The impact of global warming is becoming apparent across the globe, and the conflict in Ukraine has added a new layer to this emergency – global energy security. Despite this urgency, humankind’s ability to reduce greenhouse gas (GHG) emissions remains largely unproven.
To limit global warming by 2050 to about 1.5°C (McKinsey estimates the best feasible result is a 1.7°C increase), humanity needs to scale a major global effort to transition the global economy to sustainable energy and materials, and complement this activity with carbon capture, use and storage (CCUS) at scale.
This effort now has nations that account for over 95% of the global GDP committed to achieving net-zero emissions, and almost 3,000 organizations have signed on to the Science Based Target Initiative (SBTi), founded in 2015 to help companies set their emission reduction targets in compliance with climate science. McKinsey estimates this will require USD 3-5 trillion in investments per year until 2030 – the largest capital relocation in human history – and different parts of the world will play different roles.
The world needs Brazil to decarbonize, not only because it is the seventh largest GHG emitter in the world, but also because it is uniquely positioned to become a powerhouse in support of the global transition. Brazil’s emissions profile is quite different from the rest of the world’s. It emits close to 2.2 gigatons of carbon dioxide equivalent (GtCO2eq) every year, half of which comes from deforestation, a quarter from agriculture, a fifth from transportation and energy, and the remainder from industry and waste. Close to 80% of the deforestation takes place in the Amazon biome, driven mainly by illegal deforestation associated with a complex cycle of land grabbing of public land. To become a sustainability powerhouse, Brazil must significantly curb its deforestation and addressing the land ownership legislation is an important first step.
Brazil can play a much larger role in this transition, given its natural resources and capabilities. McKinsey has mapped three avenues associated with the green economy in which Brazil can take a leading global role: renewable power, biobased energy and materials, and carbon markets. Together, these avenues represent a market of over USD 125 billion (Exhibit 1). They can also deliver numerous other direct and indirect benefits, such as socioeconomic development, improved water security and biodiversity protection.
Therefore, beyond being an agricultural powerhouse, with 27% of the country’s GDP in 2021 in this sector and a prominent role in feeding the global population, Brazil has a unique opportunity to accelerate sustainable inclusive growth while taking a leadership role in the decarbonization of the global economy.
The country has an abundance of renewable energy sources, including hydro, biomass, wind, and solar. Wind and solar will likely become the main sources of electricity generation in the country, potentially reaching 47% of total installed capacity by 20401, with an additional potential market of USD 5 billion and USD 11 billion in 2030 and 2040, respectively. Brazil’s competitiveness in renewable energy can also give it an advantage in the production of green hydrogen (GH2), since the cost of renewable energy is 70% of the production cost of GH2. Brazil can become one of the major global GH2 producers because of the low cost derived from its natural resources and its clean and integrated power grid, which reduces the need for capital investment (capex). To complete this favorable picture, domestic demand for GH2 could represent about 60% of the total supply. This creates a potential additional market for GH2 of up to USD 5 and 20 billion in 2030 and 2040, respectively.
Biomass use is another major opportunity and has three main applications. First, to expand the use of biofuels for aviation or as a replacement for diesel. Second, to develop the biomethane industry, and third, to use biomass for steel production and other high-temperature processes.
Brazil is well-positioned to become the world's largest sustainable fuel producer. Elements of this transformation include the use of “residues,” such as sugarcane vinasse, as well as the use of soybean oil, and specialized crops, such as macaúba (which can grow on degraded pastureland). By 2040, Brazil could capture a market of up to USD 40 billion without putting its agricultural production at risk.
Brazil's biomethane market value could reach USD 15 billion by 2040, taking advantage of waste and by-products from five main industries: sugarcane, cattle ranching, dairy farming, pork raising, as well as urban waste and sewage. Biomethane is produced via anaerobic digestion and can be used in four main applications: heating or electricity for self-consumption, electricity for sale to the grid, renewable natural gas for sale, and renewable natural gas for transportation. The key factors for deciding which application makes the most sense are location and production volumes.
