Türkiye’s sustainability transformation

(11 pages)

Sustainable inclusive growth is as much of an imperative for Türkiye as it is globally, and, as for other countries around the world, it is a challenge yet also an opportunity. In 2021, Türkiye ratified the Paris Agreement on climate change and announced 2053 as the target for achieving net-zero emissions.¹ In alignment with global trends, Türkiye’s greenhouse gas (GHG) emissions in the past century have increased alongside rising average temperatures.² New regulations, such as the EU Emissions Trading System and Green Deal, have also come into play to encourage EU countries to cut net GHG emissions, and could have a significant impact on Türkiye’s export-driven economy (see sidebar “Europe’s Carbon Border Adjustment Mechanism”).³ There are ways to address these—countries and companies can create decarbonization pathways, gradually reducing the volume of GHGs in the atmosphere by shifting to greener technologies and products.

Europe’s Carbon Border Adjustment Mechanism

Europe’s Carbon Border Adjustment Mechanism (CBAM)—set to come into force in 2026—will impose a tax on imports to the European Union of high-carbon materials, including steel, cement, aluminum, fertilizers, hydrogen, and electricity. The stated aim of the CBAM is to put a fair price on the carbon emitted during the production of carbon-intensive goods that are entering the European Union, and to encourage cleaner industrial production outside of Europe.¹ This will likely motivate producers around the world to shrink their carbon footprints and, in the process, maintain access to European markets.

The implementation of CBAM will also align with the phase-out of free carbon allowances introduced under the EU Emissions Trading System (ETS). Provision of free allowances limits costs for producers participating in EU ETS in relation to competitors outside of the European Union. With phase-out of free allowances, low-emission imports into Europe in prioritized industries may have an advantage over local production with higher emissions.

These factors are relevant for Turkish companies as the European Union accounted for roughly 40 percent of $254.2 billion of all Turkish exports in 2022.² We estimate that the CBAM could lead to an additional €1 billion in costs for Turkish companies if it came into force today.³

In this article, we explore the carbon emissions dimension of sustainability in Türkiye from two perspectives: first, looking at possible pathways by which Türkiye could achieve net zero by 2053 and the investment implications; and second, viewing net zero as an economic opportunity, exploring possible green business models, products, and services that the country could consider to benefit Turkish society and lay the foundations for a more sustainable future. The net-zero journey offers Türkiye significant macroeconomic opportunities. In 2022, over 80 percent of Türkiye’s total energy supply consisted of fossil fuels, such as oil, natural gas, and coal.⁴ Türkiye relies on imports of these fuels to meet the growing energy demand. Utilizing Türkiye’s full potential in renewables to decarbonize energy consumption could significantly increase the share of domestic energy production in Türkiye’s total energy supply and reduce the energy trade deficit, which reached $81 billion in 2022.⁵

The article describes one possible pathway among many alternatives for Türkiye to reach the net-zero objective, that is built on realistic assumptions based on currently available data and technologies and modeled to illustrate the challenges and requirements for a timely transition. As part of our analysis, we ran multiple scenarios and laid out their investment implications. From the resulting pool of scenarios, here we describe one of the more feasible and cost-effective decarbonization pathways that could achieve Türkiye’s net-zero target. In this scenario, we anticipate that Türkiye would need to spend about 7 percent of GDP on energy, materials, land-use, and infrastructure development over the coming decades to meet its goal of achieving net zero by 2053.

