Asia’s net-zero transition: Opportunity and risk amid climate action

For Asia-Pacific, the journey to net zero could bring both challenges and rewards. McKinsey analysis highlights the transition’s socioeconomic effects—and the ways stakeholders might respond.

Within just a few generations, life expectancy in Asia–Pacific has more than doubled, 1 the infant mortality rate has fallen more than 70 percent, 2 and per capita GDP has risen nearly eighty-fold. 3 People are living longer, healthier, and more prosperous lives. Yet, the environmental cost of human progress, in Asia and elsewhere, is now threatening the stability of the Earth’s climate. The consensus among scientists and policy makers globally is that the climate will become increasingly volatile if greenhouse gas (GHG) emissions are not drastically reduced.

As the physical manifestations of a changing climate become increasingly visible, so too are their socioeconomic impacts. In parts of Asia, continued warming could bring higher average temperatures, deadly heat waves, severe hurricanes, drought, and changes in water supply. For example, in a scenario with high concentrations of atmospheric CO2, Bangladesh, India, and Pakistan, along with major Southeast Asian countries, could experience extreme increases in heat and humidity, which would make it harder for people to live and work, along with more frequent extreme precipitation events. Countries such as Australia may see a growing annual risk of drought. 4

The physical impacts from climate change will continue to grow until the world produces zero net emissions of greenhouse gases—something that many countries and businesses have promised to do by midcentury, in line with the targets set by the 2015 Paris Agreement. The route to net-zero, though, will not be easy or without cost, and the world economy still needs to grow. It may therefore help leaders across Asia to understand what it would take to reach net-zero, and what economic and social adjustments might be required. In a recent report, McKinsey explored the effects that a net-zero transition could have on demand, capital allocation, costs, and jobs across energy and land-use systems that account for some 85 percent of GHG emissions. The report also assessed possible economic shifts for 69 countries. (Our analysis is not a projection or a prediction and does not claim to be exhaustive; it is the simulation of one hypothetical, relatively orderly path toward 1.5°C using the Net Zero 2050 scenario from the Network for Greening the Financial System, or NGFS. 5 )

This analysis suggests that the implications of the net-zero transition by 2050 are universal: all regions would need to decarbonize, all would have some exposure to the transition, all would face some degree of physical risk, and all would have growth potential resulting from the transition. However, the implications for regions and countries vary—as Asia itself illustrates. Below, we summarize the McKinsey report’s findings on what a net-zero transition might mean for Asia.

Emissions abatement

Asia-Pacific can play a significant role in the global effort to achieve net-zero. The region is home to five of the ten largest emitters in the world (China, India, Indonesia, Japan, and South Korea) and accounts for about 45 percent of global GHG emissions due to its significant population. On a per-capita basis, Asia Pacific’s annual GHG emissions, at about 6 metric tons of CO2-equivalent (tCO2e), are below the world average (about 7 tCO2e) and far lower than the United States (about 19 tCO2e) and Europe 6 (about 9 tCO2e). That said, per-capita emissions vary widely across Asia-Pacific. Some wealthier countries in the region have per-capita emissions that are closer to those of advanced economies in other regions (Exhibit 1).

The top ten emitters account for 62 percent of global CO2 emissions and 49 percent of global methane emissions.
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Capital spending

According to McKinsey’s analysis, global capital spending would reach about $275 trillion by 2050, or $9.2 trillion per year. Compared with current annual spending, this represents an increase of $3.5 trillion—equivalent to about half of global corporate profits, one-quarter of total tax revenue, and 7 percent of household spending—and a reallocation of $1 trillion of current spending from high- to low-emission assets (Exhibit 2).

As a percentage of GDP, fossil fuel–producing regions and developing countries would spend more than others on physical assets for energy and land-use systems.
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In the Net Zero 2050 scenario, Asia-Pacific’s 7 annual capital spending on physical assets between 2021 and 2050 would rise to about $3.1 trillion from approximately $2.1 trillion in 2020, with significant variation among individual countries. India would spend an average of 10.8 percent of its annual GDP on physical assets for energy and land-use systems, while China would average 5.2 percent and Japan 4.2 percent, with the remaining countries of Asia collectively averaging 9.2 percent. By comparison, the world’s largest economies (including China and Japan), would spend about 6 percent of their combined GDP from 2021 to 2050.

A significant shift would occur in the allocation of capital spending on physical assets, such as infrastructure and factory equipment. Annual capital spending on low-emissions assets would increase from 43 percent in 2020 to an average of 76 percent over the next three decades. Spending on power assets would increase substantially, to about 65 percent, and spending on fossil-fuel assets would fall some 50 percent. The focus on power assets would be more pronounced in China, emerging Asia, and frontier Asia than in advanced Asia, where countries such as Japan could allocate a large portion of their capital expenditures to physical assets for the mobility system.