Brazil’s potential for commercial forestry is widely known and exploited by the pulp and paper industry. But the use of biomass as a substitute for coal has great potential in steel-making and other processes that require high-temperature heat, such as pelletizing and clinker production for the cement industry. In the steel value chain alone, the biomass market could reach its full potential of USD 3-4 billion as soon as 2030, staying at this level until 2040. The main restrictions are the growth cycle of the eucalyptus plant and the installation of the continuous carbonization furnaces needed for quality biomass.
Finally, besides extensive forests, Brazil has about 15% of the potential to abate or sequester carbon from the atmosphere using natural climate solutions. In fact, the country has the greatest potential worldwide. These solutions, for example, involve the preservation and restoration of biomes and the improved capture of carbon in the soil by agriculture; initiatives that can be structured via voluntary carbon credits. In addition to bringing important benefits like increased biodiversity and greater water security, this market could reach USD 15 billion in 2030 and USD 35 billion in 2040.
The green economy has the potential to attract significant investments to the country, fostering sustainable inclusive growth. At the same time, it will allow Brazil to collaborate significantly with the process of decarbonizing the global economy. It is probably the opportunity of the age.
The share of solar and wind in the installed power generation capacity of Brazil will likely grow to 47%, surpassing hydro, fossil, and biomass sources. This has a potential market of up to USD 11 billion in 2040. Three main factors will drive this growth. The first is economic attractiveness as the costs for energy generation and required capital continue to decrease as productivity, scale and technological development evolve. Our projections show that by 2040 there will be an up to 46% reduction in the levelized cost of energy (LCOE) for solar generation and a 27% reduction for wind generation (Exhibit 2).
The second factor involves the abundance of locations with high wind and solar capacity factors in the country, which are among the highest in the world. Brazil’s solar energy potential is close to that of desert countries, and it is one of the best places in the world for wind (Exhibit 3). Additionally, the complementarity of sources would allow the development of hybrid solar and wind farms in the same location.
Finally, decarbonization commitments have accelerated. Several global and Brazilian companies are setting their emissions commitments, and renewable energy is an easy and cost-effective lever to pull. Players are already locking in renewable energy positions for the next 15-25 years.
Solar energy growth has been exponential – in 2021 Brazil had 13 gigawatts (GW) of solar installed capacity that will see estimated fourfold growth, at 15% a year. Distributed generation should reach 37 GW and centralized generation another 30-40 GW, growing five- to sixfold22 Centralized solar generation remains small, but has been growing at a fast pace in a quick-moving market, with new players entering the market every year and driving prices down. In addition, technological advances such as solar tracking systems and single-axis tracking structures help to exploit the high-quality solar resources in Brazil.
Wind energy is concentrated in the Northeast and South of Brazil. The first auction in 2009 effectively kick-started the sector’s growth in the country. Unrestricted onshore wind potential in Brazil is about 440 GW33 with accelerated growth in capacity (from 1 to +17 GW per year) and capacity factors over the last decade in Brazil amid a fragmented market and falling prices. Additionally, technological advancements like taller towers have helped Brazil to exploit this high-quality resource.
Green hydrogen revolution
As a fuel and an industrial feedstock, green hydrogen will contribute to decarbonizing the world’s energy matrix, acting as a carrier for renewable energy and creating a USD 200 billion investment opportunity in Brazil over the next 20 years.
So far, hydrogen use remains limited to specific applications, such as oil refining or ammonia production, but this will change. Growing investments in renewable energy sources like wind and solar, where costs are decreasing, and the technological and industrial evolution of electrolyzers, will drive a major drop in the cost of green hydrogen production.
Furthermore, meeting the goals set by the Paris Agreement will require a reduction in CO2 emissions of 60% by 2050 – only green hydrogen will enable the decarbonization of hard-to-abate industries such as steel and fertilizers.
Brazil ranks seventh on the global list of energy generators, with a current installed capacity of 175 GW in 2021, out of which 85% of its energy comes from renewables – a key requirement for green hydrogen production. When it comes to renewable energy, Brazil is behind only the US and China.
