How the European Union could achieve net-zero emissions at net-zero cost

The decarbonization pathways to a net-zero Europe are countless, but not all are cost optimal. We explore one pathway that could reduce the EU’s emissions 55 percent by 2030 while delivering broad economic benefits.

In December 2019, the European Commission introduced an ambitious proposal to make the bloc climate-neutral by 2050. Although the proposal set specific 2030 and 2050 emission-reduction goals, it did not explain how much each sector and member state should contribute to the desired emissions reductions or what achieving those reductions would cost.

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Net-zero Europe
 

To help inform the planning efforts of policy makers and business leaders, McKinsey has attempted to find a societally cost-optimal pathway to achieving the emissions targets. Countless possible pathways exist, covering a wide range of costs and economic impacts. This report describes the least costly pathway among the many we identified.

This cost-optimal pathway illustrates the technical feasibility of reducing the European Union’s emissions 55 percent by 2030 compared to 1990 levels and reaching net-zero by 2050. It also shows that decarbonizing Europe can have broad economic benefits, including GDP growth, cost-of-living reductions, and job creation.

To achieve these benefits, the European Union has a long road ahead (Exhibit 1). In 2017, 1 the EU-27 countries emitted 3.9 GtCO2e, including 0.3 GtCO2e of negative emissions. 2 Although this accounts for only 7 percent of global greenhouse gas (GHG) emissions, the European Union achieving climate neutrality could serve as a blueprint for other regions and encourage other countries to take bolder action.

The EU will need to reduce net GHG emissions much faster to meet 2030 and 2050 climate targets.
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Five sectors emit the bulk of the European Union’s greenhouse gases: 28 percent comes from transportation, 26 percent from industry, 23 percent from power, 13 percent from buildings, and 13 percent from agriculture (Exhibit 2). Across sectors, fossil fuel combustion is the biggest source of GHGs, accounting for 80 percent of emissions.

The bulk of Europe’s emissions are generated by five sectors.
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To reach net-zero, the investments and cost savings would be higher in some of these sectors than others. However, if the decarbonization costs and savings were passed through to households, the aggregate cost of living for an average household in a climate-neutral European Union would be the same as it is today and lower-income households would see reduced costs of living. In other words, we found that the European Union could achieve net-zero emissions by 2050 at a net-zero cost.

In the following sections, we break down that cost-optimal pathway by sector, region, technology, and energy and land-use system.

Sector perspective: The speed of decarbonization depends on the availability of mature technology and the ability to scale supply chains

Although achieving net-zero emissions will require sustained effort across sectors, some could meet the target more quickly than others (Exhibit 3). In our pathway, the sectors would reach their emission-reduction goals in the following order:

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  • Power: Because wind and solar power generation technologies are already available at scale, power would be the quickest sector to decarbonize, reaching net-zero emissions by the mid-2040s. The demand for power would double as other sectors switch to electricity and green hydrogen, requiring renewables production and storage capacity to be rapidly scaled.
  • Transportation: This sector would approach climate neutrality by 2045. EVs are already in early adoption, but it will take some ten years to set up supply chains to support a switch to 100 percent EV sales, from mining the raw materials for batteries to assembling EVs. Once this happens, emissions can be reduced quickly, except for those from aircraft and ships that are too big and travel too far to rely on battery power. They must opt for the more expensive solution of switching to biofuels, ammonia, or synfuels.
  • Buildings: Most of the technology required to decarbonize the buildings sector is already available. However, renovating large portions of the European Union’s building stock is a massive undertaking. The share of dwellings using renewable heating sources would need to increase to 100 percent from just 35 percent today. Gas usage in buildings would also need to fall by more than half. The buildings sector would reach net-zero in the late 2040s.
  • Industry: The most expensive sector to decarbonize, industry would need some technology that is still under development. As a result, it would reach net-zero by 2050. Even then, the sector would continue to generate some residual emissions from activities such as waste management and heavy manufacturing, which would have to be offset.
  • Agriculture: Using more efficient farming practices could reduce agricultural emissions. But it’s by far the hardest sector to abate because more than half of agriculture emissions come from raising animals for food and can't be reduced without significant changes in meat consumption or technological breakthroughs. Like industry, our cost-optimal pathway requires offsetting agriculture emissions with negative emissions in other sectors and increasing natural carbon sinks.
Carbon dioxide-equivalent emissions by industry sector, 1990–2050.
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Regional perspective: Collective action is critical to reducing transition costs

