Reflections from COP27

I flew back from Sharm El Sheikh a few weeks ago, where I was part of McKinsey’s delegation to COP27. As the plane touched down in my hometown, Houston, I thought about what the climate dialogues mean for the city, arguably the energy capital of the world. This year’s COP brought into sharp focus that, while climate dialogues are global, transition needs to be local. Commitments are a first step, but practical actions, such as investing in transition assets will be what drives progress. For example, I believe that, with its energy infrastructure, talent, and energy technology expertise, Texas presents an attractive investment environment for the transition. With support from an attractive public policy environment, the region has great potential to become a world leader in progressing decarbonization. My colleagues and I provided insights and analyses for a recent report authored by the Greater Houston Partnership, "The energy transition capital of the world: Houston’s opportunity to win by catalyzing capital formation," which explores this very topic in greater detail. 

Below are some of my other key takeaways from COP27:

The dual challenges of climate and energy security were at the forefront in this year’s “COP of realism.” In contrast to discussions at COP26 in Glasgow, the dialogue at COP27 centered around the need to be practical about the pace of change and the sensible policies that are required to drive the transition. In one dialogue, a policy expert reminded us that transitions are messy and disorderly. Regional policies have historically been introduced and implemented in fits and starts. Investors make bets on certain technologies, with the reality that some will fail. While some geopolitical risks will diminish, new ones will emerge, such as access to rare-earth minerals, and the new supply and demand lines that will be drawn for hydrogen trading.

Today’s challenges highlight how important it is for corporate and policy leaders to engage deeply on what is needed for a more orderly transition. An example of work already underway in this regard is the activity surrounding “brown-to-green” investments in heavy-emitting industries, such as steel, chemicals, mining, and oil and gas, that will help to decarbonize existing energy infrastructure and transition to cleaner electrons and molecules (through, for example, using hydrogen and CO2-based fuels).

We need investment in both traditional and new energy supplies to make progress on energy security and access, and climate. One dialogue at the COP highlighted the ongoing requirement for a portfolio of energy carriers, suggesting that we are underinvesting in energy in general—both clean and fossil-based. While we are underinvesting in clean energy, below the rate needed to be on track for net zero, we are also underinvesting in oil and gas relative to demand projections. Practically, we will need to take a portfolio, or an “all-of-the-above” approach, to investing in energy to smooth demand and avoid supply shocks to the energy system. A geopolitical expert commented that when we starve fossil investments when they still have a role in a transition, we put control over energy systems into a smaller set of hands, which raises energy-security risks.

Several dialogues highlighted the global opportunities to jointly address the challenges of climate and energy. Technology innovations such as digital metering, micro-grids, and AI for energy efficiency are helping to accelerate the transition in some markets. An executive from a global energy tech-services company shared that her customers in Europe are asking for these solutions, “… first, because of cost savings, second, because of energy security, and third, because of climate targets." This is a tangible example of how we can address energy security and climate challenges in parallel.

The private sector started to announce solutions in Egypt, following on from commitments announced in Glasgow. Private-sector participation in Egypt was higher than initially expected, and many leaders expressed an eagerness to exchange ideas and create partnerships as a focus of this year’s COP.

Three key enablers—capital deployment, policy, and technology—were highlighted as key contributing factors underpinning progress to date. These enablers, highlighted in a dialogue on solutions, are also discussed as part of our inspiring McKinsey panel, “Ensuring a more orderly energy transition.” The following enablers were highlighted:

  • Capital investment in the transition is accelerating. For the first time in history, clean energy investment of around $494 billion this year surpassed that for oil and gas ($466 billion).1 While we may still be underinvesting in energy infrastructure, these figures illustrate the massive amount of capital being deployed for the transition, which will only continue to grow. One panelist predicted that, “When we look back from Dubai (COP28) to Glasgow (COP26), we will have witnessed an incredible, 24-month acceleration of capital deployment for the build out of transition technologies, including hydrogen, carbon capture and storage, bioenergy, and e-fuels.”
  • Regional industrial policies are creating competitive advantage for early movers in the transition. While historical ambitions of setting a global carbon price are unlikely to be realized, we entered this COP with unprecedented industrial policy in the form of the US IRA.2 While we still have a long way to go, John Kerry remarked in a small-group meeting with the Wall Street Journal that “the IRA is a first step towards the greatest transformation since the industrial revolution.”3 An important outcome of the IRA is that it will create a “first-mover” advantage for the United States as an early architect of new-energy markets and supply chains. Many of the domestic and international private-sector investors who are rushing to the United States to build transition assets and technologies will also benefit from the IRA.
  • Don’t bet against technology: innovation will underpin the transition at scale. Prior energy transitions teach us that game-changing technologies will ultimately underpin transformational changes to the global energy system. Technology breakthroughs will happen because, “That is what humans do,” as a former policymaker said in one discussion. Two examples of innovation showcased at COP27 included a company that is seeking to build the world’s first zero-carbon fuel refiner at scale, and a technology company that is building products for a “post-pollution world” and partnering with Zara to turn greenhouse gases into clothing. One of the largest global asset managers commented that, “So much capital is looking to invest in transition technologies.” Such examples of innovation continue to highlight that we should not bet against technology, as cost curves could shift sooner than we expect.

The elephant in the room: “trillions not billions” are needed for climate solutions in the developing world. In jarring contrast to progress in the North, financing the transition in developing countries stood out as the most concerning challenge on which we have made little progress. A positive outcome from COP27, however, was that multiple climate-finance innovations were launched (for example, a $2 billion African blended-finance facility, a US government-backed Energy Transition Accelerator to support renewables through carbon offsets, and mechanisms to address exchange-rate risk in Global South development projects). However, the COP also raised questions on whether there may be more opportunities for climate-finance experts to engage the corporate sector. For example, are there “brown-to-green” opportunities to decarbonize the developing world in addition to building new infrastructure? Are bolder reforms necessary to reshape the architectures for climate finance—and are there lessons that can be applied from public and private markets?

While there is still much to be done, particularly to address the climate and energy challenges in the developing world, this “COP of realism” also has markers of accelerated progress. I am witnessing this first-hand in Texas, where transition investment commitments—both for new and existing energy infrastructure--are starting to pick up speed. It is for this reason that I hope that COP27 will be looked back upon as a “COP of optimism” as well.

1 Vladimir Spasić, “Rystad Energy: Investments in renewables in Europe set to surpass oil, gas in 2022,” Balkan Green Energy News, October 17, 2022.

2 “Inflation Reduction Act 2022,” IRS, United States Government.

3 “Green transformation will rival industrial revolution: US climate envoy,” UN News, United Nations, April 18, 2021.

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