Economic and social implications

On average, Asia-Pacific countries have about 37 percent of their GDP in sectors most exposed to the transition, slightly above the world average of around 35 percent. However, there is wide variation depending on the specifics of individual economies and land use. GDP exposure in surveyed APAC countries range from 21 percent of GDP (Singapore) to 58 percent (Vietnam), with a median of 38 percent (Exhibit 3).

Countries with lower GDP per capita and fossil fuel resource producers have higher transition exposures.
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Among APAC countries the percentage of jobs in sectors with the highest exposure to the transition spans a similarly wide range, from 22 percent (Singapore) to 72 percent (India). The median percentage for APAC is 54 percent, higher than the world median of 35 percent. (McKinsey estimates that the net-zero transition could be somewhat positive overall, with a global loss of 187 million jobs by 2050 and the creation of 202 million new ones, given the growth of sectors like hydrogen and renewables.) The story is much the same for countries’ share of capital stock in sectors with highest exposure to the transition. The share ranges from 13 percent (Singapore) to 58 percent (Pakistan), with APAC’s median value of 41 percent being higher than the world median (34 percent).

Together, these metrics indicate that, although some APAC countries face lower overall exposure to the transition (Singapore especially, but also New Zealand, Australia, Japan, and South Korea), the region as a whole would be highly exposed as the net-zero transition unfolds. Some countries are likely to experience more difficulty during the transition to net-zero than others. Less developed countries and those with greater fossil fuel resources would need to invest more, relative to GDP. Manufacturing-dependent countries such as Bangladesh, Pakistan, and Vietnam are more exposed to shifts in demand for products than, say, Japan, which is predominantly a service economy.

For individuals, too, effects of the transition are likely to vary: lower-income people would carry a heavier burden from the effects of higher electricity prices during the transition, before they eventually fall thanks to the lower operating costs of low-emissions sources. On a positive note, the region is well placed for renewable energy and abatement efforts: Indonesia, the Philippines, and Thailand all have great potential for re-forestation, which could generate carbon credits.

Opportunities

Despite the challenges, the net-zero transition is also rich in opportunity, holding out the prospect of more efficient operations from decarbonization, expanding markets for low-emissions products like electric vehicles (EVs), and new goods and services to support these opportunities such as rare-earth metals, EV charging infrastructure, and forest management. Many APAC countries are well-positioned to take advantage of potential transition opportunities because they have abundant natural, human, and technological capital.

Natural capital for the net-zero transition generally consists of renewable-power potential, forestry potential, and mineral reserves. Australia has average theoretical solar potential (global horizontal irradiance) in the top quartile of countries surveyed; Pakistan, Sri Lanka, India, Thailand, the Philippines, and Malaysia all have average theoretical solar potential that is above the median. New Zealand ranks in the top quartile for wind power potential, based on mean wind-power density in the windiest 10 percent of its land area. Japan, China, the Philippines, Pakistan, and Sri Lanka also have considerable wind power potential by this measure. When it comes to reforestation and afforestation, New Zealand, Vietnam, Malaysia, and Sri Lanka each have CO2e abatement potential in the top quartile of countries surveyed. As for reserves of minerals that will be in high demand during the transition, Australia and China are rich in cobalt, copper, nickel, zinc, and rare earths, while countries such as the Philippines, Indonesia, Vietnam, and India all harbor significant reserves of minerals of various kinds (Exhibit 4).

Countries could capture potential growth opportunities from the transition to Net Zero emissions: Renewable power example.
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R&D and innovation are also expected to play a significant role in the transition, and several Asia-Pacific countries are well placed in this respect. South Korea, Japan, China, and Singapore are all in the top quartile of countries for spending on R&D as a percentage of GDP. Japan, South Korea, China, and India are in the top quartile for numbers of patent filings relating to climate-change mitigation. And certain countries appear to have strong pools of technical talent: Singapore, Malaysia, South Korea, and India each enjoy a top-quartile share of college graduates with a STEM degree.


The transition to net-zero will require a transformation of the economy, which could be disruptive in some respect. But for Asia, and for many other regions, the benefits should outweigh the costs, in terms of avoided climate risk and improvements in environmental quality, such as cleaner air. What’s more, there are substantial economic opportunities for countries and companies that are prepared to engage in the transformation—and Asia is well positioned to be part of the solution.

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