy systems. If supply of key materials or low emissions of sources of energy do not keep up with demand, this could result in shortages and price increases, which we have not considered in our quantification. Higher-order effects could magnify risks and increase costs, particularly in the short term. For example, depending on how the transition is financed, the effects on the overall economy could be substantially higher than sized here. Finally, effects could also be larger under an abrupt or delayed transition.
- Economic and societal adjustments needed for the transition. Costs and investments could be higher than sized here, for example to implement social support schemes to aid economic and societal adjustments. Similarly, additional costs may arise from delays, setbacks, and urgently needed adaptation measures, particularly if restricting warming to 1.5°C proves not to be possible. For our analysis, we quantify the scale of first-order effects and describe qualitatively the adjustments needed.
Aspects we did not cover. Topics we did not cover include the likelihood, validity, and comparative costs associated with various decarbonization scenarios; the comparative merits of different emissions-reduction technologies; constraints to implement and deploy decarbonization technologies (for example, scaling up supply chains); the actions needed to drive and incentivize decarbonization; quantification of higher-order economic effects of the transition, including on output, growth, value pools, valuations, trade flows, and human well-being: relative costs and merits of decarbonization and adaptation; and impacts that could result from physical climate hazards. We use benchmarks from the external literature and our past research to describe these latter possibilities. As discussed above, our analysis here represents first-order estimates. Fully quantifying the costs of rising physical risks and the transition is complex. It would require estimating impacts from rising physical risks and the cost of adaptation actions, building robust estimates of the impact of the net-zero transition on the economy that takes into account the higher-order effects described above, and doing so over time and while grappling with the various uncertainties described previously.
For developing countries, higher projected rates of economic growth naturally create higher spending needs relative to GDP than in developed countries. In our analysis of the NGFS Current Policies scenario, spending in India, sub-Saharan Africa, and Latin America would total more than 9 percent of GDP. Spending would increase to some extent from these levels in the net-zero scenario analyzed here. For example, in the Net Zero 2050 scenario, India’s capital requirements would be 11 percent of GDP, compared to the global average of about 7.5 percent of GDP. It would moreover be spent differently than in the Current Policies case. Some 60 percent of annual average investments in India would be on low-emissions assets under current policies compared to 80 percent in the NGFS Net Zero 2050 scenario. Much of that capital would be used to reduce the use of existing coal power and expand low-emissions electricity.
Fossil fuel–based economies would also see substantial spending on physical assets as a share of their GDP: above 15 percent in the Middle East and North Africa, Russia, Ukraine, and the Commonwealth of Independent States. Much of this spending would be continued spending on fossil fuel assets in the near term. However, even these economies would allocate half or more of their spending to low-emissions assets under a net-zero transition.
Developing countries and fossil fuel–producing regions have relatively large exposure to the transition, raising concerns about growth and inequality
Beyond spending on decarbonizing their existing assets and building low-emissions assets, economies will also need to transform under a net-zero transition. We assessed each country’s exposure to the transition by measuring the proportion of employment, economic production, and physical capital stock in exposed sectors today. It is important to note that current efforts undertaken by countries could reduce this exposure going forward. According to our analysis, all countries now have some exposure to the transition and, as discussed earlier, low-income households everywhere would be most exposed to any cost increases that feed through to consumers.
The highest levels of exposure are in countries with relatively lower GDP per capita, such as Bangladesh, India, and Kenya, and in countries with relatively higher shares of jobs, GDP, and capital stock in sectors that are more exposed to the transition—that is, sectors with emissions-intensive operations, products, and supply chains. Significant fossil fuel resource production also creates high exposure for some countries, such as Qatar, Russia, and Saudi Arabia. Secondary effects from direct exposure could also extend to government tax revenues and exports, which are often linked with exposed sectors like fossil fuel extraction and steel. By contrast, countries with higher GDP per capita tend to be less exposed because a majority of their economies are in service sectors, which have relatively lower exposure (Exhibit 2).
Thus, for many lower-income and fossil fuel–producing countries, challenges associated with climate change could compound. These countries would need to balance multiple imperatives: decarbonizing their economies and funding associated capital expenditures, managing exposure of large parts of their economies to a net-zero transition, and enabling economic development and growth, particularly by expanding access to affordable, secure energy. And, as noted earlier, these challenges will be aggravated for some countries by heightened physical climate risk, such as the growing probability of lethal heat waves in parts of India. Inequity concerns would grow as an issue, particularly as developing economies argue that they have contributed less than others to emissions and yet are being asked to shoulder a large burden in the net-zero transition.
