The Business Times

What it will cost to get to net-zero

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THE story of human progress is a heartening one. People everywhere are living longer, healthier and more prosperous lives. Consider: In Singapore in 1960, life expectancy was 65 years; now it is more than 83. Per capita GDP in Singapore has risen from US$24,000 in 2000 to almost US$60,000 in 2020. It was just US$428 in 1960.

But here's the terrible irony. That progress is threatening the very condition that made it possible: the stability of the earth's climate. The effects of climate change are already visible, and they will only get worse if emissions of greenhouse gases (GHGs) are not radically reduced.

"Net-zero" refers to the goal of reducing emissions to the extent possible, and balancing any remaining emissions which cannot be eliminated, in order to stop the addition of GHG emissions to the atmosphere. Climate science tells us that limiting the rise of the earth's temperature to no more than 1.5 degrees Celsius would reduce the odds of initiating the most catastrophic impacts of climate change.

More than 70 countries, including China, Indonesia, Japan, South Korea and Thailand, have made net-zero pledges. All told, these countries account for the vast majority of both emissions (80 per cent) and GDP (90 per cent). Few, however, have backed up these promises with decisive action. That is understandable. Getting to net-zero will not be easy or without cost and, will need to go hand-in-hand with other objectives like economic development and increasing energy access.

What would it take to reach net-zero? And what kind of economic and social adjustments might be required? In a new report, McKinsey tries to answer those questions, based on a hypothetical scenario to achieve net-zero emissions by around 2050 developed by the Network for Greening the Financial System (NGFS), a group of 105 central banks and financial supervisors. These are not predictions, but a simulation of what is required under the NGFS trajectory.

In economic terms, spending on physical assets on the course to net-zero would reach about US$275 trillion by 2050, or US$9.2 trillion per year on average, an annual increase of US$3.5 trillion. To put it in comparable terms, the US$3.5 trillion increase is equivalent to about half of global corporate profits, one-quarter of total tax revenue, and 7 percent of household spending.

It's worth remembering that not all of this spending should be counted as a cost; many net-zero related investments already deliver economic returns (over and above their role in avoiding the buildup of physical risks), and more will likely do so as the transition matures. These capital expenditures could cut costs through reduced fuel consumption, improved material and energy efficiency, and lower maintenance costs.

Another important point is that these investments would need to start now - and indeed, the biggest spending as a share of GDP based on the NGFS scenario will take place in the next 10 to 15 years. Delay is itself costly. If countries invest in, say, new coal power plants and then decide to shut them down before the end of their useful life, those assets are stranded, which is expensive. It also means that workers are more likely to be dislocated. An orderly, gradual and determined transition is far preferable to an abrupt and disorderly one.

As for jobs, McKinsey estimates that getting to net-zero could mean the loss of 187 million jobs globally by 2050. There could be 202 million new ones, given the need for new large-scale capital investment and the growth of sectors like hydrogen and renewables.

In social terms, the most important fact about the net-zero transition is that the burdens are not evenly felt: some countries will have more difficulty reaching net-zero than others. Poorer countries and those with greater fossil fuel resources would need to invest more, relative to GDP, to reduce their emissions and towards economic development. For example, India's capital requirements would be 10.8 per cent of GDP under the NGFS, compared to the global average of about 7.5 per cent.

On the other hand, the region is well placed to capture the opportunities that emerge in a net-zero economy. Indonesia, the Philippines and Thailand all have great potential for reforestation, which could generate carbon credits.

Singapore is playing a role in catalysing green finance to support Asia's decarbonisation drive: as a source of investment funds; through promoting carbon markets; and, through collaborating with central banks, regulators and international platforms, like NGFS, to improve transparency around climate exposures and risks.

For individuals, too, disparate effects are likely. Lower-income households would be hurt more if the net-zero transition results in an increase in electricity prices (for example, due to supply shortages and volatility).

Change will be difficult and disruptive, in effect requiring a transformation of the global economy, in everything from how we work to how we build our homes to how we get from place to place. But the common thread is that this transformation produces benefits, both in limiting physical risks, and in day-to-day improvements, such as cleaner air and healthier land.

The story of human progress is the story of human ingenuity - one resource that is truly inexhaustible. And Asia is well positioned to be part of the solution: countries, such as China and Singapore, have a high share of STEM graduates, R&D investments, and climate patents; Asian countries more broadly are leading on the kind of innovation a net-zero transition needs. We believe that human ingenuity can ultimately solve the net-zero equation. But we need to make the decision to do so - and start now.

Human progress is threatening the very condition that made it possible: the stability of the earth's climate. The effects of climate change are already visible, and they will only get worse if emissions of greenhouse gases are not radically reduced.

This column originally appeared in The Business Times.

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