|
Plenty of studies have shown that the cost of inaction on climate change will ultimately be greater than the cost of action. But a McKinsey study published this week estimated how much more needs to be spent across sectors and across countries to achieve an orderly and universal net zero transition in the next three decades: capital spending on physical assets would total around $275 trillion through 2050—approximately $9.2 trillion per year–or an increase of $3.5 trillion on the annual spending today, as high-emissions activities are ramped down and low-emissions activities ramped up. The slice of GDP dedicated to the transition would need to rise from 6.8% today to as much as 8.8% between 2026 and 2030, before falling back. Dr. Mekala Krishnan, the report’s lead author, told me more about what’s behind the numbers.
Where should this extra $3.5 trillion come from?
The nature of this transition means that the investments that will be needed are not evenly distributed. There are certain parts of the economy—sectors that either themselves contribute to emissions like fossil fuel-based power, or sectors whose products contribute to emissions, like the automotive sector—that will need to spend more than other parts. There's another 10% of the economy where the supply chain is the biggest contribution to emissions. So if you think about that, the investment that we need to make is not evenly distributed, it's actually concentrated in certain parts of the economy. The same is true when we think about countries, where we find that emerging markets, as well as fossil fuel based economies, would need to spend about one and a half times or more as much as advanced economies both for their economic development, but also to build low carbon infrastructure going forward. There's various kinds of challenges as we think about deploying this capital that extend well beyond just the scale of spending.
We shouldn’t view this spending as a cost—in many ways, it's actually an investment, it creates opportunities for growth and avoids the build up of physical risk and reduces the odds of initiating the most catastrophic effects of climate change. It's also important to remember, the world may actually be able to afford this. We've seen from other research that we've done that the balance sheet of the world has substantially tripled over the last 20 years. And so there's a whole bunch of capital that is actually looking for productive uses. We have the financing capacity and there are returns to many of these investments. It's important to think about collaboration across the public and private sector, for example, to reduce the risk of some of these investments. We may also need collaboration across the private sector and financial institutions to manage some of this risk and help deploy capital. There’s also a need for greater collaboration across stakeholder groups to drive capital flows to where it is needed, and then we also may need to think about entirely new types of financial instruments, whether that's voluntary carbon markets to drive capital flows or special purpose vehicles to help with the retirement of high emitting assets, so on and so forth. We've talked a lot when it comes to the net zero transition about technological innovation. I do also think we need to think about other kinds of innovation, for example, business model innovation or innovation with financial instruments.
What are the actions business leaders can take now to ensure their businesses can sustain and thrive in the transition?
The first thing that companies should consider doing is to do a robust full potential assessment. Based on those assessments, [they can] develop plans for both decarbonization, but also navigating these risks and opportunities. Depending on the nature of business, the focus may be on their Scope one emissions, or on their Scope three emissions. It may not be about their own emissions at all, but rather about their very business models and the nature of their products. Doing the analysis informs what the most urgent action is. If you think about both rising physical risks as well as the net zero transition, it's very important for business leaders to realize what that does is actually affect each and every business decision that a company makes, in some way, shape, or form—how companies think about capital allocation, about strategy, about operations and supply chains, about R&D. We have a table in the report and in chapter five of the report that lays out a set of about 20-25 different business decisions and how each of those decisions will change if the net zero transition was incorporated into them. This will take entirely new capabilities in the organization to integrate climate into all their decision making.
So one of the questions that companies need to ask themselves is, for each function in the organization, do they understand how that function would evolve if climate considerations were taken into account? Our hope is that through putting out this kind of fact-base [report], it can drive, inspire greater and more thoughtful, more decisive action. We need that action for two reasons. One is, of course, the avoidance of physical risks. The second, which is equally worrying in the near-term, at least, is the risk of a more disorderly transition, where we don't manage displacements and adjustments.
Dr. Mekala Krishnan’s answers were condensed and edited for brevity and clarity.
|
