An affordable, reliable, competitive path to net zero Authors Mekala Krishnan Humayun Tai Daniel Pacthod Sven Smit Tomas Nauclér Blake Houghton Jesse Noffsinger Dirk Simon Editor Benjamin Plotinsky November 2023 Contents Cover image: Sam Falconer All interior images: © Getty Images Copyright © 2023 McKinsey & Company. All rights reserved. Confidential and proprietary. Any use of this material without specific permission of McKinsey & Company is strictly prohibited. At a glance 2 There has been meaningful momentum toward net zero 4 Nevertheless, the world is not on track to reach net zero by 2050 5 A poorly executed transition could compromise affordability, reliability, and competitiveness—and slow progress toward net zero 9 A well-managed transition would follow seven principles 14 An illustration shows how following those principles could accelerate the world’s current trajectory 36 Embracing a change of mindset can help the world move closer to its net-zero goals 41 Technical appendix 43 Acknowledgments 46 An affordable, reliable, competitive path to net zero At a glance — Though there has been meaningful momentum, the world is not on track to achieve the goal enshrined in the Paris Agreement of limiting warming to well below 2°C or ideally 1.5°C. To meet that goal, countries and companies have committed to reaching net-zero emissions of CO2 and reducing emissions of other greenhouse gases. But there has not been enough progress. The share of primary energy produced by renewable sources, for example, has risen slowly, from 8 percent in 2010 to 12 percent in 2021. If emissions stay on their current trajectory, estimates from various sources suggest, net zero would not arrive even by the end of the century. — A successful net-zero transition will require achieving not one objective but four interdependent ones: emissions reduction, affordability, reliability, and industrial competitiveness. A poorly executed transition could make energy, materials, and other products less affordable, compromising economic empowerment. It could also make the supply of energy and materials less secure and resilient, and it could render some countries and companies less competitive. If that happened, progress toward net zero itself could stall. — Our research has found practical ways to address those objectives simultaneously. Seven principles can help stakeholders successfully navigate the next phase of the transition. For example, deploying lower-cost solutions and driving down the cost of more expensive ones could bolster affordability. Managing existing and emerging energy systems in parallel could make access to energy more reliable. Seeking opportunities by using comparative advantage as a guide could help countries bolster their competitiveness. — Following those principles could substantially improve the world’s current trajectory. We examined the potential implications of applying two principles: deploying more lower-cost solutions and using R&D and other measures to double the expected rate of cost declines. Our illustrative analyses found that doing so could substantially improve the current trajectory of emissions and help limit warming to what the Paris Agreement envisions. Capital spending on low-emissions technologies would potentially be one and a half to two times as large as it is now—as opposed to about three times, as might be the case if the two principles were applied less extensively. — Embracing a change of mindset can help the world move closer to net zero. In addition to global commitments to reach net zero in the future, stakeholders should commit to making more and more progress every year and doing so in a way that addresses all four objectives.   An affordable, reliable, competitive path to net zero 2 Introduction Today, the world is undertaking the net-zero transition, an ambitious effort to reach net-zero emissions of CO2 and reduce emissions of other greenhouse gases (GHGs). The goal of the transition is outlined in the Paris Agreement adopted at the United Nations in 2015: to limit global warming above preindustrial levels to well below 2.0°C, and ideally to 1.5°C. Doing so would reduce the odds of initiating the most catastrophic impacts of climate change.1 According to the Intergovernmental Panel on Climate Change (IPCC), limiting warming to 1.5°C would require reducing GHG emissions by 43 percent between 2019 and 2030 and cutting net emissions of CO2 to z