Net zero or growth? How Belgium can have both

Through the Paris Agreement, Belgium has committed to achieve net-zero emissions of greenhouse gases by 2050, but the country faces substantial challenges along that road. Because of its dense population and industrialized economy, Belgium’s emissions per capita are among the most intensive in Europe (ranked seventh in terms of CO₂ per capita out of 27 EU countries).

This report examines the actions and significant investments that would be needed across sectors for Belgium to address and overcome these challenges. At the same time, it looks at the significant business opportunities that the global net-zero transition could create for Belgian companies and the economy more broadly.

The benefits offered by an orderly transition over time include an increase in energy security, as well as clear growth opportunities in Belgium and beyond. These benefits come on top of mitigating environmental challenges such as pollution (such as nitric oxide, sulfur oxide, and particulate matter), deteriorating water quality, and a sharp decline in biodiversity.¹For an example, see “Nature in the balance: What companies can do to restore natural capital,” McKinsey, December 5, 2022. However, a disorderly transition could entail risks that include waning competitiveness (with subsequent risks to economic growth and jobs) and the broader issue for the global economy of failing to reduce emissions.

Belgium can build on its current momentum: while quadrupling acceleration of the rate of decarbonization compared with that of 1990 to 2019 is required in the coming decades, Belgium has already been accelerating across sectors in recent years. For instance, between 2021 and 2022, the percentage of renewable-energy production from solar and wind in Belgium rose by 15 percent, while adoption of electric vehicles (EVs) increased by 75 percent. The number of buildings with the best energy performance certification doubled since 2019, in large part because of energy-efficient new builds.²Eurostat data; Marleen Vanhecke, “Belgium’s 2022 electricity mix: the increase in renewable energy and availability of nuclear power plants kept exports high,” Elia Group, January 6, 2023; “Twice as many homes with an A label in 4 years,” De Standaard, May 30, 2023; “Vehicle stock,” Statbel, September 15, 2022.

The analysis in this report is based on a net-zero pathway that builds on previous McKinsey research and for which we created a bottom-up model of different economic sectors in Belgium and what it would take for them to decarbonize (see sidebar, “The net-zero pathway modeled for this report”).³For more, see “The net-zero transition: What it would cost, what it could bring,” McKinsey Global Institute, January 2022; and “The energy transition: A region-by-region agenda for near-term action,” McKinsey, December 15, 2022. This pathway, which considers known technologies, existing regulatory boundaries, and realistic assumptions about behavioral changes, aims to illustrate the requirements, trade-offs, and implications for achieving net-zero goals.⁴The net-zero pathway we have modeled relies on technologies that we are relatively confident will become commercially scalable by 2030. However, while most known green technologies are proven, about 10 percent of the modeled abatement depends on technologies still in research and development.

Today, Belgium’s energy mix relies heavily on fossil fuels. The transition to lower-carbon alternatives and other actions to meet emission-reduction targets, such as greater energy efficiency and recycling, will affect all sectors—from power, industry, and transportation to residential housing and commercial buildings. Our analysis shows that this transition will require around €415 billion in incremental cumulative investments by 2050, the equivalent of about 2 to 3 percent of Belgium’s 2022 GDP every year, of which more than half would go to decarbonizing the building stock (mainly households).

Belgium has core strengths it can leverage as it seeks to reorient its economy to become more sustainable. Our research has identified five specific (albeit nonexhaustive) opportunities that the country may consider to generate new green growth: establish Belgium as a European green gateway, provide cleantech solutions for solar, wind, and hydrogen; scale already-strong capabilities in materials recycling; develop service models for deep energy retrofits for buildings; and become a leader in agriculture and food technology through innovation in biotech.

Speed is of the essence to meet decarbonization deadlines according to the Paris Agreement. Key decisions on issues related to funding, resource allocation, infrastructure, long-term energy-supply mix, and regulation will need to be made soon, and the effects of these decisions will be felt for decades to come.

