Governments and companies are increasingly committing to climate action. Yet significant challenges stand in the way, not least the scale of economic transformation that a net-zero transition would entail and the difficulty of balancing the substantial short-term risks of poorly prepared or uncoordinated action with the longer-term risks of insufficient or delayed action. In this report, we estimate the transition’s economic effects on demand, capital allocation, costs, and jobs to 2050 across sectors that produce about 85 percent of overall emissions and assess economic shifts for 69 countries. Our analysis is not a projection or a prediction and does not claim to be exhaustive; it is the simulation of one hypothetical, orderly path toward 1.5°C using the Net Zero 2050 scenario from the Network for Greening the Financial System (NGFS), to provide an order-of-magnitude estimate of the economic costs and societal adjustments associated with net-zero transition (see sidebar, “Our research methodology: Sources, scenarios, limitations, and uncertainties”).
Six features characterize the shifts in energy and land-use systems, economic sectors, and countries in the net-zero transition, according to our analysis. They are the following:
1. Universal
Each of the seven major energy and land-use systems contributes substantially to emissions, and every one of these systems will thus need to undergo transformation if the net-zero goal is to be achieved. Moreover, these systems are highly interdependent. Actions to reduce emissions must therefore take place in concert across the systems. For instance, electric vehicles lead to overall emissions reductions only to the extent that low-emissions electricity production has been achieved. More broadly, all sectors and geographies must play a role. All sectors of the economy participate in these energy and land-use systems across global value chains. Similarly, all countries contribute to emissions, either directly or through their role in value chains (although with significant differences, as we note below). Reaching net-zero emissions will thus require a universal transformation of the global economy.
2. Significant
The economic transformation needed to achieve the transition to net zero will be significant. Our analysis focuses on demand, capital allocation, costs, and jobs. Looking just at capital allocation, we find that annual spending on physical assets in the energy and land-use systems through 2050 would need to be about 60 percent greater than it is today, rising by $3.5 trillion annually on average. Accounting for expected increases in spending, as incomes and populations grow, as well as for currently legislated transition policies, the required increase in spending would be lower, but still about $1 trillion. In all, our analysis suggests that the Net Zero 2050 scenario would require spending on physical assets of about $275 trillion between 2021 and 2050 (about 7.5 percent of GDP over the period) in the areas we analyzed. We also see significant shifts in demand for various goods and services in the scenario analyzed here, including steep declines in demand for coal, oil, and gas production and an eventual virtual end to manufacturing of cars with internal combustion engines, as sales of zero-emissions alternatives (for example, battery-electric and fuel cell-electric vehicles) increase from 5 percent of new-vehicle sales in 2020 to virtually 100 percent by 2050.
3. Front-loaded
Several aspects of the transition to net zero would be more significant in the early stages of the shift. For example, the capital spending increase noted above would rise from 6.8 percent of GDP today to about 9 percent of GDP between 2026 and 2030 before falling. Delivered cost of electricity could increase in the near term. In our scenario, delivered cost of electricity could rise about 25 percent from 2020 levels until 2040 and still be about 20 percent higher in 2050, to build out renewable power assets and grid infrastructure. In the long run, it is conceivable that the delivered cost of electricity could be on par or potentially less than 2020 levels, because renewables have a lower operating cost—provided that the power system can find ways to overcome the intermittency of renewable power and build flexible, reliable, low-cost grids. The up-front capital spending for the net-zero transition could also lower other operating costs over time for consumers. A key example of that is mobility. More broadly, action is needed over the next decade to reduce the buildup of emissions and prevent rising physical risks that might occur in future decades.
4. Uneven
While universal, the economic exposure to the transition will not be uniform across sectors, geographies, and communities and individuals. First, sectors that account for approximately 20 percent of GDP are most directly exposed to the transition; they have high levels of emissions in their operations (for example, steel and cement), and in the use of their products (for example, automobiles and fossil fuels). Sectors accounting for about another 10 percent of GDP are also exposed because of emissions in their supply chains (for example, construction). Many could see a decline in demand for products in their current form. Many of these sectors would also incur cost increases as they decarbonize. For example, steel and cement production costs would rise by about 30 percent and 45 percent, respectively, by 2050, compared with today, in the scenario we analyze. Second, lower-income countries or those with economies that depend heavily on fossil fuel resource-producing sectors would also be more exposed; for example, sub-Saharan Africa, Latin America, India and some other Asian countries would require capital spending of about 10 percent or more of GDP, approximately one and a half times more than the capital spending in other regions such as Europe, the United States, and Japan, and deploying the capital may be more challenging for these regions; a greater share of their economic activity, employment, and capital stock would also be exposed and may need to transform.
Watch the replay
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.
Finally, within countries, certain communities could be more affected than others if their economies rely heavily on industries that have high levels of emissions or whose products are heavy emitters; in the United States, for example, more than 10 percent of employment in 44 counties is in coal, oil, and gas, fossil fuel–based power, and automotive. Workers in such exposed sectors are especially vulnerable; for example, by 2050 in the Net Zero 2050 scenario, demand for fossil fuel–based power jobs could be about 60 percent lower compared to today’s direct jobs related to operational activities due to the net-zero transition, while millions of new jobs could be created in the renewables sector. (By “direct” jobs we mean jobs in the specified sector, as opposed to “indirect” jobs, which refers to the upstream jobs that produce inputs for production in the specified sector.) Any increase in costs or prices would affect lower-income households the most.
5. Exposed to risks
Management of the transition to net zero will substantially influence outcomes, and any net-zero transition scenario including the Net Zero 2050 one we use in this research will be exposed to risks. These risks range from the potential for increased physical climate risks if any transition is abrupt or delayed, to heightened labor market disruption in the event that the nature of any change is so abrupt that workers have insufficient time to adapt. Large-scale asset-stranding is also a significant risk, if an abrupt transition means that even relatively new high-emissions assets are retired or replaced with low-emissions ones before their normal replacement cycles. Our analysis for stranded assets in the power sector suggests that about $2.1 trillion of assets could be prematurely retired or under-utilized in the net-zero scenario analyzed here between now and 2050. One of the most immediate risks is that of a disorderly energy transition, if the ramp up of low-emissions activities does not take place fast enough to fill gaps left by the ramping down of high-emissions activities. That mismatch could potentially affect energy markets and the economy more broadly if energy supply and prices become volatile. This in turn could potentially create a backlash that delays the transition (see sidebar, “How rising energy prices create risk”). Higher-order effects could include declines in market prices including for financial assets.
6. Rich in opportunity
The opportunities for countries, sectors, and companies could be considerable if they are able to tap into growing markets as the world transforms to a net-zero economy. Nations that have abundant natural capital, such as more hours of sunshine, or that invest in technological, human, and physical capital could well be positioned to prosper in the net-zero economy. Companies could also gain from three categories of opportunity: first, through decarbonizing processes and products, which can make them more cost-effective in some cases or tap into new markets for relatively lower-emissions products; second, from entirely new low-carbon products and processes that replace established high-carbon options, for example carmakers meeting new demand for electric rather than ICE vehicles; and third, through new offerings to support production in the first two categories. These could take the form of inputs such as lithium and cobalt for battery manufacturing, physical capital such as solar panels, and an array of technical services from forest management to financing to emissions measurement. And the most significant benefit of the net-zero transition is that it will prevent the build-up of physical risks and reduce the odds of initiating the most catastrophic impacts of climate change.