Unlocking decarbonization pathways

In 2019, Türkiye’s net GHG emissions were approximately 422 million tons CO₂ equivalent (MtCO₂e).⁶ Total emissions (by which we mean emissions excluding removals by land-use and forestry) were 506 MtCO₂e,⁷ more than half of which came from three sectors: power and heat generation⁸ (accounting for 139 MtCO₂e); road transportation (77 MtCO₂e); and cement production (49 MtCO₂e).⁹ Furthermore, Türkiye has a thriving agricultural sector, which produces large volumes of methane.¹⁰ These emissions are partially balanced by the forestry and land-use sector, which yields an abatement potential of 84 MtCO₂e. Emissions continue to rise, with the current trajectory suggesting a 60 percent increase over the next 30 years.¹¹

Our methodology

Our methodology used a proprietary tool kit, McKinsey’s Decarbonization Scenario Explorer (DSE), that allows for the development of country- and sector-level decarbonization scenarios and analysis of their implications. The model provides an outlook on investments, operational expenditures (opex), and abatement costs, and helps answer two questions: how can Türkiye decarbonize most cost-effectively? And what is the cost for Türkiye to decarbonize?

This article compares a business-as-usual scenario with a net-zero scenario. Both analyses are built upon a baseline of emissions across seven key sectors. Each scenario considers the drivers of these emissions and projects activity levels and corresponding emissions up to 2053, using growth estimates for population, GDP, and sector-specific developments based on regional and global trends. The business-as-usual scenario is included for benchmarking purposes—it assumes that there would be limited change in attitudes and priorities, and no major changes in technology, economics, or policies in relation to sustainable development.

The net-zero scenario is selected from a study of potential net-zero pathways, which we evaluated according to the potential penetration of current and new technologies based on their maturity, abatement potential, and expected uptake in similar countries. To allow for a realistic and cost-effective pathway, we assumed a gradual transition approach, so that many new green technologies would need to be mature enough and economically viable for wide-scale adoption in Türkiye.

The net-zero scenario is based on specific assumptions and a maturity assessment of various aspects of Türkiye’s industry and technologies. For example, it reflects Türkiye’s current advantages by assuming a rapid transition to green technologies for select areas—such as a full transition to renewables in power generation, and full-scale adoption of electric arc furnace (EAF) technology in cement production. By contrast, for certain new green technologies, we assumed full implementation would only follow when both economic and technical maturity have been achieved, for example, in carbon capture technologies and fuel cell electric vehicles.

To set realistic boundaries, we calculated the maximum potential of renewable energy production sources, the decarbonization potential of the forestry and land-use sector, and the need for hydrogen and long-duration energy storage capacities to offer grid security and flexibility. From the resulting pool of scenarios, we selected the least costly decarbonization pathway, considering capital expenditure (capex) and opex costs, that also achieves net zero.

The scenario presented is only representative of a single pathway that we modeled to illustrate the undertaking. It is not meant to advocate for one specific pathway to achieve net zero and it will likely evolve over time. It does not intend to provide a McKinsey forecast or recommend a policy.

Moreover, the model is subject to certain limitations stemming from its initial assumptions. The model does not account for how challenges around capital raising or aligning stakeholders may be addressed, nor does it consider the actions taken by neighboring countries or the potential system-level consequences and interdependencies that these actions may entail. The model does not encompass the entire range of individual company actions that have been announced or are currently under consideration. Rather, the pathway outlined in the model concentrates on the most relevant actions within each sector.

Even with these limitations, we believe that the broad conclusions related to what the transition would entail and the spending involved are robust and that the findings are useful in determining which sectors can play a significant role in decarbonization and the timelines and spending needed to do so.

Türkiye’s journey to net zero will be contingent on the abatement pathway it chooses. The net-zero scenario described here is arrived at following McKinsey methodology that focuses on seven key sectors of the economy: power, transportation, buildings, industry, agriculture, waste management, and the forestry and land-use sector.¹² The net-zero transition: What it would cost, what it could bring, McKinsey Global Institute, January 2022. The model used considers 50 subsectors and more than 160 technologies, which we replicated in the Turkish context. The result is a potential roadmap for emissions reduction across Türkiye’s sectors (see sidebar “Our methodology”). If Türkiye is to reach its net-zero target, significant action is likely needed across four decarbonization levers across seven sectors, each dependent upon key technologies (Exhibit 1):

Power generation, consumption, and electrification: This includes renewable electricity generation, electrification of industrial processes, changes to buildings for heating and cooking (for example, heat pumps for residential heating), and decarbonization of transportation (for example, EVs).
Carbon capture and storage: This is a potentially significant lever, especially for reducing emissions from industrial processes.
Nature and agriculture: The main activities within this lever include reforestation, the management of pastureland, cropland, and grazing land to control forages, and optimized use of fertilizers.
Waste management: This comprises recycling and large-scale implementation of waste recovery systems.

