The heat is on: How public-sector leaders could drive net-zero goals

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Another summer of record-breaking heat waves in Europe, Asia, and the Americas is yet another reminder of the climate crisis that imperils our planet and all who inhabit it. The good news is that we have reached a turning point in the global commitment to decarbonize. In the United States, the Inflation Reduction Act (IRA), signed into law on August 17, 2022, directs $369 billion in federal funding—the largest climate investment in US history—to lower the nation’s carbon emissions substantially by the end of this decade. The IRA builds on early and sustained leadership by the European Union, which in 2019 committed to achieve net-zero emissions by 2050, launched its Fit for 55 package in 2021 to reduce net emissions by 55 percent by the end of this decade, and most recently developed a plan for rapidly shaking its reliance on Russian fossil fuels and accel­erating the transition to green energy. Though China recently scaled back its near-term renewable-energy goals amid power shortages, the world’s second-largest economy is still working toward having renewables account for a third of national power consumption by 2025.1

Momentum is building, and throughout the world, nations have set net-zero targets. Now comes the work of reaching them. On balance, tremendous progress has been made over the past decade to lay out feasible and affordable technological pathways for every global region and economic sector. These road maps reflect the widely held understanding among experts and policy makers that reaching net zero will require transforming energy and the use of land. Changing people’s habits is a big part of that. But public-sector leaders could play a pivotal role in the other part of the equation—namely, the development, adoption, and improvement of climate technologies.

To that end, we’ve identified three complementary and mutually dependent action areas that govern­ment leaders could focus on: innovation, industrialization, and infrastructure. Innovation spans basic research to develop new climate technologies, experimental applications for them, and ongoing engineering improvements to mature technologies. Broad adoption of climate tech pivots on industrialization to scale up demand and supply, while infrastructure serves as the backbone to enable and sustain their use. All three of these action areas will likely require enablers—effective institutions—to help them thrive and ultimately deliver on the goal of net zero.

Innovation challenges and enablers

A significant share of net-zero targets could be realized with climate technologies that are already mature or in the early stages of adoption. McKinsey’s net-zero pathway for the European Union found that more than 85 percent of emissions reduction could be achieved through technologies that are at least at the demonstration stage, while 60 percent could be met through technologies that are already in early adoption or fully mature.

But hitting net-zero goals will also require developing new climate technologies while existing ones are improved for performance and cost reduction. This calls for ongoing, accelerated innovation along the entire technology life cycle, from the lab to the field.

Hitting net-zero goals will require developing new climate technologies while existing ones are improved for performance and cost reduction.

We’ve identified three core factors that slow the machinery of innovation: insufficient funding for early-stage R&D, promising ideas getting stuck in the lab, and a lack of structures to keep driving innovation in the field (see sidebar “Climate tech innovation: Core challenges and key enablers”).

It can be tough to maintain a consistent flow of investment for fundamental and applied research, given that investors tend to dislike uncertainty, because breakthroughs by their nature are often sudden and unexpected. Moreover, public R&D funding for clean technologies has largely stagnated in the past decade.2

Even with seed funding, promising new technologies can die before they start generating revenue—a phenomenon so common that venture capitalists call it “the valley of death.” Moving technologies from conception to market in the seven to ten years venture capitalists typically require for a successful exit from their investments is tough. One reason is that the skills required to start a successful company often differ from those needed to achieve tech­nological breakthroughs. In addition, the innovation cycle can be long. It took ten to 15 years to bring decarbonization technologies such as lithium ion batteries to market and even longer for solar photovoltaics (solar PV), first developed at Bell Labs in the 1950s.3 It then took until the mid-2010s before costs had come down enough for lithium ion batteries to be viable for high-end electric cars, and we are now roughly at the point where costs are low enough to enable electric vehicles (EVs) to compete with internal-combustion-engine vehicles.

If technologies do manage to move from the lab to the field, continuous innovation after that often hinges on learning by doing. Usually, that requires effective mechanisms to share learnings within and between clean-tech companies (which may be competing with one another) and market structures that reward continuous efforts at cost reduction.

Public-sectors leaders could help overcome these core challenges in several ways. To start, governments could commit to increased and consistent public funding for applied-technology development and early-stage R&D. To increase the effectiveness of this funding, governments could collaborate with industry and academia to define innovation missions that set clear priorities and turn them into long-term commitments while striking a balance between “picking winners” and encouraging open-ended experimentation. Moreover, public R&D spending could be targeted toward innovation hubs, where a wide variety of research areas could be pursued. Such hubs may well enable the cross-pollination of ideas from one technological pathway to another. For instance, today’s highest-efficiency solar cells were created using techniques inspired by innovations in generating hydrogen fuel from water. Hubs may also encourage better use of innovation resources by adopting benchmarks and metrics to shut down dead-end projects quickly, and they should encourage private-sector involvement to ensure market acceptance and commercial viability for technology innovations. Further, hubs could enable governments to tap into creativity and ideas outside of formal public and institutional structures—for instance, through challenge grants styled like those of the Defense Advanced Research Projects Agency and collaborations with corporate R&D departments.