Brazil is one of the most competitive places in the world to produce green hydrogen (Exhibit 4). This study shows that the levelized cost of green hydrogen (LCOH) produced in Brazil would be under USD 1.50 per kilogram of H2 in 2030. This is in line with the LCOH of the best locations in the US, Australia, Spain, and Saudi Arabia. By 2040, this cost could drop to approximately USD 1.25/kg.
The total opportunity for Brazilian green hydrogen at USD 15-20 billion. The domestic market has the largest potential, possibly generating revenue of USD 10-12 billion by 2040, primarily driven by trucking and steel along with other industrial heat energy uses. Exports to the US and Europe could add another USD 4 to 6 billion as the landed cost of Brazilian green hydrogen in these regions should be competitive vis-à-vis the main potential competitors (Exhibit 5).
In a fast-paced scenario, green hydrogen will require USD 200 billion in investments, including 180 GW in additional power capacity from renewable sources. Additionally, there are several other factors to consider.
Regulation. Questions arise as to which regulatory functions will fall under what government agencies, as well as regulations governing the use of hydrogen. Regulators must also develop technical standards for hydrogen facilities and transportation, including issues such as blending hydrogen to natural gas flowing in pipelines.
Connecting hydrogen projects to the national electricity grid. The connection to the grid means stakeholders can size electrolyzers and renewable generation more accurately. Furthermore, excess energy can be sold, with additional energy bought from the grid as necessary. A large-scale off-grid project in the Northeast would yield an all-in unit cost to produce hydrogen of around USD 1.90/kg in 2030. This includes the estimated costs of hydrogen storage and transportation for use in typical applications. On-grid, this same project’s hydrogen cost would drop by some 10% to about USD 1.70/kg. However, connecting a plant to the grid can raise other issues, since the electricity used by an on-grid plant is not necessarily 100% renewable. This hydrogen might or might not be certified as green, for example, depending on the criteria.
The end-use of green hydrogen and its derivatives. The main challenges involve certification trends. In international markets, requirements may stipulate the use of only wind and solar energy, which may limit the utilization of the clean, integrated grid that exists in Brazil and is a significant competitive advantage. Internally, regulations to support other sources of energy and the non-existence of carbon pricing make traditional solutions more competitive in the short term, delaying the domestic adoption of hydrogen.
Transporting green H2. H2 is primarily a renewable energy carrier and currently ammonia is one of the preferred choices for transport over long distances. However, the cost of ammonification, transport and cracking can more than double the cost of H2 at the destination. Consequently, it makes sense to consider alternative carriers and final usage options. For example, Brazil is uniquely positioned to export green metallics in the form of hot briquetted iron (HBI) due to its low green H2 production costs and the high-quality of iron ore pellet feed. Green HBI is produced through the briquetting of green direct reduced iron (DRI), a process in which GH2 is used to reduce iron ore pellets to create sponge iron. This medium for carrying GH2 could save more than USD 100 per tonne of green metallic produced. We estimate that the EU steel industry alone will require at least 11 million tonnes of green metallics annually by 2030 to fulfill its decarbonization commitments and those of its main customers (e.g., automakers, white goods manufacturers).
Biobased energy and materials
Brazil is a leader in the use of biomass for energy, especially in the generation of electricity, process heat and biocoal for steel. The country has a unique capacity and competitiveness for producing biomass, with shorter growth cycles and proximity between the planted areas and the industries that use it. Companies can be segmented into two groups: those that produce biomass as a by-product of their industrial processes (e.g., sugarcane, palm oil, pulp and paper), and those that need a dedicated planting for consumption (e.g., chemicals and petrochemicals, mining companies, consumer goods, steel companies). Looking ahead, with the development and scale-up of new technologies, biomass could be used as a feedstock for advanced fuels and chemicals or plastics.
Technology could enable the use of biomass as a feedstock for advanced fuels, chemicals, and plastics. Brazil’s great feedstock potential position it as a potential world leader in sustainable aviation fuel production. The total opportunity could amount to up to 40 billion by 2040 with a focus on the export market.
Aviation is one of the hard-to-abate sectors and accounts for 2 to 3% of global emissions. Although several technologies are under development such as hydrogen, batteries, and fuel cells, they will have limited impact on most of the emissions generated by the industry until well after 2050. However, sustainable aviation fuels represent the only technically viable option to decarbonize over 70% of the industry’s emissions.
