World needs to spend $275 trillion by 2050 to reach net-zero

The global economy would need to spend US $275 trillion in total or nearly US $9.2 trillion per year to create a net zero emissions world order by 2050, McKinsey estimated in a report on energy transition published on Tuesday.

A net zero transition would also entail a significant and often front-loaded shift in demand, capital allocation, costs, and jobs, said the report, titled “The economic transformation: What would change in the net-zero transition”.

While underscoring that the economic impact of the energy transition was much higher than earlier estimates, the consultancy group said such heavy investments could be lucrative and warned that the long-term costs of not doing enough to tackle climate change would be far greater.

According to McKinsey’s analysis using the Network for Greening the Financial System (NGFS), changes in policies, technologies, and consumer and investor preferences would lead to considerable shifts in demand for various goods and services.

“By 2050, oil and gas production volumes would be 55 percent and 70 percent lower, respectively, than they are today. Coal production for energy use would nearly end by 2050,” the report said.

The estimate found that the transition would heavily impact demand for products that use fossil fuels. “Demand for internal combustion engine (ICE) cars would eventually cease as sales of battery-electric and fuel cell-electric cars increase from 5 percent of new-car sales in 2020 to virtually 100 percent by 2050,” it said.

On the fiscal front, the cumulative spend of US $275 trillion would mean an annual increase of US $3.5 trillion on current spending, McKinsey said. "The increase is approximately equivalent, in 2020, to half of global corporate profits, one-quarter of total tax revenue and 7 percent of household spending,” it calculated.

The consultancy said that while the spending requirements look large and financing has yet to be established, many investments had a favorable return profile and should not be seen as merely costs.

According to Gernot Wagner, a climate economist at New York University, the estimate was a welcome step in establishing the true cost of energy transition and the investments needed.

“Climate policy means massive investment, and a massive rejigging of market forces from the current high-carbon and low-efficiency path onto a low-carbon and high-efficiency one,” Wagner told Reuters.

Noting that global decarbonisation will be possible only if nine system-level requirements are met - encompassing physical building blocks, economic and societal adjustments, and governance, institutions, and commitment, McKinsey said.

“We find that the transition would be universal, significant, and front-loaded, with uneven effects on sectors, geographies, and communities, even as it creates growth opportunities,” the report said.