Significant action would likely need to be taken on four key decarbonization levers to achieve net zero by 2053.

Turning to a sector view, according to our model, Türkiye would need to cut emissions from transportation, buildings, and power generation by as much as 90 percent, and from agriculture by 50 percent to achieve net zero by 2053. Meanwhile, emissions from hard-to-abate sectors—industry and agriculture—would likely account for two-thirds of emissions by 2053, and 124 MtCO₂e would need to be offset by investment in forestry and land-use change (Exhibit 2).

Türkiye would need to cut emissions from transportation, buildings, and power generation by as much as 90 percent.

In the power sector, renewables (including solar, wind, hydropower, and geothermal) will play a key role in the transition and could abate a significant volume of emissions (about 30 percent by 2053). In 2022, renewables accounted for 42 percent of electric power generation in Türkiye. In the net-zero scenario, the share of electricity produced by coal power plants would be reduced by 81 percent by 2030 and eliminated by 2053.

Renewables capacity would get close to the maximum potential for Türkiye, meaning solar power capacity would rise to 240 gigawatts (GW), more than a 25-fold increase from 2022, and wind capacity would rise to 85 GW, an almost eight-fold increase from 2022. Around 30 GW of long-duration energy storage capacity would be available to maintain energy security and help address intermittency issues. Meanwhile, green hydrogen production would rise from zero at present to 3.6 million tons (Mt) per year to meet domestic demand alone (Exhibit 3).

Türkiye's renewable energy resources could meet increasing electricity demand.

In industry, due to a relatively long implementation time span and high capex for new technologies, decarbonization efforts up to 2030 would primarily focus on retrofitting conventional technologies and using biofuels in industrial processes. Thereafter, a significant portion of abatement by 2053 would result from electrification of industrial processes. Under the modeled pathway, an 80 percent reduction in emissions in cement production could be achieved through electrification using biomass, carbon capture, alternative raw materials, and clinker substitution. In industries that use low-to-medium-intensity heat (such as food and beverage; tobacco; pulp and paper; textiles; wood-related products; etcetera), emissions could be reduced by more than 90 percent through waste heat recovery, as well as by using heat pumps, which are about four times more efficient than traditional systems.¹³ And, in the iron and steel industry, increased adoption of green hydrogen-based direct reduced iron (DRI) in EAF technology and carbon capture would reduce emissions by about 85 percent.

With the changes brought about by the need for decarbonization, urban life in Türkiye will likely have undergone a major transformation by 2053. For example, in transportation, the share of EVs in the total car parc would need to reach 20 percent by 2030 and over 95 percent by 2053, with EV charging stations needing to be built.¹⁴ And, as another example, under the net-zero scenario, heat pump penetration in the buildings sector would need to double by 2030 and reach 20 million in 2053. In 2053, the share of residential buildings with solar panels would need to reach about 80 percent.

In nature, there are potential opportunities to offset carbon through nature-based solutions such as avoiding deforestation and reforestation. These could be supported by satellite data gathering and the use of AI to ensure effective management of pastures, crops, grazing lands, and forests. These kinds of actions could add another 9 percent of abatement, with annual absorption rising from 84 MtCO₂e at present, to 103 million MtCO₂e in 2030, and 124 MtCO₂e in 2053 (Exhibit 4).

Türkiye could increase its CO2 absorption potential by 1.5 times through land use and forestry optimization.