Four geographical factors will determine how easy it is for each country to reduce emissions and which decarbonization measures would be the most cost-optimal. Those are local climate, CO2 storage opportunities, local agriculture practices, and the land available for reforestation, wind farms, and solar plants. For example, Northern EU countries would benefit from 30 to 60 percent more hours of onshore wind than those in the south. Southern countries would benefit from the 1,000 more hours of sunlight they receive each year.

Under the cost-optimal pathway, EU member states would achieve climate goals collectively so they can pool their advantages and lower transition costs. For example, countries with more abundant solar resources or natural carbon sinks could help other countries offset their emissions at a lower cost than if they had to reduce emissions locally using CCS. If member states pursued reduction targets individually rather than in aggregate, the transition cost would increase by roughly €25 per tCO2e.

Technology perspective: Most of the required technologies are available, but accelerated innovation will be critical

Through 2030, nearly two-thirds of emissions reduction could be achieved with energy efficiency and electrification.
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By 2030, 64 percent of the European Union’s emissions reduction would be achieved by large-scale electrification and increases in energy efficiency, accounting for 47 percent and 17 percent, respectively. Demand-side measures and circularity would reduce emissions an additional 15 percent. Hydrogen would contribute another 13 percent. The remainder would come from ramping up the use of biomass, land-use changes, and other innovations (Exhibit 4).

Toward 2040, electrification opportunities would approach their maximum uptake, and other measures would become the focus. By 2050, 45 percent of the European Union’s total emissions would be abated by switching from fossil fuels to electrification, and another 30 percent would be eliminated by using hydrogen, biomass, and CCS.

From now until 2030, 75 percent of abatement would be achieved by expanding mature and early-adoption technologies such as heat pumps in buildings, heat cascading in industry, and EVs in transportation. By 2050, these mature technologies would achieve maximum market penetration, contributing 60 percent of the required abatement for climate neutrality. Demonstrated but not yet mature technologies like CCS would need to be rapidly scaled after 2030 to reduce emissions by an additional 25 to 30 percent. Solutions still in R&D, such as direct air capture, would be required to abate the remaining 10 to 15 percent.

Even though most emissions would be abated using mature and early-adoption technologies, continued innovation and scale effects will be important to drive down transition costs. Solar panels are a good example of a solution that has become much cheaper because of continued innovation and the industrialization of production. In the next 20 years, EVs and electrolyzers could achieve similar price reductions.

Energy system perspective: The power sector would become the central switchboard

Today, the European Union meets 75 percent of its primary energy demand with fossil fuels. On the cost-optimal pathway, most coal consumption would be eliminated by 2030, and oil and gas consumption would drop to less than 10 percent by 2050. Renewable power would satisfy more than 80 percent of primary energy demand by 2050. Seventy-five percent of renewable energy would be used directly as electricity. Another 25 percent would be converted into green hydrogen to replace fossil fuels in subsectors such as steel production, long-haul trucking, aviation, and shipping. The power sector would become the central switchboard of the EU energy system, creating and channeling renewable power into other sectors. Meeting this renewable power demand would require increasing solar capacity from 20 gigawatts (GW) a year to 50 GW by 2050, and wind from 15 GW a year to 30 GW a year by 2050. The EU would also need to triple the interconnections among its power grids by 2030 and increase its battery storage capacity to 25 GW by 2030, and to more than 150 GW by 2050.

Land-use perspective: Reaching net-zero would require re-thinking land use

Climate neutrality would require increasing natural carbon sequestration to offset residual hard-to-abate emissions and scaling sustainable bioenergy production, especially for the transportation and industry sectors. We estimate that natural carbon sequestration in the European Union could be increased to 350 megatons (Mt) per year, mainly through reforesting 12 Mha of land freed up by greater efficiency in the agriculture sector. Also, 62 Mha of EU land are currently unused or abandoned and lack high biodiversity value, of which about 30 Mha (45 to 50 percent) would be used for bioenergy production.

