Climate Change: How Much Will It Cost? McKinsey Has The Answer

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McKinsey is one of the world’s largest consulting firms. Consulting means identifying risks and advising clients — mostly corporations — how to deal with them. This week, McKinsey issued a report that attempts to put real numbers on the true cost of climate change. We’ll get to that in a minute. You might want to grab a chair and sit down before we do.

This post will focus on the report itself. In a subsequent article, we will provide our readers with some context as the world tries to understand what the McKinsey report has to say about the costs of addressing climate change. What is important is that while the numbers are staggering — and suggest serious economic disruptions in the lives of billions of people — they are paltry in comparison to the costs and disruptions that absolutely will happen if the world continues to drift along in “business as usual” mode much longer.

The good news is that McKinsey sees a rainbow at the end of this period of turmoil, namely a truly sustainable world economy that does not use the Earth as a community toilet and in which new economic opportunities abound. The message is that there are plenty of painful transitions ahead, but they need to be worked through in order for humanity to flourish in the future. For some, that will be a bridge too far. Many will stare into the face of the approaching storm and shrink from the challenge. But that won’t prevent the storm from visiting them. In fact, it will only make the ferocity of the oncoming maelstrom worse.

Probably the best advice we can give our readers is to read the report about the likely financial effects of climate change for yourselves. It is divided into six sections. What follows is the synopsis McKinsey gives for each of those sections and the links to the research that went into each one. So settle in, get comfortable, and prepare to see the future through the eyes of people whose job is to see the future clearly, with no political, social, or cultural blinders on. Ready? Let’s begin.

I. Climate Change — 6 characteristics define the net-zero transition

“The transformation of the global economy needed to achieve net-zero emissions by 2050 would be universal and significant, requiring $9.2 trillion in annual average spending on physical assets — $3.5 trillion more than today. To put it in comparable terms, that increase is equivalent to half of global corporate profits and one-quarter of total tax revenue in 2020 (emphasis added). 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.

“Spending would be front-loaded — the next decade will be decisive — and the impact uneven across countries and sectors. The transition is also exposed to risks, including that of energy supply volatility. At the same time, it is rich in opportunity. The transition would prevent the buildup of physical climate risks and reduce the odds of initiating the most catastrophic impacts of climate change. It would also bring growth opportunities, as decarbonization creates efficiencies and opens markets for low emissions products and services. Our research is not a projection or prediction and does not claim to be exhaustive. It is the simulation of one hypothetical and relatively orderly pathway toward 1.5°C using the Net Zero 2050 scenario from the Network for Greening the Financial System.”

For more information on this topic, follow this link.

On its website, NGFS says: “The Central Banks and Supervisors Network for Greening the Financial System (NGFS) is a group of Central Banks and Supervisors willing, on a voluntary basis, to exchange experiences, share best practices, contribute to the development of environment and climate risk management in the financial sector, and to mobilize mainstream finance to support the transition toward a sustainable economy. Its purpose is to define and promote best practices to be implemented within and outside of the Membership of the NGFS and to conduct or commission analytical work on green finance.”

II. Climate Change — Accelerating Decarbonization Worldwide

“The seven energy and land-use systems that account for global emissions — power, industry, mobility, buildings, agriculture, forestry and other land use, and waste — will all need to be transformed to achieve net zero emissions. Effective actions to accelerate decarbonization include shifting the energy mix away from fossil fuels and toward zero emissions electricity and other low emissions energy sources such as hydrogen; adapting industrial and agricultural processes; increasing energy efficiency and managing demand for energy; utilizing the circular economy; consuming fewer emissions-intensive goods; deploying carbon capture, utilization, and storage technology; and enhancing sinks of both long-lived and short-lived greenhouse gases.”

For more information on this topic, follow this link.

III. What Would Change In The Net Zero Transition?

“On the basis of this scenario, we estimate that global spending on physical assets in the transition would amount to about $275 trillion between 2021 and 2050, or about 7.5 percent of GDP annually on average. The biggest increase as a share of GDP would be between 2026 and 2030. Demand would be substantially affected. For example, manufacturing of internal combustion engine cars would eventually cease as sales of alternatives (for example, battery-electric and fuel cell-electric vehicles) increase from 5 percent of new-car sales in 2020 to virtually 100 percent by 2050.

