McKinsey estimated the global energy transition at $275 trillion



2022/01/25

McKinsey estimated the global energy transition at $275 trillion

McKinsey experts: global energy transition will require $275 trillion, or 7.5% of global GDP.

The "green" energy transition will greatly affect the global economy - up to a change in food habits, McKinsey estimated. It will cost Russia dearly, but if it fails to contain warming, the country may be among the winners

Read also: Rubi Rose

The McKinsey Global Institute, a research arm of the McKinsey consulting company, has described a hypothetical model of large-scale changes in the economy and social sphere that will occur if the world reaches carbon neutrality by 2050. Most countries have promised to strive for this (Russia also declares such a goal, but by 2060). RBC got acquainted with the study "Transition to net zero emissions".

According to McKinsey, Russia was among those countries to whom the energy transition will cost the most, since its economy is based on fossil fuels. The country ranks fourth on the planet in terms of carbon dioxide emissions. At the same time, due to its climatic conditions, Russia bears the least risks if carbon neutrality is not achieved and global warming cannot be contained.

The study was based on a scenario developed by the Network for Greening the Financial System (NGFS), an organization established by central banks and supervisory authorities in December 2017 for a rapid global response to climate change (the Bank of Russia joined it in 2019). Most countries of the world agreed to prevent the global temperature from rising by more than 1.5 degrees Celsius relative to the level of 1850-1900 by signing the Paris Climate Agreement in 2016. In November 2020, the participating countries of the UN Framework Convention on Climate Change signed a climate pact at a conference in Glasgow, which instructs states to reduce the use of coal. Other agreements reached between the countries concerned stopping deforestation and reducing methane emissions.

McKinsey experts examined what transformations will take place in the global economy through the prism of four aspects — demand for products and goods, capital allocation, costs for production and consumers, and the labor market. The global study covered the sectors responsible for about 85% of total greenhouse gas emissions and describes economic changes in 69 countries, including Russia.




How much will the energy transition cost to countries

According to the authors of the study, the transition to zero emissions can only be universal, that is, affect all sectors of the economy and countries: the energy and land use systems underlying the global economy and responsible for CO2 emissions will be rebuilt.

From 2021 to 2050, the total capital expenditures on physical assets necessary for the transition to carbon neutrality will amount to $275 trillion, or 7.5% of the accumulated global GDP for the period. We are talking, for example, about replacing traditional coal-fired power plants with coal-fired thermal power plants with carbon capture technology or about moving away from internal combustion engines in vehicles. The average annual cost of decarbonization will have to grow from today's $5.7 trillion to $9.2 trillion.

At the beginning of the road — until 2030 — the volume of investments will be greater. Consumers may also face increased start-up costs, as they will have to switch to low-emission products (for example, electric vehicles). In addition, an increase in electricity prices is possible in the short term.

Among the countries at risk that may not be able to cope with the financial challenges of energy transition, there will be low-income countries, as well as countries with large reserves of fossil fuels. The largest costs will be incurred by fossil fuel-based economies - an average of 18% of their total GDP until 2050. These are the countries of the Middle East, North Africa, Russia and the CIS countries, in particular Kazakhstan.

Most of their expenses will continue to be spent on fossil fuel-related assets. However, these countries will strive to reduce them and switch to low-emission assets, McKinsey predicts. According to the Russian government's assessment presented in the low-carbon development strategy (.pdf), achieving carbon neutrality will cost the country 1% of GDP annually in 2022-2030 and 1.5-2% in 2031-2050. "For Russia, the challenge will be that coal occupies a significant share in the structure of fossil fuels. Risks are associated both with domestic needs (coal is used for power generation, metallurgy and other industries) and with exports. The latter will decrease as other countries abandon coal," Sergey Zaborov, head of ESG for resource industries in Russia and the CIS at McKinsey, told RBC. VTB Capital estimated the cost of decarbonization in Russia in the amount of up to 480 trillion rubles by 2060.

McKinsey estimates that the costs of the world's largest economies - the United States, China, the European Union, Japan and the United Kingdom - will account for about half of global spending on physical assets in the context of decarbonization. These countries will spend about 6% of their total GDP from 2021 to 2050.

Among the risks of energy transition is the volatility of electricity prices (producers will try to compensate for investments in clean energy by raising tariffs). "With weak governance, the transition can destabilize energy prices, which will negatively affect its availability, both physical and economic, especially for households and low-income regions. This will also affect the economy as a whole and may lead to disruption of the transition (for example, if an increase in energy prices causes a negative backlash)," the authors of the study warn.




Uneven transition

The global energy transition will take place unevenly in different sectors, communities and even individual families, depending on their income, McKinsey expects.

Among the sectors most at risk will be industries with high emissions either as a result of production processes (steel, cement production), or from manufactured products (oil, gas, coal, automotive) — these sectors account for about 20% of global GDP. Another 10% of GDP is accounted for by sectors with high emissions associated with supply chains — for example, construction. According to McKinsey, as of 2019, 30% of carbon dioxide emissions in the world are caused by energy, the same amount is accounted for by industry (steel, cement, oil and gas production, coal and chemical industries), 19% - by the transport industry.
In individual communities within countries, those whose local economy depends on high-emission sectors are more at risk. For example, more than 10% of jobs in 44 U.S. counties are in the extraction of fossil fuels, energy based on fossil fuels, and the automotive industry.

Poor families, regardless of their location, will suffer from energy consumption more than others. For low-income households, it may be unbearable to increase the cost of electricity, although in the long term consumers may see benefits, for example, from improving energy efficiency in homes.




Impact on consumer behavior and the labor market

The transformation of the global economy into a carbon neutral one will also lead to a change in consumer behavior and the redistribution of jobs. Consumers will need to replace products that use fossil fuels. First of all, this applies to cars powered by an internal combustion engine and home heating systems.

The diet may also change: there will be less beef and lamb in stores, whose cultivation is associated with a high level of emissions, and there will be more poultry meat. The fact is that cattle require large areas of land for walking and growing feed, which leads to deforestation — one of the main reasons for the loss of biodiversity and the release of carbon into the atmosphere. Pork and poultry meat production requires several times less feed. In addition, ruminants emit methane (it evaporates from manure) - a greenhouse gas, which is considered much more dangerous than carbon dioxide.

Michael Zippo
https://linkedin.com/in/michael-zippo-9136441b1
[email protected]

Sources: McKinsey





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