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The socioeconomic implications of decarbonizing Europe

Reaching net-zero would require investing an estimated €28 trillion in clean technologies and techniques over the next 30 years. About €23 trillion of this investment—an average of €800 billion a year—would come from redirecting investments that would otherwise have funded carbon-intensive technologies. This amounts to roughly 25 percent of the annual capital investments now made in the European Union, or 4 percent of the current EU GDP. Stakeholders in the European Union would also have to allocate an additional €5.4 trillion (an average of €180 billion a year) to clean technologies and techniques.

Of that €5.4 trillion, about €1.5 trillion would be invested in the buildings sector (29 percent), €1.8 trillion would be used for power (33 percent), €410 billion for industry (8 percent), €76 billion for agriculture (about 1 percent), and €32 billion in transportation (less than 1 percent). About €1.5 trillion (28 percent) would fund infrastructure to improve energy transmission and distribution in all sectors.

Although implementing clean technology would require additional investment (Exhibit 5), it would ultimately lower operating costs. From 2021 to 2050, the EU would save an average of €130 billion annually in total system operating costs. By 2050, these measures would reduce total system operating expenditures by €260 billion per year, more than 1.5 percent of the current EU GDP. Most of these savings would be in transportation.

Reaching net zero would require an estimated €28 trillion in investments over the next 30 years.
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Mobilizing capital: Roughly half of the necessary investments require interventions

Without targeted intervention, businesses and consumers would likely make decisions different from those laid out in our cost-optimal pathway because half the required €28 trillion capital outlay would not have positive investment cases. This may result from differences in the cost of capital or because a stakeholder doesn't consider an investment's long-term benefit. For example, car buyers usually care more about the upfront purchase price than the total ownership cost. In the industry sector, 95 percent of pathway capital expenditures lack positive business cases; in buildings, it's 85 percent; in power 46 percent; in transportation 36 percent; and in agriculture 11 percent.

Mobilizing financing for these investments would require interventions, particularly in subsectors with high abatement costs. Those interventions could include:

  • Direct financing interventions. Closing gaps to positive investment cases for individual stakeholders through direct public financings such as carbon contracts for difference and feed-in-tariffs would require an estimated €4.9 trillion through 2050.
  • Price measures such as carbon prices or cap-and-trade systems. A carbon pricing or emissions trading scheme could create incentives for individual stakeholders to reduce emissions. At a carbon price of €50 per tCO2e, an additional 21 percent of required capital, on top of the 40 percent already in the calculation, could be unlocked through 2050. A carbon price of €100 per tCO2e could unlock another 10 percent, giving more than 80 percent of all capital expenditures, including infrastructure, a standalone investment case. The remainder would require carbon prices of over €100 per tCO2e to create positive investment cases.
  • Commercial derisking and bringing in long-term investors. Capital could be mobilized by reducing investment risks and employing new financing models such as adding insulation costs to house mortgages. This could help bring more long-term investors into markets dominated by short-term decisions. Long-term investors could see viable business cases in at least 10 percent more of the total capital expenditures than individual stakeholders would. Capital markets innovations such as asset-backed securities, utility and corporate power purchase agreements, government incentives, and risk guarantees could also reduce the cost of capital.

Impact on households: Lower- and middle-income households would see lower costs

If consumption patterns remain the same, and the cost increases and savings of decarbonization pass directly through to consumers, the aggregate cost of living for an average household in a climate-neutral European Union nation would remain the same as today. Power and heating/cooling bills would be lower, and mobility would be more affordable, while the cost of food and flights for vacation would increase. Costs for lower- and middle-income households would slightly decrease, whereas high-income households would see no significant change.

The labor market: A net gain of 5 million jobs, but reskilling and support needed

The net-zero transition would create an estimated 11 million jobs while eliminating 6 million, resulting in a net gain of 5 million jobs. Many of the new jobs would be in renewable energy (1.54 million), agriculture (1.13 million), and buildings (1.1 million). For example, in the buildings sector, the EU would need 1.1 million skilled workers to retrofit homes with higher insulation and install green heating and cooking systems.

Although regions may experience different levels of job displacement, most would see net employment increases.