“Power demand in 2050 would be more than double what it is today, while production of hydrogen and biofuels would increase more than tenfold. The transition could lead to a reallocation of labor, with about 200 million direct and indirect jobs gained and 185 million lost by 2050—shifts that are notable less for their size than for their concentrated, uneven, and re-allocative nature.”

For more information on this topic, follow this link.

IV. Sectors Are Unevenly Exposed In The Net Zero Transition

“All sectors of the economy are exposed to a net-zero transition, but some are more exposed than others. The sectors with the highest degree of exposure are those which directly emit significant quantities of greenhouse gases (for example, the coal and gas power sector) and those which sell products that emit greenhouse gases (such as the fossil fuel sector and the automotive sector). Approximately 20 percent of global GDP is in these sectors. A further 10 percent of GDP is in sectors with high-emissions supply chains, such as construction.

“Each of the most exposed parts of the economy will be differentially affected. The total cost of ownership of EVs could be lower than ICE cars by about 2025 in most regions, even as costs for steel and cement production could rise. Job gains would be largely associated with the transition to low-emissions forms of production, such as renewable power generation. Job losses would particularly affect workers in fossil fuel intensive or otherwise emissions-intensive sectors.”

For more information on this topic, follow this link.

V. How The Net Zero Transition Would Play Out

“To decarbonize, lower income countries and fossil fuel resource producers would spend more on physical assets as a share of their GDP than other countries — in the case of sub-Saharan Africa, Latin America, India and other Asian nations, about 1.5 times or more as much as advanced economies to support economic development and build low carbon infrastructure. Developing countries also have relatively greater shares of their jobs, GDP, and capital stock in sectors that would be most exposed; examples include India, Bangladesh, Kenya, and Nigeria. And countries like India would also face heightened physical risk from climate change.

“The effects within developed economies could be uneven, too; for instance, more than 10 percent of jobs in 44 US counties are in fossil fuel extraction and refining, fossil fuel based power, and automotive manufacturing. At the same time, all countries will have growth prospects, from endowments of natural capital such as sunshine and forests, and through their technological and human resources.”

For more information on this topic, follow this link.

VI. Climate Change — Actions For Stakeholders

“The findings of this research serve as a clear call for more thoughtful and decisive action, taken with the utmost urgency, to secure a more orderly transition to net zero by 2050. Economies and societies would need to make significant adjustments in the net-zero transition. Many of these can be best supported through coordinated action by governments, businesses, and enabling institutions.

“Three categories of action stand out: catalyzing effective capital reallocation, managing demand shifts and near-term unit cost increases, and establishing compensating mechanisms to address socioeconomic impacts. The economic transformation required to achieve net-zero emissions by 2050 will be massive in scale and complex in execution, yet the costs and dislocations that would arise from a more disorderly transition would likely be far greater, and the transition would prevent the further buildup of physical risks.

“It is important not to view the transition as only onerous; the required economic transformation will not only create immediate economic opportunities but also open up the prospect of a fundamentally transformed global economy with lower energy costs, and numerous other benefits (emphasis added). For example, improved health outcomes and enhanced conservation of natural capital.”

For more information on this topic, follow this link.

The Takeaway

There is a lot to unpack about climate change in the McKinsey report, and we will work to keep our readers informed as much as possible about this topic. What the report does is set forth in clear, unambiguous terms what will be required to address the fallout as the world continues to get hotter.

The main point is the longer we wait to get started, the more this is going to cost. Wishing it wasn’t happening or railing against climate scientists will just prolong the agony. If, as Lloyd’s of London suggests, the most likely scenario is a Green Cold War — one that delays serious action on global heating — we will be digging our own graves, both figuratively and literally.

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Steve Hanley

Steve writes about the interface between technology and sustainability from his home in Florida or anywhere else The Force may lead him. He is proud to be "woke" and doesn't really give a damn why the glass broke. He believes passionately in what Socrates said 3000 years ago: "The secret to change is to focus all of your energy not on fighting the old but on building the new." You can follow him on Substack and LinkedIn but not on Fakebook or any social media platforms controlled by narcissistic yahoos.

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