A Belgian pathway to net-zero emissions

The pathway we model and detail here highlights the far-reaching changes Belgium may make to reach net-zero emissions by 2050. Among the most significant changes would be a full-scale energy transition: primary energy demand would fall by more than 50 percent, mainly through energy-efficiency measures and electrification, while electricity demand would double by 2050.⁵Primary energy refers to energy sources before they are transformed into use. For example, coal can be converted to synthetic gas, which can be converted to electricity; in this example, coal is primary energy, synthetic gas is secondary energy, and electricity is tertiary energy. Belgium could experience a significant reduction in energy dependency from foreign countries: today, Belgium supplies only 5 percent of its domestic energy needs but could become up to 50 percent self-sufficient if it were to follow the net-zero pathway we modeled as the use of renewable energy sources grows through a maximized build out of solar and wind production capacity and new energy-efficiency measures are implemented.⁶See “A Belgian pathway to net-zero emissions” in the report for more details. Building out a renewable-power system to meet electricity demand would require balancing loads, building out sufficient thermal and electric storage capacity, and strengthening grids and interconnections, among other actions. Furthermore, we explored additional measures related to supply and demand which could enhance Belgium’s energy self-sufficiency performance.

Long-term green financing will need to be available to address the feasibility of some measures for households and industry alike—for example, the retrofitting of housing with insulation and energy-efficient technologies.⁷For a detailed breakdown of these requirements and the challenges on the path to net zero, see “Solving the net-zero equation: Nine requirements for a more orderly transition,” McKinsey, October 27, 2021; and “The energy transition: A region-by-region agenda for near-term action,” McKinsey, December 15, 2022.

Under the net-zero pathway we modeled, this transition would have significant implications for a range of economic sectors (Exhibit 1):

• The power sector would need to phase out most traditional fossil power sources and build up locally produced and imported green electricity to replace them. Local production capacity for solar and wind energy would need to increase at least tenfold by 2050 if Belgium would be willing and able to fulfill all local demand—assuming the currently planned phaseout of nuclear energy sources is implemented. This would reduce Belgian energy imports from around 98 percent in 2019 to approximately 55 percent by 2050. A fully renewable system would require more and longer connections and smart flexibility, including the ability to adapt consumption to production levels. Thermal and electrical storage, as well as (synthetic) biomethane, would need to be added, while existing gas-fired boilers and heat and power assets would be kept as backups. Electrification would require a clear view of the grid requirements of the future at both the transmission and distribution levels, and large capex decision will require a stable outlook on energy mix, access, and price.
• Industry would need to phase out fossil fuels as a heat source, switching to electrification, thermal storage, and biofuel. Together with doubling down on energy-efficiency measures, this is one of the main contributions to cutting primary energy demand in Belgium as a whole by about 50 percent. Our large industrial hubs would need to harness and implement nascent technologies such as thermal storage, direct electrification, high temperature lift heat pumps, or carbon capture and storage (CCS) in addition to new technologies such as geothermal looping for steam or direct reduction of iron for the steel industry. Electrification, CCS, hydrogen, and green molecules will in turn require new large-scale infrastructure.
• In transportation, EVs would entirely replace internal-combustion-engine (ICE) passenger vehicles, and trucks would shift to electric and fuel-cell technology by 2050. Public transport would need to be further developed, with a modal shift including an increase in train usage and a reduction of passenger vehicle kilometers driven. Again, this implies the need for significant infrastructure.
• For buildings, to achieve net zero, new buildings and nearly all existing building units (5.5 million out of a total 5.7 million) will need to evolve toward an A-label energy performance certification.⁸The total includes residential dwellings, such as detached and semidetached houses or apartments, and nonresidential buildings such as commercial, offices, health, education, and other public buildings. A-label energy performance certification entails reaching energy consumption that is equal to or below 100 kilowatt-hours per square meter. This would require a combination of deep energy retrofits, rebuilds, and new builds. Deep energy retrofits result in a reduction of energy consumption of more than 60 percent or contribute to achieving A-label certification. This could be achieved through better insulation and by switching from fossil-energy sources to heat pump technology and district heating. This is a major undertaking because Belgian buildings tend to be larger, older, and less insulated than the stock of buildings in some other European countries, and its dense, historical city centers add to the complexity of this undertaking.⁹Analysis based on Eurostat database of distribution of dwellings by period of construction and national averages, 2021. The total energy retrofit market could double in size, while the pace of the deep energy retrofits needed to achieve an A-label certification would have to increase 25-fold by 2030, from about 10,000 building units per year today to 250,000. This would lead to a massive increase in demand for building materials and human resources. Moreover, innovation would be required to develop greener, more-productive, less-invasive, and more-affordable materials and construction methods. Training and education will also need to be adapted as of today. Our analysis estimates that incremental cumulative investments of approximately €210 billion could be needed to decarbonize buildings. Given the size of the incremental investment needed in buildings, including residential housing, about 45 percent of the total incremental spending would be borne by households; consumers would also carry some of the investment cost of the power and transportation transitions. Businesses would carry about 40 percent of the investment across sectors. And investments by central infrastructure providers in power, transport, and industry would make up the remaining 15 percent.
• For agriculture, land use, and forestry, changes would include technology shifts for feed mix, fertilizer use, and electrification; reductions in the size of livestock herds; and optimized use of available land.