In agriculture, the use of feed additives in animal farming, replacement of synthetic fertilizers with enhanced fertilizers, and switch to electrical farming equipment can lead to a 5 percent emission reduction in 2053.

Finally, in waste management, circular business models and greener technologies have the potential to drive emission reductions, amounting to 3 percent of potential CO₂ abatement.

The requirements for a net-zero transition

The net-zero scenario we have used in this analysis finds that over the coming decades, Türkiye would need to spend about $3.1 trillion on the path to achieving net zero. We estimate that this spending would make up 7.0 percent of Türkiye’s GDP, slightly higher than the 6.5 percent of GDP specified by the European Union for its member states.¹⁵ The net-zero transition: What it would cost, what it could bring, January 2022. This spending would be done on low-emission and high-emission assets across all sectors.

Low-emission investments would likely be used for funding green technologies; implementing reforestation and management of land; improving insulation of buildings; transforming existing infrastructure; and deploying new infrastructure to improve energy transmission and distribution. Infrastructure investments would include building and scaling up electricity transmission lines and creating power system flexibility. In addition, further infrastructure investment requirements would include building waste management facilities; EV charging stations; hydrogen refueling stations; district heating systems; and hydrogen pipelines.

Based on our analysis, about 20 percent of this funding would represent the additional capex required for Türkiye to achieve net zero, amounting to $620 billion. The remaining 80 percent would comprise continued investments on high-emission assets and capital reallocation away from carbon-intensive assets (for example, to EVs instead of internal combustion engine vehicles). Catalyzing effective capital reallocation would likely require scaling up climate finance, issuing new financial instruments, and rethinking conventions for risks and returns.

Three net-zero considerations

Reducing GHG emissions to achieve net zero in line with the goals of the Paris Agreement is critical, yet the challenges involved are significant. For example, the required shift away from relying on coal to produce power, alongside mass electrification of industry and transport, are major undertakings for any economy—with significant financial costs and social implications. Türkiye faces the same challenges that many countries face in a net-zero transition, such as the need for financing, investment in new infrastructure, and ensuring a transition that is orderly and well sequenced. Any transition roadmap would likely include initiatives to bolster energy security and pay attention to technological shifts and the scaling up of existing systems. In addition, like other countries that derive sizable portions of their GDP from high-emissions manufacturing, fossil fuel-based power, and agriculture, Türkiye may also be at risk of asset stranding. Newer technologies may be too expensive to use at scale while lower-cost, high-emissions assets may need to be prematurely retired.¹⁶ How the net-zero transition would play out in countries and regions,” McKinsey, January 25, 2022.

For every country, the transition will likely be huge and complex, and all stakeholders will need to play a role. To ensure a smooth transition, Türkiye, like other countries, would need to address three further considerations: affordability, reliability, and industrial competitiveness.¹⁷An affordable, reliable, competitive path to net zero, McKinsey, November 30, 2023.

Affordability relates to both energy resources and new technologies. A poorly executed reduction in the share of fossil fuels could lead to higher energy prices for consumers, due to potential limitations in power supply and storage. The production cost of materials, such as steel and cement, could increase if new technologies are not sufficiently scaled or deployed.

Reliability lies in ensuring a secure supply of energy, food, and materials. Poorly designed energy systems might not provide storage and capacity to meet demand reliably; diligent planning will be required to balance supply and demand.

Industrial competitiveness could be vital for Türkiye, as the net-zero transition could impact countries’ positioning in the global economy. Such shifts may require Türkiye to position itself well to capture economic opportunities arising from growing industries and technologies.

Stakeholder collaboration will be necessary

The modeled scenario assumes that Türkiye’s stakeholders would act with unity to achieve net zero, and that the scale and complexity of the challenge is not to be underestimated, for example:

Industrial associations could create industry-wide, net-zero roadmaps and pioneer green ecosystems, while companies could set science-based decarbonization targets and source capital globally and domestically to fund the transition.

