Sectors are unevenly exposed in the net-zero transition

Economic sectors with high-emissions products or operations would face substantial effects on demand, production costs, and employment.

A net-zero transition could affect the world’s energy and land-use systems and, by extension, the economic sectors that participate in these systems. Using the Net Zero 2050 scenario developed by the Network for Greening the Financial System (NGFS) as a starting point, we look at what the decarbonization implications would be for each. We seek to measure the potential changes in demand and the necessary spending on physical assets to reach net-zero emissions, as well as the implications for costs and jobs. We also focus on the opportunities in each sector and identify key takeaways for stakeholders (see sidebar, “Our research methodology: Sources, scenarios, limitations, and uncertainties”).

We find that, while all sectors of the economy are exposed to a net-zero transition, some are more exposed than others. The sectors with the highest degree of exposure directly emit significant quantities of greenhouse gases (for example, the coal and gas power sector) or sell products that emit greenhouse gases (such as the fossil fuel 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. Other sectors accounting for about 70 percent of GDP have less pronounced direct exposure. They are nevertheless dependent on the highly exposed sectors, for example through interconnected economic and financial systems, and therefore could be affected by the transition.

Below, we describe the economic shifts for some of the most affected sectors. Together they account for about 85 percent of global GHG emissions through their operations or products, and we present our analysis of the economic changes they would likely experience in the Net Zero 2050 scenario. 1

Fossil fuels. As noted earlier, combustion of fossil fuels produces 83 percent of global CO2 emissions. The sector is seeking to decarbonize through energy efficiency, electrification, and managing fugitive methane emissions. At the same time, it faces significant demand shifts from potential shifts in the energy mix, with a reduction in demand for fossil fuels and growing demand for other energy sources such as electricity, hydrogen, and biofuels. In the scenario analyzed here, oil and gas production volumes in 2050 would be 55 percent and 70 percent lower, respectively, than today. Coal production for energy use would be nearly eliminated. Under the net-zero transition, demand for jobs within the fossil fuel extraction and production sector could be lower by about nine million direct jobs by 2050. McKinsey research suggests that oil and gas companies are adapting to the low-carbon transition by becoming resource specialists, transforming into diversified energy players, or turning themselves into low-carbon pure plays.

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Power. To decarbonize, the global power sector would need to phase out fossil fuel–based generation and add capacity for low-emissions power to meet the existing additional demand arising from both economic development and the growing electrification of other sectors. It would require substantial annual capital spending from 2021 to 2050, which we estimate at about $1 trillion in power generation, $820 billion in the power grid, and $120 billion in energy storage, in the NGFS Net Zero 2050 scenario. Opportunities would arise not only for power producers but also for providers of equipment, electricity-storage hardware, and related services. Our analysis suggests that by 2050, under a net-zero transition, approximately six million direct jobs could be added in operations and maintenance for renewable power and approximately four million direct jobs could be lost in fossil fuel–based power. The build-out of power infrastructure and the capital spending associated with the net-zero transition could produce as many as 27 million direct jobs in the early years of the transition, and about 16 million direct jobs associated with construction and manufacturing activity in 2050. Asset stranding could be large. Our analysis suggests that about $2.1 trillion of the sector’s capital stock could be stranded by 2050 in the Net Zero 2050 scenario. Eighty percent of this amount is today’s capacity, while 20 percent is capacity that would be built between 2021 and 2050.

Mobility. Our analysis of mobility focuses on the road transportation segment, which accounts for about 75 percent of all mobility emissions. Decarbonization would involve replacing ICE vehicles with battery-electric vehicles or vehicles powered by hydrogen fuel cells (exhibit). In the Net Zero 2050 scenario, annual spending would be $3.5 trillion on both vehicles and to build charging and fueling infrastructure between 2021 and 2050. About 13 million direct ICE-related jobs would be lost in the Net Zero 2050 scenario, although some of this loss would be offset by gains of about nine million direct jobs related to EV manufacturing by 2050. The difference between losses and gains is driven in large part by the relatively higher productivity of low-emissions vehicle manufacturing.

Virtually all new new-car sales will be of electric vehicles by 2050 in the NGFS Net Zero 2050 scenario.
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Industry. We focus on two sectors, steel and cement, that together account for approximately 14 percent of global CO2 emissions and 47 percent of industry’s CO2 emissions. While technology pathways are still emerging, steel and cement production could be decarbonized by installing CCS equipment or switching to processes or fuels—such as hydrogen—that can have zero or low emissions. Production costs in both sectors could increase by more than 30 percent by 2050 compared with today.

Buildings. In the net-zero scenario, the buildings sector would decarbonize by improving energy efficiency—for example, through the use of insulation—and by replacing fossil fuel–powered heating and cooking equipment with low-emissions systems. The average annual spending on physical assets between 2020 and 2050 would be $1.7 trillion per year. Decarbonization of buildings could result in a net gain of about half a million direct jobs by 2050 under a climate transition, driven by retrofitting buildings with insulation. The buildings sector’s biggest adjustment during this transition would be managing the up-front capital costs for end consumers to retrofit equipment and aligning incentives among various stakeholders (such as building owners who invest capital and tenants who may see the benefits of reduced operating costs).

Agriculture and food. In the net-zero scenario, agricultural emissions would be reduced as a result of producers deploying GHG-efficient farming practices and some consumers shifting their diets away from ruminant animals that generate significant quantities of methane. The scenario would also entail an increase in production of energy crops to produce biofuels. As a result of these shifts, the net-zero transition would result in about 34 million direct jobs lost (predominantly due to diminished production of ruminant meat) and 61 million gained (related in large part to increased production of energy crops and poultry) by 2050. This net gain of about 27 million direct jobs due to the transition is about 4 percent of the 720 million or so direct agriculture jobs today. These job shifts need to be considered against a long-standing trend in the agricultural sector of workers shifting to nonfarm work in addition to productivity, population, and income growth. Through 2050, more than $60 billion of annual capital spending would be needed to enable more emissions-efficient farming. Such investment need not all be new funds; repurposing existing subsidies, many of which counteract environmental and climate-change mitigation goals, could cover a substantial amount of this cost.

Forestry and land use. Land use primarily contributes to an increase in CO2 emissions today from land clearing and deforestation. Reaching net zero in this scenario would involve halting deforestation and accelerating efforts to restore forests and other natural environments to serve as a net sink of emissions. Making these changes would require capital spending of $40 billion per year between 2021 and 2050, about 75 percent of which would be spent in the next decade, primarily on acquiring and protecting land. Reducing deforestation would also require managing adjustments to subsistence-level farming activity (a substantial portion of deforestation is driven by expansion of agricultural land). Opportunities for economic gain might come from voluntary carbon markets and industries based on ecosystem services.

New energy sectors (hydrogen and biofuels). The expansion of low-emissions energy technologies will create opportunities. Expanding capacity and infrastructure for other low-carbon fuels would require additional capital spending of about $230 billion per year between 2021 and 2050. We estimate that the hydrogen and biofuel sectors would create approximately two million direct jobs by 2050.

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