1

Based on the pathway modeled, the total cumulative incremental capital expenditure needed to enable this transition by 2050 is about €415 billion—or the equivalent of about 2 to 3 percent of Belgium’s 2022 GDP annually until 2050 (Exhibit 2). About €210 billion would be required for building retrofits, with another €110 billion necessary for switching to a zero-emission power sector, according to this analysis. Incremental cumulative capital expenditure for industry is estimated between €30 billion and €45 billion, largely concentrated in a few industrial clusters that play in a global market.¹⁰Capital expenditure has been calculated conservatively to account for a small part of hydrogen in heating, which is cheaper than electricity for selected industrial use cases. For these players, global competitiveness is key, and large capital expenditure spending and asset reconfiguration decisions therefore require a stable energy mix and price outlook to ensure costs can be predicted and kept competitive. They would also again need access to the required infrastructure in a stable and competitive way that fosters investments. Moreover, based on our pathway, up to 40 percent of these incremental investments would be required before 2030 to meet the European Union’s Fit for 55 objectives.¹¹“‘Fit for 55’: Council adopts key pieces of legislation delivering on 2030 climate targets,” Council of the EU, April 25, 2023.

2

In the long term, the decarbonization and energy transition would most likely result in lower operating costs for much of society, mostly because of the reduction in demand for primary energy of about 50 percent. In the short term, the effect on operational costs will likely differ by sector: hard-to-abate sectors could face a cost increase, making business cases and investment decisions challenging (as mentioned, for large industrial companies competing globally, this implies a clear need for a stable outlook on energy mix, access, and cost in the short, medium, and long term); in other sectors, such as personal mobility, EVs are already drawing close to parity with ICE vehicles in terms of the total cost of ownership; and retrofitting buildings would result in direct operational cost savings, though the challenge here would be affordability. Industry players that electrify their high-temperature heating energy may need a full rebuild of the equipment, but they could benefit from designs that would be cheaper to operate and would provide fuel flexibility, enabling them to arbitrage based on cost. Low-cost renewables, green molecules, and green hydrogen in sufficient amounts, coupled with efficient CCS, could reinforce the long-term competitiveness of the largest industrial plants and clusters.

Five actions on the net-zero pathway

Putting in motion these large-scale changes on an accelerated timeline will be challenging. Here we focus on five of the most pressing aspects:

• Safeguarding the competitiveness of Belgian industry. Rapid and bold energy-efficiency and electrification measures and a continued push on R&D for new climate technologies would be needed to achieve net-zero commitments, and the competitive context within and beyond Europe’s borders would also play a role. This is especially important given differences in CO₂ and energy price levels and supporting mechanisms by country and region. Large industrial clusters that compete on a global scale would need to be certain about future green-feedstock availability, energy mixes, access, and costs to make business cases work and hold in the global competitive landscape.
• Defining the long-term electricity supply mix to meet Belgian electricity demand and manage intermittency. The net-zero pathway we modeled could result in decreased energy imports from about 98 percent in 2019 to about 55 percent in 2050. If we maximize the build-out of renewable electricity in Belgium within the boundaries set today (for example, available space to build renewables), we see that 40 to 50 terawatt-hours (TWh) of electricity demand cannot be covered through local production. Covering this difference will require a combination of supply or demand side measures (Exhibit 3). A difference of 30 to 40 TWh is already expected (before taking supply or demand side measures) by 2030. Added to this is the variability of a renewables-based system, meaning the size of this difference will vary, with energy being exported and stored during times of excess and imported and released from storage when production levels of renewable sources are low, thereby requiring a combination of increased interconnectivity, energy carrier arbitrage, storage, and demand flexibility.