Financial institutions and investors have a role to play in assessing opportunities to deploy green funds with accessible terms for organizations to undertake major transformations. In addition, new financial structures could allow companies to replace high-carbon legacy assets.

Government could play a role, for example, by raising awareness among the public, and enabling the transition through new initiatives and funds for all stakeholders.

Consumers could demand more sustainable choices, which could stimulate green business building, while entrepreneurs and universities have an opportunity to build green technology ecosystems and fund innovation and idea generation.

While there are considerable challenges involved in the transition, a new type of demand is opening up as the journey toward net zero gathers momentum. The world needs new products and services to replace carbon-intensive ones, and countries and companies can position themselves at the forefront of this change.

Building green businesses to support sustainability

While decarbonization could create risks and incur costs, it could also bring significant business-building opportunities. Recently, navigating the net-zero economy has become more complicated with current pressures in economies creating tension between near-term financial performance and commitments toward a net-zero world.¹⁸ Full throttle on net-zero: Creating value in the face of uncertainty,” McKinsey, September 20, 2023. However, leaders that take bold actions have a unique opportunity to create value despite the headwinds. Globally, reaching net zero could entail a 60 percent rise in capital spending on physical assets by 2050, amid accelerating sales of sustainable products across value pools.¹⁹ Accelerating toward net-zero: The green business building opportunity,” McKinsey, June 14, 2022. Our analysis indicates that growing demand for net-zero offerings could generate more than $12 trillion in global annual sales by 2030 across 11 value pools. Nearly half of this value would come from the transportation, buildings, and power generation sectors. Companies that move fast could benefit most, with about 250 green “decacorns” (companies worth more than $10 billion) predicted globally by the end of the decade.²⁰ Building green businesses to speed the transition to net zero,” blog entry by Anna Granskog and Tomas Nauclér, McKinsey, July 12, 2022.

Against this background, Turkish companies have a chance to create more sustainable business models. We estimate that the cumulative value from green business building could reach over $500 billion by 2030.

Seven potential areas of opportunity

Türkiye is well placed to capture new business opportunities. Its geographic location sets the country up as a manufacturing hub close to Europe, with an already significant export volume to Europe of about €100 billion in 2022. It also has a young population, with 26 million people between 15 and 34 years of age in 2022, comprising around 66 percent of the working age population.²¹ The country’s growing innovation ecosystem could also stand it in good stead; six unicorns (a start-up company valued at more than $1 billion) have been founded in the past six years.²²

Building on our scenario-based assessment, there are several green business building opportunities for companies, institutions, and the public sector, selected according to viability, adaptability to Türkiye’s infrastructure and workforce, and potential sustainability and economic impact. Some may supply domestic demand, others may be better suited for export. Opportunities in the following seven areas are contingent on the ability of decision makers to implement and achieve scale—primarily by unlocking investment across renewable energy, sustainable products, clean transportation, and green buildings.

Residential heat pumps: Heat pumps are highly efficient systems that produce up to five times the energy they consume and can be used to heat or cool buildings. When powered with green electricity and adequately maintained, they produce zero emissions.²³ Based on the net-zero scenario described in this article, Türkiye would need to install about 20 million heat pumps by 2053, requiring capital spending of between $400 million and $1 billion. By 2030, the cost of heat pumps is projected to fall to 8 percent below that of conventional technologies, driven by innovation and economies of scale.²⁴

Residential solar panels: Installed off-grid solar power capacity has increased globally by 27 percent a year over the past decade, due to the decreasing cost of solar photovoltaic systems and changes in regulations worldwide.²⁵ Solar generation has grown rapidly in Türkiye, with solar power accounting for 8 percent of the energy mix in 2021.²⁶ Based on the net-zero scenario, 80 percent of residential buildings would need to be equipped with residential solar roofs and sidings to achieve net-zero emissions by 2053.