Reaching net-zero emissions could require retraining up to 18 million workers, especially to fill jobs that currently do not exist (almost 3.4 million by 2050) and those lost during the transition (2.1 million by 2050). Some of the new jobs would require skills similar to those that disappear. For instance, oil and gas engineers could transition into the CCS industry. Retirements in industries with older workforces such as coal mining could reduce the number of job changes and retraining required.

Trade and production: Energy independence, new risks and opportunities

By pursuing decarbonization, the EU could become effectively energy independent. Between 2020 and 2050, oil, gas, and coal demand would decline 80 percent, from 43 exajoules (EJ) to 6 EJ, and reduce the fossil fuel trade deficit by two-thirds.

Although the European Union would no longer depend on fossil fuel imports, it might develop new dependencies on imports of technologies vital to a zero-emissions economy. Today, for example, solar panels are primarily imported into the EU, and some critical raw materials, such as cobalt for batteries or iridium for electrolyzers, have a limited supplier base.

The shift to zero-emissions technologies could also influence competitive dynamics and shift production locations. Adjusting to the change could threaten some parts of the EU economy, while also creating opportunities. For example, exporting heat pumps, electric furnaces, electrolyzers, and zero-emission agriculture technologies from the European Union could account for more than €50 billion a year by 2050.

Charting a way forward

Although the case for decarbonization and the pathway are clear, it will take decisive action to achieve the European Union’s climate goals. Stakeholders would need to address five hurdles to accelerate the transition:

  • Shift social norms and consumer and investor expectations to zero-carbon as the new normal. Consumers and business leaders would need to make decisions in the expectation and in support of a shift to net-zero instead of business-as-usual as the public and business default.
  • Create secure and stable policy frameworks and regulatory environments. Successful decarbonization depends on public sector leaders adopting regulatory frameworks that are ambitious enough to meet emission-reduction goals rather than incremental policies. This would provide stable planning and investment signals that could incentivize low-carbon technologies and business models.
  • Encourage constructive industry dynamics. Business leaders that lean into the transition and demonstrate a commitment to overcoming transition hurdles through collective action rather than worrying about first-mover disadvantages will be critical.
  • Mobilize green capital and investment. Much more public and private money would need to be invested in pre-commercial technologies and deploying commercially mature infrastructure. Investors that issue environmental, social, and corporate governance-aligned funding mandates that require businesses to quantify their exposure to climate risks and emissions could also help.
  • Accelerate net-zero technologies along their learning curves. Achieving the necessary technological breakthroughs to reduce emissions in hard-to-abate sectors and accelerating their progress to market would require consistent public and private investment. It would also take greater willingness among business leaders and policymakers to adopt new technologies.

Successful decarbonization requires deploying and scaling net-zero technologies. The journey for any single technology from early-stage R&D and proof-of-concept to early deployment and commercial competitiveness depends on a complex system of support models and stakeholders. Accelerated innovation is critical, along with commercial pilots and capturing scale effects to drive down costs. Achieving net-zero by 2050 would require the following immediate actions:

  1. Rapidly scale cost-competitive technologies and business models to reduce near-term emissions. Expediting the scale-up of mature and early-adoption zero-emissions technologies is crucial to meeting near-term reduction targets. These include solar and wind power, EVs and charging infrastructure, better building insulation, and district heating systems.
  2. Accelerate next-generation technologies and invest in enabling infrastructure to reduce emissions after 2030. To boost industry-wide innovation, funding mechanisms for deploying early technology should encourage collaboration. Policymakers could create regulatory certainty with CO2 and hydrogen price floors to mobilize capital for essential infrastructure such as carbon and hydrogen pipelines.
  3. Invest in R&D and negative emissions to close the gaps to net-zero by 2050. Increasing public and private investments in R&D that drive down the cost of such things as direct air capture technologies will be critical to achieving net-zero. It will also be essential to invest in reorganizing land use to generate negative emissions through efforts such as reforestation. Lawmakers can also start passing legislation that creates glide paths for each sector to reach net-zero emissions, such as automotive emissions standards now in effect in the transportation sector.

As this report will show, the European Union can achieve net-zero emissions without compromising prosperity. Advances over the last decades have put climate neutrality within reach. But laying the foundation in the next decade will be critical to achieving this goal.

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