Countries can use natural endowments or technological, human, and physical resources to harness the transition’s growth potential
All countries have opportunities to tap into the transition’s potential for growth and secure advantages through their endowments of natural capital, such as sunshine and wind, and through the availability of technological, human, and physical capital.
All countries have opportunities to tap into the transition’s potential for growth and secure advantages, through their endowments of natural capital such as sunshine and wind and through the availability of technological, human, and physical capital.
Natural-capital endowments: Countries could benefit from the transition if they possess rich stocks of natural capital such as ample sunlight and wind, forestland, mineral resources, and CO2 sequestration potential (Exhibit 3). Generally speaking, many developing countries have the natural resources to accommodate solar power production and forestry protection or restoration efforts, which could be supported by flows of capital through mechanisms such as voluntary carbon markets. And most countries, developing or otherwise, have at least some of the natural-capital endowments that would likely be in demand during the transition. For example, Australia and Saudi Arabia have extensive solar resources, Argentina and the United Kingdom have high wind power potential, and Chile and China have large reserves of minerals.
Availability of technological and human capital: Some countries have already gained strong positions in the markets for sophisticated low-carbon goods, such as solar panels and EVs. Even so, these markets offer considerable growth potential, which should be most accessible to countries with adequate technological capital. For example, South Korea has approximately 6,600 patents on technologies related to climate-change mitigation and human capital. Countries like China and Singapore have a high share of STEM graduates in the population, which provides an indication of the workforce’s technical skill. This in turn might be applied to developing solutions for the climate transition.
A country’s physical capital, in the form of low-emissions infrastructure and industrial systems, could also create growth potential in a net-zero transition, for example, if consumers shift their preferences or carbon border taxes are applied. Even currently high-emissions infrastructure could be a benefit if it can readily be retrofitted, for example, with alternate low-emissions fuel sources.
We identify six main archetypes of countries, based on the common nature of their transition exposure
To help illustrate how the net-zero transition might play out differentially across the globe, we have defined six archetypes of countries according to the nature and magnitude of their exposure across sectors and households. We use sector exposure to define country archetypes as a way to highlight the distinct economic and societal adjustments that countries may need to make under a net-zero transition, while noting that countries will face myriad specific issues that are not reducible to a single archetype (Exhibit 4).
The following are the six archetypes:
Fossil fuel resource producers. Countries in this category include Australia, Bahrain, Canada, Egypt, Kuwait, Nigeria, Norway, Oman, Qatar, Russia, Saudi Arabia, the United Arab Emirates, and Venezuela. Fossil fuel resource-producing sectors account for a significant portion of GDP in these countries, ranging from 3 percent in Australia to 39 percent in Kuwait, and a large share of physical capital—an average of about 15 percent, compared to 2 percent in the rest of the countries. The magnitude of exposure varies among countries in this grouping. For example, Saudi Arabia has about 25 percent of its GDP in fossil fuel–producing sectors, and Qatar has about one-third of its GDP and its capital stock in those sectors. That compares with about 3 percent of GDP and 13 percent of capital stock in Australia. For the countries with higher shares in particular, various challenges could exist: the potential loss of government revenues from exposed sectors, the reallocation of capital spending from high- to low-emissions assets, and the potential need to diversify their economies. Many countries could also experience rising physical risks; countries in this grouping that are near the equator will become hotter and more humid as warming increases. At the same time, a net-zero transition offers opportunities that these countries can tap into, though capturing them and sufficiently compensating for loss in revenues and exports could also come with challenges. They generally have high solar power or wind power potential, which they could use to develop capacity for renewable-energy generation and make green hydrogen. Some fossil fuel producers, for example those in the Middle East, also have relatively low levels of carbon intensity associated with their oil and gas extraction and have relatively lower costs; thus, they could be the last standing providers of the remaining fossil fuels needed in a net-zero economy, in the scenario modeled here.