To help prevent promising new technologies from getting stuck in the lab, government leaders could encourage longer-term decarbonization planning by using regulatory backstops and incentives. Establishing carbon price floors, as Canada has done,4 or mandating sunset dates for polluting technologies could encourage more corporate investment and commercial pilots. Mobilizing investment from impact and venture funds into earlier-stage technologies also could help nascent technologies find their legs.5

To encourage more learning by doing, public-sector leaders could build continuous improvement into regulation by creating target paths for sectors to follow. An example would be continually raising vehicle-emissions and energy-efficiency standards. International agreement on those standards could enable learnings to disseminate globally, while markets, such as reverse auctions, could be designed to foster competition during phases in which significant investment in early-stage climate technologies is still required. To encourage knowledge sharing between projects and firms, various sectors could establish platforms for the exchange of information.

Industrialization challenges and enablers

Stimulating demand for climate tech while supply chains and production capacity are built out could nurture industrial scaling of these technologies and drive down costs.6 Countries could also capture more domestic value from climate technologies by manufacturing components domestically. In Germany, for example, we estimate that the employment and GDP benefits of expanding solar PV installations would be five times larger if the modules and inverters were manufactured at home rather than abroad. In the United States, the Inflation Reduction Act includes tax incentives, loans, and grants to spur the domestic deployment of existing climate technologies, including energy production and consumer goods such as EVs, and to promote the development of new decarbonizing technologies.

Still, efforts to industrialize climate tech face several hurdles (see sidebar “Industrializing climate technologies: Hurdles and interventions”). For one, reaching a point where new technologies are cost-competitive with coal, oil, and gas will likely take significant investment.7 Also, it is difficult to reorient complex value chains toward climate technologies when doing so requires synchronized action (for example, switching aircraft to sustainable aviation fuel). Another thorny challenge is shortages of workers, materials, and other inputs. The production of new technologies may require new skills that are not widely reflected in the current workforce. What’s more, new import dependencies may arise, supply bottlenecks could trigger price spikes (as with cobalt for EV lithium ion batteries), and raw-material suppliers could become unreliable.

None of these obstacles are insurmountable. Public-sector leaders have a range of interventions to consider for helping industrialize climate technologies, starting with robust demand signals.

Public-sector leaders have a range of interventions to consider for helping industrialize climate technologies.

Regulations, carbon taxes, and emissions-trading schemes could make climate technologies more competitive vis-à-vis incumbent ones. A variety of possible levers that could shift the economics of these technologies include tax credits,8 low-interest loans,9 feed-in tariffs to guarantee above-market prices to support the development of renewable-energy sources, and the reduction (or elimination) of fossil-fuel subsidies. Whether and which of these interventions are appropriate ultimately depends on the specific context that informs their design. Tax credits and subsidies are well suited to active markets with many players, while loans and loan guarantees tend to work best when the number of beneficiaries is limited and start-up costs are high.

In addition, administrative processes, such as permitting for onshore wind turbines, could be streamlined to reduce costs and save time. Finally, public-sector procurement of climate technologies could be used to create early lead markets. For example, governments could purchase low-carbon cement or green steel for public construction projects or buy electric vehicles for government fleets.10

Where incentives are unlikely to prove sufficient or noneconomic factors come into play, government mandates could help. Setting standards for vehicle emissions or insulating buildings, for example, could drive decarbonization and stimulate competition. Government mandates could provide clear targets for industries, helping to overcome economically nonrational behaviors that inject uncertainty into the outlook. Ensuring a level playing field for trade-exposed sectors also may be necessary. Government leaders could consider policies such as linking carbon taxation and emissions-trading systems among jurisdictions by establishing carbon-free trade areas or border adjustment mechanisms. International collaboration to align product carbon standards not only could help ensure fair competition but also could create greater economies of scale.

Fostering private-sector collaboration could help create a critical mass of demand for decarbonized products, such as for green steel in the automotive industry. At the value chain level, collaboration could focus on establishing product standards to accelerate the industrial learning curve and the sharing of information to track supply chain decarbonization. Identifying critical raw materials, actively managing supply risks,11 and shaping industrial policy to regain and capture priority value chain elements domestically also could help strengthen supply. And working with universities and employers to create training programs could contribute to ensuring that a skilled climate tech workforce is in place for the future.

Infrastructure challenges and enablers

A key component of switching to climate technologies is having sufficient infrastructure to support them. For example, a commercial vehicle manufacturer is more likely to develop hydrogen trucks if manage­ment is confident that an adequate hydrogen infrastructure is in place to support demand. A trucking company is more likely to switch to green hydrogen trucks if there are hydrogen refueling stations, a hydrogen distribution network, and transmission lines channeling renewable power to electrolyzers.