Sustainable aviation fuels (SAF) are “drop-in” fuels that can directly replace jet fuel with GHG emissions reductions of 70% to 100%. The reduction potential depends primarily on the type of feedstock used. SAF has been in commercial use since 2011. Consequently, many expect global demand for SAF to increase rapidly, driven mostly by regulation and corporate commitments. SAF should meet almost 40% of the total aviation energy demand by 2050 (Exhibit 6).
Within SAF, there are multiple technologies with different degrees of maturity and decarbonization potential. Of the four that receive the most focus, hydroprocessed esters and fatty acids (HEFA) is currently the only mature technology in commercial production. As the other technologies develop, we expect HEFA to remain the cheapest alternative until the late 2030s or early 2040s when Power to Liquid (PtL) will likely reach price parity in the most favorable regions. Brazil is well positioned to supply the world with HEFA given its high feedstock potential.
Access to foreign markets will be defined by future regulation, which will determine the acceptability of feedstocks and production processes. SAF regulation is characterized by two key elements: feedstock type and GHG emissions. The EU is focusing on both feedstock types and emissions, and the rest of the market, including the US, is focusing mainly on GHG emissions. Purpose-grown oil trees on degraded pastureland seem to fulfill both requirements and the resulting fuel is likely to be marketable in all markets. Soybean oil SAF fulfills the emission requirements in the US and other regions but does not fulfill feedstock requirements in the EU.
Brazil’s potential relies on its ability to export its sustainable fuel production. This will be driven by regulation and local demand. The market is expected to have short- and, possibly, longer-term shortages of selected feedstocks for the most competitive pathways such as HEFA. This means Brazil could potentially sell all its production to foreign markets. However, the US market could be significantly less attractive to exporters given recent Inflation Reduction Act (IRA) measures that favor local production. This may also make any US-produced volumes more competitive in export markets. Moreover, SAF production hubs present an opportunity to use bioenergy with carbon capture and storage (BECCS) technologies to produce biofuels with negative emissions, enabling users to avoid the concentration step because it is already over 95% concentrated.
Cooperation along the value chain has helped the SAF industry take off in the EU and the US, especially when there was little regulatory certainty regarding demand volumes. While regulation currently provides more certainty, offtake agreements with customers (e.g., airlines) remain beneficial (e.g., for improving project “finance-ability”), especially when they represent new pathways (e.g., the production of macaúba on a commercial scale).
Finally, the government could choose to provide support to incentivize and de-risk investments in this space, similar to what was done with ethanol. This support could take multiple forms. For example, establishing blend mandates would accelerate development by guaranteeing local demand, direct financial support, and/or the facilitation of access to external markets (via trade treaty agreements and interventions).
Biomethane and renewable methane
Brazil can build a strong biomethane industry worth more than USD 15 billion in total market value by 2040 based on waste and byproducts from five industries (sugarcane, beef, dairy, pork, and urban waste and sewage).
Biomethane is produced through the anaerobic digestion of biomass with proven commercial application for different feedstocks. Biomethane can be used to generate heat or electricity for self-consumption and/or sale (via power purchase agreements or PPAs) and sold as renewable natural gas (RNG) replacing natural gas in industrial applications and transportation markets.
Currently, we estimate that the viable feedstock in Brazil could supply approximately 50% of the total Brazilian demand for natural gas (Exhibit 7).
This potential is largely untapped. Today, Brazil uses only 10% of its total biomethane potential. Most of the current usage comes from urban sewage and waste directed toward electricity production. While Brazil almost entirely converts its urban waste and sewage to biomethane, it barely uses its sugar cane and animal waste resources, which account for 90% of the total potential (Exhibit 8).
The economics of the optimal uses of biomethane by types of feedstock will evolve over the next 10 years, driven by the cost of alternatives like natural gas and electricity. Key factors for determining the optimal use include production volumes and locations since the distance to the grids determines transportation cost.