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Emissions-intensive producers. Countries in this category include Bangladesh, China, India, Indonesia, Pakistan, South Africa, Thailand, Turkey, Ukraine, and Vietnam. These countries derive sizable portions of their GDP, about 18 percent on average, from highly exposed sectors such as high-emissions manufacturing, fossil fuel–based power, and agriculture. Jobs tend to be concentrated in agriculture (more than 20 percent), while much of their capital stock is in manufacturing and fossil fuel–based power. These countries would likely adjust to the transition mainly by decarbonizing industrial processes, expanding renewable-power capacity, and helping farmers adopt low-carbon practices or transition away from agriculture. As discussed above, many of these countries will need to make substantial investment to decarbonize their economies and secure low-carbon growth. Our analysis suggests that these countries face a particular risk of asset stranding. Capital stock in these countries (coal-fired power plants, for example) is often newer than in advanced economies. The average age of coal power plants in China and India is less than 15 years, compared with more than 30 in the United States. Lower-income countries may also find that some low-carbon technologies (for example, electric-arc furnaces for steel production and CCS equipment for steel or cement factories) remain too expensive to deploy or, in some cases, unready for large-scale deployment. At the same time, these countries will have potential to serve the growing markets for low-emissions goods. Without careful planning, however, they run the risk that continued spending on lower-cost, high-emissions assets could result in the need to prematurely retire or reduce utilization of these assets after only a few years as the world transitions to a net-zero path.
Asian countries—many of which are included in this archetype—more broadly possess resources that could be conducive to low-emissions innovation. That capital spending for the transition may need to be complemented by investment in adaptation measures, since many countries in this archetype would become hotter, more humid, and more prone to flooding as warming increases.
Challenges could compound for many lower-income and fossil fuel–producing countries, who would need to balance multiple imperatives.
Agriculture-based economies. Countries in this group include Ghana, Kenya, Morocco, the Philippines, Senegal, and Sri Lanka. Agriculture is the primary source of employment and income for a large share of the population in these countries, accounting for up to about 55 percent of jobs and up to about 30 percent of GDP. An important adjustment for these countries will be adopting low-emissions farming practices, which would require mobilizing millions of stakeholders. Many of these countries are expected to invest substantially in new assets as they grow their economies, particularly related to the power sector; securing financing would thus be a key priority under a net-zero transition. These countries also have significant potential to produce solar power and use forestland to generate carbon credits. Almost all of these countries are exposed to physical climate risk because rising heat and humidity affect their agricultural workforces and increase the volatility of agricultural yields.
Land-use-intensive countries. This group includes Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, Honduras, Malaysia, Panama, Peru, and Uruguay. In these countries, which have generally reached the early or middle stages of industrialization, the agriculture and forestry sectors together represent significant shares of GDP (more than 5 percent), jobs (more than 10 percent), and capital stock (more than 5 percent). They would have to balance land-use needs with protection of forests and would have to support communities whose livelihoods depend on them. With their stocks of natural capital, these countries would have growth potential in sectors such as renewable energy, minerals needed for the transition, and forest management; reforestation and afforestation projects could generate valuable carbon credits and ecosystem services. The contribution of other sectors such as fossil fuel production, power, and industry to GDP, jobs, and capital stock is also sizable for some countries in the archetype, like Brazil, which could also therefore be exposed to issues described for other archetypes.
Downstream-emissions manufacturers. Countries in this group include Austria, Bulgaria, the Czech Republic, Germany, Hungary, Italy, Japan, Mexico, Poland, Romania, Slovakia, South Korea, and Sweden. The main exposure for these middle- to high-income countries relates to the manufacturing of goods, such as automobiles and industrial machinery, that could experience falling demand because they use fossil fuel–based energy. Countries in this category could manage their exposure to shifts in demand for these products by reinventing products and supply chains. Many make large investments in R&D, which position them well to develop and commercialize low-emissions technologies.
Services-based economies. Countries include Belgium, Denmark, Finland, France, Greece, Ireland, Israel, the Netherlands, New Zealand, Portugal, Singapore, Spain, Switzerland, the United Kingdom, and the United States. These countries have high GDP per capita and derive most of their economic output from service sectors, so their overall exposure to net-zero transition adjustments is low. However, in certain regions and sectors, exposure could be high. These countries also tend to have high consumer emissions—1.6 tons per capita on average, compared to 0.9 tons per capita on average for other countries—and will therefore need to induce behavioral changes in their populations and incur up-front capital costs in order to decarbonize (although, as discussed previously, this could come with long-term benefits, such as lower total cost of ownership). These countries could use their ample natural, technological, and human capital to develop new low-emissions industries or provide services, such as financial or information services, in support of the transition.
