What’s the price of a green economy? An extra $3.5 trillion a year

Politicians around the globe have been keen to state their commitment to net-zero emissions, and now a new report tells us exactly how much this transition will cost.

Consultancy firm McKinsey says total global spending by governments, businesses and individuals on energy and land-use systems will need to rise by $3.5 trillion a year, every year, if we are to have any chance of getting to net-zero in 2050.

That’s a 60% increase on today’s level of investment and is equivalent to half of global corporate profits, a quarter of world tax revenue and 7% of household spending. A further $1 trillion would also need to be reallocated from high-emission to low-carbon assets.

“Achieving net-zero emissions by 2050 would entail a fundamental transformation of the global economy,” McKinsey says in the report, titled The Net-Zero Transition: What it Would Cost, What it Could Bring?.

The report lays out six characteristics of the transition to a green economy, starting with the point that it will affect all industries. And it says seven energy and land-use systems create all the world’s greenhouse gas emissions.

The cost of the shift to zero emissions will be “significant”, the report says. Most of this will occur earlier in the transition, but it will fall unevenly on developing nations and fossil fuel producers, creating risks of disruptions to energy supply and price hikes. But there will also be new opportunities in a low-carbon world, the report adds.

The most noticeable impacts on everyday lives will include rising energy bills, job losses in high-emission industries, changes in what people eat, and increasing outgoings to end our dependence on fossil fuels to heat homes and travel, the report says.

Transitioning the energy sector to zero carbon and beefing up electricity grids to cope with an expected doubling of global demand by 2050 will push up bills by 25% between 2020 and 2040, the report predicts.

Even when the necessary changes have been made, electricity prices will still be 20% higher by 2050, although technological innovations may help to soften the price rises. Costs could be significantly higher if producers fail to build flexible and reliable low-cost power grids.

Although moving away from fossil fuels will cost 185 million jobs, the green economy will create 200 million new roles by 2050, including eight million in renewable power, hydrogen and biofuels, the report says.

Consumers will face the cost of replacing home heating systems and cars that run on fossil fuels, and will have to change their diets to avoid high-emission foods such as meat. However, the total costs of owning and running an electric vehicle will be lower than those for a petrol or diesel vehicle in most parts of the world by 2025, McKinsey says.

High-emission industries – which today account for 20% of global GDP – will be most affected by the transition, the report predicts. Coal production will be almost halted by 2050, while oil and gas production will more than halve.

There will also be a 30% rise in the cost of producing steel, while cement-making will become 45% more expensive by 2050.

World leaders need to start the transition now, the report urges, saying that the economic and social costs will only increase if there is a delayed or abrupt transition, as this could produce a backlash among consumers that risks further slowing measures to get to net-zero.

If the switch from high- to low-emission energy is not carefully managed, shortages and price rises will occur. “Much depends on how the transition is managed,” the authors say.

Achieving a green economy will call for unprecedented cooperation between nations and companies, McKinsey says, warning that the way things are going means it may already be too late to halt the rise in global temperatures to 1.5°C above pre-industrial levels.

Speaking at the 2022 Davos Agenda virtual meeting, World Economic Forum President Børge Brende warned against focusing solely on the price of the transition, saying: “The cost of inaction far exceeds the cost of action.”

And European Commission President Ursula von der Leyen says people must not expect the transition to be smooth. “There will never be a linear shift from a fossil fuel-based system to the clean energy system – we must be upfront about that. But the direction is clear and so is our commitment.”

The World Economic Forum’s most recent report on climate change says the race to net-zero will change the way many firms do business forever. But companies are unprepared for the challenge because the data they are using to predict the future is outdated, it adds.

Business leaders need to see the transition to a green economy as an opportunity, the Forum report says. “Climate leaders can attract and retain better talent, realize higher growth, save costs, avoid regulatory risk, access cheaper capital and create new sources of value for customers. Done well, this will translate to higher shareholder returns and a sustainable source of competitive advantage.”