One interesting opportunity involves the production of RNG, which is attractive not only to potential producers but also to the country in general. By establishing “virtual pipelines” composed of trucks transporting RNG (either compressed or liquified), Brazil could double its production of renewable natural gas and reduce its dependence on foreign LNG imports by roughly half the average amount imported yearly in the last 10 years. This would help reduce the price of natural gas in Brazil and decrease the country’s reliance on foreign sources.
Each type of player needs to assess its production capabilities and location (in terms of a connection to the grid and the distance to a pipeline) to determine the optimal use of biomethane and if it needs to collaborate with nearby producers. Brazilian regulation could help incentivize development and provide financing to accelerate the growth of the industry.
Green metallics could unlock a significant opportunity for biomass use in steel making, especially with carbon prices and taxes becoming a reality around the world. The Brazilian biocoal market is driven by steelmaking applications, whereby eucalyptus is leveraged as the preferred biomass feedstock for biocoal production. Currently, steel making uses biocoal mainly to produce pig iron in small blast furnaces, but there is potential to address a much larger market (Exhibit 9) as industry commitments drive decarbonization. In the steel value chain, the market could reach its full potential of USD 3-4 billion as soon as 2030 (keeping approximately that value until 2040), with the main restrictions being the growth cycle of the eucalyptus and the installation of continuous carbonization furnaces necessary for producing quality biomass and an up to 90% reduction in emissions compared with traditional metallurgical coal routes.
Brazil could export biomass pellets to other regions as a source of renewable power and heating fuel. Pellets are used for power and heating in Europe, and most of the supply comes from the US. As decarbonization commitments and initiatives accelerate, demand could increase, positioning Brazil to build a supply chain to export pellets. However, limitations exist regarding the logistics needed to move the biomass to ports with appropriate infrastructure.
Biomass is the cheapest fuel for generating steam for industrial processes and could expand as the decarbonization agenda enables it to grow (Exhibit 10). Agro-industrial, textile and food companies have used biomass for steam generation for many years, and the last 10 years have seen the entry of companies in the beverage, chemicals/petrochemicals, metals/mining and consumer goods industries. The biomass heat production market may experience faster growth in the coming years due to the decarbonization agenda of companies in different sectors. Furthermore, the development of technologies for high temperature heat could open a new market for it. Thus, the greatest limitation should lie in the production capacity of biomass and the logistics up to the point of use as a fuel.
Today, biomass accounts for almost 10% of the Brazilian power matrix, compared with less than 3% of the world's matrix. However, the potential for generating electricity with biomass is more restricted due to its low competitiveness in relation to wind and solar generation.
Overall, biomass should play a more relevant role in the future to support the decarbonization of industries, and Brazil could be a leader in this area, leveraging its experience from different uses. Still, supply will likely remain a limiting factor. Barring major shifts in land use allocations or technological breakthroughs, the supply of biomass will face curbs based on limitations in terms of available land, competing uses, the cost of collection, and stricter sustainability regulations.
To limit global warming to 1.5°C by 2050, companies around the world are pledging carbon-neutral and/or net-zero targets. That is, they seek to achieve net GHG emissions from their operations by insetting and offsetting the residual emissions. Decarbonizing operations (insetting) is the preferred path, but many industries – such as aluminum and cement – cannot totally achieve net zero with currently available technologies. Hence, this will drive most companies to buy carbon credits to remove or neutralize their residual emissions. Additionally, offsets can sequester carbon from the atmosphere, keeping the world’s and/or a company’s GHG inventory within the 1.5°C pathway.
Globally, estimates suggest carbon credits are set to increase 15-fold or more by 2030 and up to 100-fold by 2050. The global carbon credit market should grow from roughly USD 1 billion in 2021 to USD 50-100 billion in 2030.
Brazil has highly privileged conditions in which to develop a vibrant voluntary carbon credit market, for both its potential demand (90-220 MtCO2eq in 2030), as well as its potential for generating carbon credits: 15% of the world’s entire carbon offset potential through natural climate solutions resides in the country. In addition to this enormous potential, Brazil’s cost to develop and implement projects to obtain high-quality and high-integrity carbon credits is lower and more competitive than the global average, with more attractive returns when compared to current economic activities – particularly extensive cattle raising on degraded pastures.