3

• Transitioning Belgian households to energy-efficient and lower-emissions buildings in an affordable and feasible way. The challenge here is twofold: first, the extent of the necessary retrofitting, rebuilding, and new building (Exhibit 4); and second, the very substantial household investment associated with this retrofitting and rebuilding or new building. Various tools could help set this transition into motion, including commercializing new technologies, such as heat pumps, at an affordable price; providing long-term green loans for rebuilds and energy-efficient retrofits, including adding insulation; and supporting strong regulatory mechanisms and incentives to ensure rapid and comprehensive rebuilds, as well as retrofitting that is affordable for Belgian households. Contractor capacity would also have to increase, implying a massive HR and training challenge.

4

• Accelerating the rollout of open-access infrastructure for power, CO₂, hydrogen, and green molecules to allow decarbonization of existing assets and attract new greenfield investments. Public–private task forces and accelerated permitting processes would be required to speed up the transition, and this would need to happen soon given the large lead times, especially for industrial reconfiguration.
• Speeding up sectoral shifts to meet Fit for 55 goals by 2030. Emission-reduction targets that the European Union has set for 2030 are an interim step to achieving the 2050 goals. They represent a massive challenge for all stakeholders, requiring them to take rapid action and commit to intense acceleration in the next seven years, regardless of the chosen pathway. To meet this target, an estimated €165 billion (or 40 percent of total incremental cumulative investments) could be required before 2030.

Seizing opportunities for green growth

The global sustainability transition offers green growth opportunities, including for Belgian players. While the scale of Belgium’s sustainability transition may seem daunting, the country also has the potential to tap new sources of green growth. The report concludes by outlining five such potential opportunities that would play to Belgium’s strengths and allow it to access new value pools, including through exports. This list is not meant to be exhaustive, and Belgium will have other opportunities.

Establishing Belgium as a European green gateway. The net-zero transition will give rise to new global trade flows of hydrogen and derivatives, green and blue ammonia, green methanol and ethanol, recycled plastics, synthetic fuels, hot briquetted iron for green steel, CO₂, and electricity, among others. These new trade flows would require import and transit hubs. Belgium could position itself as such a hub, given its geographical location in the heart of Europe, its seaports, and its industrial backbone, including a strong petrochemical cluster in Antwerp, which could be leveraged to create new processing facilities. Our analysis suggests three potential opportunities for Belgium as this trading accelerates: first, to become a transit hub for hydrogen and derivatives, green feedstock, green molecules, and CO₂¹²Green feedstock includes biomass, vegetable oil, recycled plastic (assuming it’s based on bio feedstock), green ethanol, and green CO2. Green molecules (resulting from hydrogen and derivatives and the green feedstock) include green CO2, green alkanes, green ethylene, and bio-based naphtha.; second, to serve as an electricity trading hub for Europe; and third, to be a processing hub for green molecules (Exhibit 5). The storage and transportation services, channeling 15 to 30 percent of the European Union’s import of hydrogen and green molecules through Belgium could create a €4 billion value pool with a growing transit, trading, and processing hub, according to our analysis.