EV battery recycling: In the net-zero scenario, Türkiye’s demand for EV batteries is projected to rise to about 100 terawatt hours (TWh) by 2053, because of increased EV ownership.²⁷ EV battery recycling typically involves separating out valuable materials such as cobalt and lithium salts, stainless steel, copper, aluminum, and plastics. With 21 TWh of EV battery capacity likely to be available for reuse in 2053, Türkiye could generate $71 billion in EBITDA in EV battery recycling.

Plastics recycling: Türkiye recycled 6.1 Mt of plastic during 2020 with an estimated $6 billion in value-add to the national economy.²⁸ The sector is expected to reach $900 billion globally in 2050, with demand driven by major consumer brands’ commitments to use recycled raw materials.²⁹

Sustainable construction and green steel: As the world’s seventh largest steel manufacturer, Türkiye has an opportunity to establish itself as a regional hub for green steel, which emits at least 70 percent fewer GHGs than conventional steel.³⁰ In the net-zero scenario, Türkiye could reduce its iron and steel industry carbon footprint by 85 percent while tripling its production volume to more than 100 Mt annually.³¹ Based on the net-zero scenario, local demand for green steel could reach 7 to 11 Mt by 2030 and offer a price premium of €150 to €200 per ton.³² To tap into this market, steel makers would need to adopt modern technologies; for example, scaling up their use of green hydrogen-based DRI in furnaces, instead of fossil fuel-based DRI, and building cleaner EAFs instead of traditional blast furnaces. The net-zero scenario estimates that an annual investment of $1.3 billion would be required to achieve this. At the same time, producers could increase their use of scrap metal in EAFs, which could eventually make blast furnaces obsolete.

Green hydrogen: Türkiye’s domestic demand for green hydrogen would rise from zero today to 3.6 Mt by 2053 in our scenario. To be able to supply this demand, at least $100 billion of investment would be necessary. Integrating green hydrogen production facilities with current infrastructure could support stakeholder investment. Moreover, Türkiye’s abundance of low-cost renewable energy sources and proximity to Europe could boost the green hydrogen trade.

Voluntary carbon markets: Voluntary carbon markets operate in parallel to compliance markets, but without a legal obligation to participate. Türkiye is the world’s fifth-largest voluntary market for carbon credits, with 46 MtCO₂e issued to date.³³ Based on countries acting on net-zero commitments, the market could grow to 30 to 40 MtCO₂e by 2030, worth between $800 million and $1.3 billion.

Next steps: Laying the groundwork

To seize the opportunities presented by the net-zero transition, companies will likely need to solve complex optimization problems across products, operations, employees, and financing. To support decision making in these areas, organizations could establish baseline capabilities that will serve as the foundation on which to build a solid platform to capture opportunities. The following three steps could help them to achieve this:

Develop a vision and identify sources of funding: Decision makers could assess opportunities and formulate sustainability strategies with specific targets. An early priority would be to size up and identify financing opportunities to build green businesses.
Create green ecosystems and partnerships: Companies could work with other stakeholders to create green ecosystems and partnerships that would support change internally and across industries. This would include decarbonization of supply chains through close collaboration with suppliers, and partnerships to codevelop green projects.
Create a culture of continuous innovation: In corporate environments, sustainability needs to be established at the core of the culture. For many companies this would mean a change in mindset, prioritizing green ideas, and leaders promoting a culture of innovation and positive engagement with sustainable technologies. It would also mean assigning the right budget and talent to sustainable technologies, and continually monitoring progress.

The path to net zero and green business building is set to catalyze disruptive change across the Turkish economy. While there will be challenges in managing the transition, there will also be opportunities. Indeed, much of the capital spending required could be sourced by redirecting investments. With that in mind, companies and stakeholders have an opportunity to seize the moment, seeking out the most promising pockets of value, and investing boldly to create Türkiye’s green economy of the future.

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Türkiye’s sustainability transformation: The net-zero opportunity