This article was a collaborative, global effort by Jonathan Woetzel, Kimberly Henderson, Mekala Krishnan, Haimeng Zhang, and Grace Lam, representing views from McKinsey Global Institute, McKinsey & Company’s Greater China office, and the firm’s Sustainability and Global Risk practices.
As the COVID-19 pandemic sweeps through the globe, lives and livelihoods are threatened. Yet now more than ever, we need to bear in mind its larger implications. The same forces that have enabled the virus’s assault on humanity underlie the larger threat of a changing climate. The current pandemic presents imminent and discrete dangers, while climate risks, by contrast, are gradual and cumulative. This means that a global climate crisis could be far lengthier and more disruptive than the coronavirus pandemic. Moreover, our responses to the pandemic will be critical factors in whether and how we achieve sustainability. In a time where the world faces simultaneous supply and demand shocks, building resilience through a focus on sustainability can and must be consistent with the effort to safeguard our economy and our lives.
Earth’s climate is changing, after more than 10,000 years of relative stability. Since the 1880s, the planet’s temperature has risen by about 1.1 degrees Celsius. As average temperatures rise, acute physical hazards such as heat waves and floods grow in frequency and severity, and chronic hazards, such as drought and rising sea levels, intensify.
For China, climate change is forecast to make the country warmer and wetter. According to McKinsey’s analysis, if emissions continue to rise at the current rate, the threats of extreme heat and lethal heat waves could affect 10 to 45 million people by 2030, particularly in East China. The average share of outdoor working hours lost each year to extreme heat and humidity would increase from 4.0 percent today to as much as 6.5 percent in 2030 and 9.0 percent in 2050—equivalent to $1 trillion to 1.5 trillion in GDP at risk in an average year by 2050. The kind of heavy precipitation that was a once-in-50-years event in 1980 is expected to be two to three times more likely in 2030 and three to six times more likely in 2050 (Exhibit 1).
Preventing further buildup of physical risk and stabilizing the climate will require rapidly reducing GHG emissions and ultimately taking emissions to net zero. China has mounted a vigorous response to climate risks and opportunities. These initiatives are admirable and, in some sectors, industry-leading. Nevertheless, given its scale and influence, it can do more. China still accounts for around 20 percent of global emissions, with net emissions of 16 gigatons of CO2 equivalents.
By making a rapid and orderly transition to a low-emissions pathway, China could greatly limit its exposure to both physical climate risk and transition risk, and it could tap new sources of economic growth. The country could also help reduce the world’s GHG emissions to an extent that almost no other nation can.
China could adopt a “4+3+3” climate response centered on mitigation, adapting the country to climate risks and supporting global sustainable economic development (Exhibit 2).
In order to transit to a low-emissions pathway in line with the Paris Agreement, we identified four ways for China to mitigate and decarbonize. First, emissions could be reduced through demand-side measures, which include improving energy efficiency, optimizing industry processes, implementing circular economy measures, and encouraging shift in consumer patterns. Second, power and fuel mix would need to change. Power and transportation account for about a third of China’s GHG emissions. Retiring inefficient coal plants and deploying more renewables, ramping up electrification, expanding the use of biomass, and growing the hydrogen market are all important steps. Third, scaling up a carbon-management industry is essential. China could invest in developing carbon capture, utilization and storage (CCUS) technology and further support reforestation. Fourth, non-CO2 emissions, like methane and nitrous oxide, would need to be significantly reduced as well. This includes reforming agricultural and food systems, such as improving fertilization practices, as well as eliminating fugitive methane emissions.
As climate hazards are likely to grow in frequency and intensity, climate adaptation measures are important. There are three ways to put resiliency at the core of China’s city planning and infrastructure. First, China needs to develop resiliency planning expertise and factor in physical risks into city planning policies, strategies, and operations across all departments. Second, infrastructure projects need to plan for the changing climate, including climate risk assessments to evaluate potential effects of acute and chronic hazards. Third, financial innovations could be promoted to better manage risks. Instead of relying on post-disaster government relief, climate risk insurance could be helpful to transfer some of this risk exposure in light of extreme weather events.
Lastly, in addition to decarbonizing and adapting at home, China can support sustainable economic development globally. There are three ways to support sustainable economic development. First, China could develop, scale, and transfer low-emissions solutions. As the world seeks to move toward a low-carbon economy, demands for related exports and technologies—such as electrolyzers, sustainable aviation fuels, alternative proteins, CCUS technologies—could increase dramatically. As it develops low-carbon technologies, China should aspire to be more than a manufacturer. It could provide financial and technological support to overseas customers. Second, it could mobilize capital flows for green projects. Given China’s influence, it is well placed to prioritize cross-border green projects, to mobilize investment into green finance, and to encourage other countries to consider the climate impacts of their own infrastructure. Third, and most importantly, China could play a bigger role to support international climate collaborations. Dealing with climate change requires a rapid transition in all sectors, everywhere, at a time when global political leadership is in flux. For China, this is an opportunity to demonstrate its commitment to leading in the low-carbon transition.
In the post-coronavirus world, countries are going to grapple with restarting economies amidst a recession. The “next normal” could reflect an imminent restructuring of the global economic order. However, we cannot afford to leave the climate risk agenda on the table. Climate change is here, with associated physical risks. The next ten years are critical if the world is to meet its climate-change commitments. The fixed “carbon budget” means that the further we delay our actions, the steeper our future decarbonization path would need to be.
Dealing with climate risk will continue to be a top global priority and will force change in many industries. Although this transition will be difficult, it also is a time for China to show leadership in a new, low-carbon economy. The potential is huge.