5

Providing cleantech solutions for wind, solar, and hydrogen. The need for equipment and engineering, procurement, and construction (EPC) services for the scale-up of onshore and offshore wind, solar, and hydrogen value chains is growing and is expected to reach €1.1 trillion per year globally by 2040. Belgium could capture a share of this opportunity given its capabilities, expertise, and current activities—for example, in offshore wind, where Belgian companies have a strong track record installing offshore windmills and cables.¹³See, for example, “Factbox: The world’s biggest dredging companies,” Reuters, March 29, 2010. The country’s geographic location, which could help it become an important energy hub, and existing infrastructure could serve as another differentiator. With the proper developments, Belgian players positioned across this value chain could potentially capture a value pool of €4 billion through, for example, integrated offerings in hydrogen and green-molecule supply chains from EPC companies for renewable energy projects, including offshore wind projects.¹⁴Based on a global revenue pool of about €500 billion along the value chain, assuming 5 percent market share and 15 percent profit margin. If Belgian players were able to sustain a 20 percent share of the electrolyzer market by 2030, they could potentially capture a value pool of about €900 million; to do so would imply a fivefold increase in electrolyzer production capacity. Moreover, implementing efficiency measures in the electrolysis production in Belgium could result in cost savings of as much as €16 billion across Europe.

Scaling already-strong materials-recycling capabilities. Belgium is home to players with leading recycling expertise and strong technological capabilities in complex recycling. The country also has a high share of current European recycling capacity, including, for example, about 40 percent of battery recycling and 20 percent each of copper and stainless-steel recycling. Belgium also already functions as a trade hub for EU metal scrap. For nine materials assessed, the European value pool could grow to €25 billion to €35 billion by 2040. Keeping market share for most materials¹⁵This assumes a 20 percent market share of EU battery recycling. Belgium currently has a share of about 40 percent of this market. would result in a Belgian recycling value pool between €1 billion and €2 billion¹⁶In 2022 real prices. by 2040, twice the size of today’s value pools.

Developing service models for deep energy retrofits of buildings. Buildings in other European countries, not just Belgium, will also need to undergo major retrofitting, rebuilding, or new building to achieve net-zero targets, raising the prospect of a new growth sector specializing in buildings retrofits and rebuilds. In Belgium alone, the retrofit potential under the net-zero pathway represents a cumulative €400 billion investment pool between 2023 and 2050 (of which €210 billion is incremental)—about €16 billion annually from 2030 to 2050. This represents an opportunity for companies, especially early movers, to develop service offerings that address these new market needs.

Becoming a leader in agriculture and food technology through innovation in biotechnologies. Belgium already has a leading pharmaceutical biotech R&D position in Europe and numerous specialized research institutions and universities.¹⁷For example, Belgian biotech companies had a market value of €42 billion in 2022, or about one-quarter of the total stock market value of biotech companies in the EU. See “Flanders is ‘European biotech leader’ for 3rd year in a row,” Flanders Investment and Trade, accessed May 25, 2023. It also has a diverse and sizable agriculture and agro-processing industry. Opportunities in sustainable agricultural inputs, alternative proteins, and waste reduction in food include the growing market for specialty crop nutrition and biologicals and more-sustainable ways to produce animal protein through precision fermentation for alternative proteins, which is expected to see annual growth of approximately 40 percent by 2030. Together, these represent a global estimated market of up to €560 billion by 2030, albeit with considerable uncertainty about the range of opportunities.

Each of these opportunities will require a bold vision and action by stakeholders for the opportunities to be seized. This includes building out appropriate infrastructure, adopting a regulatory and policy approach that fosters green innovation, and implementing steps to overcome bottlenecks such as lengthy permitting and construction times and a limited supply of some strategic materials. In some cases, including for housing retrofits and large industrial capital expenditure decisions, high financing requirements may run up against issues of affordability. For industry, operating expenditure implications can be made clearer, including with greater certainty on future green feedstock, energy mix, cost, and availability. Yet the upside of taking these actions and seizing the opportunities is considerable: the greener future that beckons will ultimately benefit Belgium—and the planet. In a rapidly shifting job market globally, a greener future could present significant employment opportunities. Much is at stake, and key decisions will need to be made.

Speed is of the essence: moving rapidly will be essential to ensure Belgium meets its national and European commitments and potentially secures a competitive advantage in the process.

This report is not a playbook or a road map but rather a source of new insights, facts, and data to drive decisions to reach the net-zero objective. It is based on the in-depth analysis of one possible pathway that was in turn based on realistic assumptions and modeled to illustrate the challenges and requirements for a timely transition. Nonetheless, the conclusion remains the same: Belgium could reach its net-zero ambition, but achieving this will require coordinated action. On top of that, Belgium can be ambitious and tap into various value pools that the transition offers globally.