Early development and deployment of infrastructure could help accelerate the development of climate technologies, which may very well entail a significant investment in renewal and build-out of existing infrastructure.12 This could be challenging on several fronts (see sidebar “Net-zero infrastructure: Challenges and enablers”). Large infrastructure projects rarely finish on time and within budget, and there could be public opposition to some efforts, such as overground transmission lines.13 Then there are the long infrastructure lifetimes that lock in emissions trajectories for decades and may require early retirements of existing assets, which can be costly. Since investments in infrastructure usually need to come before the deployment of the tech­nologies that infrastructure will support, investors can be hesitant to mount the capital to build infrastructure if they fear the market could develop in unforeseen ways. And the clock is ticking. In the European Union, we estimate that 75 percent of the total investment for infrastructure needed to hit 2050 net-zero targets must be mobilized before 2040.

Early development and deployment of infrastructure could help accelerate the development of climate technologies.

Public-sector leaders can consider several categories of interventions to support the timely build-out of the right infrastructure. However, there is no one-size-fits-all. Different types of infrastructure have unique capital expenditure profiles, market and development mechanisms, and complex stakeholder ecosystems.

Carefully planning infrastructure deployment needs could help prevent technology development from being short-circuited. When no clear choice of zero-emissions technology exists, deploying infrastructure can influence what becomes the most attractive option. Consider, for example, industrial players for which carbon capture and storage (CCS) and electrification have similar decarbonization costs. Connecting an industrial cluster to CO₂ pipelines could lead to members of the cluster choosing CCS to reduce emissions. In some circumstances, that could lock in higher-than-optimal costs.

Policy makers could start by gaining an under­standing of future infrastructure needs and transition paths. Then they could create an appropriate regulatory framework for each domain and mobilize finance for infrastructure investments. In addition, they can facilitate all three of these steps by engaging the private sector more effectively and by encouraging collaboration.

To help with development of comprehensive infrastructure build-out plans, policy makers could create a full-system model of the net-zero economy that identifies steady-state needs and works backward.14 Identifying and capturing synergies and interdependencies also may be key,15 along with investing in optionality and anticipating when projects are likely to hit a point of no return.16

Developing an appropriate regulatory framework could start with ensuring that the right model is in place. For example, should EV-charging infra­structure be deployed under a merchant model for profit (as is often the case today), included in a regulated asset base like a power grid, or publicly owned, as road and rail networks are in most jurisdictions? Efforts that could prove crucial at this stage include ensuring that public infrastructure planning is reliable and working with other jurisdictions to harmonize frameworks across borders.17

Engaging the private sector early and often could help with all these efforts. Public funding alone is unlikely to be enough to cover all the infrastructure investments required to achieve net zero, so new tools and strategies may be needed to encourage private investments before market signals make it an enticing proposition. Choosing financial structures that fit the nature of the investment needed and the stage of project development could help in this regard.18 Bringing in private stakeholders early could help public-sector leaders gain a better understanding of private-sector views on market dynamics and infrastructure needs, as well as address concerns. Private-sector players could be encouraged to form joint ventures to build infrastructure, and they could collaborate with local financial institutions to gain a better understanding of local risks. Finally, public-sector leaders could help organize demand and supply clusters to help achieve the scale required for justifying private infrastructure investments.19

Across these efforts, institutions

While the net-zero transition requires the public sector, business, and civil society to do their part, governments arguably will play the most critical role. They can set priorities, balance interests, and pursue fair and equitable outcomes. Governments can also set guardrails within which businesses can innovate and deliver, help them create and shape markets, and provide funding for research and infrastructure.

None of this will be easy. There is no tried-and-tested policy toolbox for removing many of the obstacles on the road to net zero, and these efforts are unlikely to fall under the remit of a single government agency. Rather, they will likely require agencies to collaborate on an unprecedented scale and pace.

Some situations may require enhancement of existing public institutions or creation of new ones to provide new functions with new capabilities while remaining focused on the core mission of the net-zero transition. This could require enhanced planning for decarbonization sector by sector, combined with efforts to ensure pathways are both adaptive and risk resilient.20 Other measures that could help are strengthening project steering and management through KPIs that track progress and drawing on experi­ences from other sectors to inform policy design. Communication will be critical. Dialogue and collaboration across borders and sectors, coupled with effective citizen outreach, could aid innovation, industrialization, and infrastructure.

The global nature of the climate challenge may require moving beyond national or state-level public institutions to enhance or create international institutions. Other historic junctions offer analogies. The end of World War II, for example, saw the creation of the Bretton Woods system with its global institutions, such as the World Bank and the International Monetary Fund. The new challenges posed by climate change may require new international capabilities, such as the regulation and support of international carbon markets, the imple­men­tation of an international loss-and-damage agreement, and the enabling of fair and effective carbon track-and-tracing in international trade.

Reaching net zero by 2050 will require tremendous effort from policy makers, public servants, businesses, and citizens. And it will almost certainly depend on not only how the world changes its behaviors but also how we as societies use land and develop and deploy new climate technologies. Creating the conditions to enable ongoing innovation, as well as the industrialization and infrastructure for climate technologies, will require efforts by many stakeholders. Of these, public-sector leaders are arguably the most important for ensuring the well-being of the planet and its people.

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