Brazil’s total potential is 1.2-1.9 GtCO2eq, with roughly 80% associated with reforestation projects of degraded pastureland (Exhibit 11). Projects of this type produce high-quality credits and satisfy the demand of companies seeking carbon removal credits, in addition to having many other associated benefits (e.g., biodiversity recovery, a positive impact on local communities, and water security).
McKinsey’s estimate of the potential and cost of restoration projects considers implementation costs – for example, the purchase cost of land and the adoption of restoration techniques according to the type of soil and biome, as well as the opportunity cost of substituting cattle-raising activities in each of Brazil’s mesoregions. Assuming a carbon credit price of USD 30/tCO2eq in 2030, the country would be able to activate 1.5 GtCO2eq of sequestration credits by restoring +70 million hectares of forest. In other words, in roughly 50% of today’s pastureland, it would become more financially attractive to substitute extensive cattle-raising activities in degraded pastureland for forest restoration or afforestation projects.
In addition, regenerative agriculture and methane reduction projects can cut Brazilian agriculture related emissions from 373 down to 160 MtCO2eq. Today, methane emissions (mainly associated with enteric fermentation from cattle) account for 27% of Brazil’s annual emissions44. Integrated agroforestry practices, such as crop-cattle-forest, have the opportunity not only to reduce emissions related to cattle ranching, but also to intensify herd concentration and shorten the fattening cycle. To do so, it is essential to develop specific methodologies with global certification bodies that consider Brazil’s agriculture conditions, which already feature considerable penetration of regenerative agriculture practices like no tilling and crop rotation.
To scale up its high-integrity voluntary carbon market, Brazil needs to address three crucial challenges. It must 1) review regulatory gaps, 2) develop a robust market governance, and 3) create mechanisms to convert credits into products that can be traded safely and with integrity. Initiatives such as the Brazilian Initiative for the Voluntary Carbon Market are a good example of how a cross industry collaboration can create market wide mechanism to address these challenges.
Implications for Brazilian institutions
Capturing this opportunity will not be easy, requiring significant will and joint effort. Some sectors, such as renewable energy, are on a growth trajectory and have already achieved high levels of maturity in terms of regulatory mechanisms and market development. Other sectors, however, need to achieve scale and will require targeted efforts to develop in these two areas.
For the Brazilian government and its entities, it will be important to understand how to optimize the legal and regulatory frameworks that already exist to govern these new value chains and create new mechanisms accordingly. The voluntary carbon market, for example, requires the development of legislation to avoid uncertainty about land ownership, which will allow the creation of PPPs on public land for both preservation and restoration.
Private institutions must understand the opportunities and how to enter or grow in these value chains. Effectively capturing the opportunities under the new green economy rubric will depend on collaborative ecosystems. Consequently, few single entities will assume responsibility for the entire process from start to finish. Instead, it will be necessary to understand the possibilities of collaboration, joint ventures, and mergers and acquisitions, whether to enter these markets or develop the necessary capabilities. Taking green hydrogen as an example – before a project becomes a business, it will need an offtaker willing to buy a significant share of the production, an equipment supplier willing to collaborate on its technology, a renewable power producer willing to take on the risk of the venture, other equity and debt holders willing to finance it, a construction company willing to take the whole asset out of the ground, and all the licenses and authorizations that multiple state entities will issue.
The winners of the new sustainable economy will not be companies that play defense. The winners will play offense and face the challenges and opportunities that will arise head on. Those companies will capture the high-growth segments, attract demanding customers and collaborators, and enjoy the valuation uplift already evident. To do this, they will have to combine eco-ambition with hard-nosed execution, leveraging their advantages to compete in a fast-changing environment – more than that, they will have to have the wherewithal to shape the market.
The green economy is gradually becoming embedded in the strategies of businesses and governments. The opportunity may be equivalent to the size of the current agricultural market, and Brazil and its institutions are well positioned to capture it. Success will require major efforts and collaboration between the public and private sectors. The path will be difficult, but this opportunity to create sustainable inclusive growth will lead to a better world for future generations.
It has always been said that Brazil is the country of the future. In the sustainable economy, the future is at hand.