Solving the net-zero equation: Nine requirements for a more orderly transition.
As leaders prepare for COP261at the end of this month, the need for addressing the looming climate crisis seems to be grasped more broadly than ever before.2 Already, 74 countries-accounting for more than 80 percent of global GDP and almost 70 percent of global CO2 emissions-have put net-zero commitments in place.3 And more than 3,000 companies have made net-zero commitments as part of the United Nation's "Race to Zero" campaign.4 Capital markets are increasingly building emissions risk into asset prices, and venture investments in transition technologies are at an all-time high. For their part, an ever-greater number of companies are recognizing how shifting investor preferences-as well as changes in technology, regulation, and consumer behaviors-are changing the basis for competition and are calling for an altogether greater level of global and local collaboration.
Yet, these developments do not mean that net zero is in sight. The well-known words of Winston Churchill, pronounced in another context, seem to apply here too: "Now is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning". Indeed, the struggle to reach net zero requires the world to both rapidly reduce greenhouse-gas (GHG) emissions to the greatest extent possible and also preserve, regenerate, and develop the natural and man-made stores of greenhouse gases to balance all that cannot be reduced. Today, however, emissions continue to apace without sufficient abatement and are not counterbalanced by removals. Nor can the goal be achieved on the current trajectory. Indeed, while the International Energy Agency's World Energy Outlook report, released earlier this month, acknowledges that the transition to cleaner energy sources is occurring at a rapid pace, it also highlights that it is still not aligned to a pathway that would stabilize global temperature increases at 1.5°C and achieve other energy-related sustainable-development goals.5
Thus, even as additional and more extensive commitments, including near-term targets, are discussed by key public-, private-, and social-sector entities, the world would need to advance rapidly from what is to be achieved-a net-zero world, within three decades or sooner-how this can best be done. But moving from commitments to action has not proven easy or straightforward so far. There are five main reasons for this.
First, the required step-up in spend on physical assets (both capital expenditures and consumer spend on durable goods) to reach net zero by 2050 would be substantial. Indeed, we currently estimate this spend to represent an about 60 percent increase relative to today (from an estimated annual $5.7 trillion to $9.2 trillion).6 While many of these investments come up with a positive return, financing for this scale of capital needs to be secured. The scale of the challenge is compounded by the speed at which it is required: entire energy- and land-use systems that evolved over a century or two would have to be transformed over the next 30 years.
Second, the transition calls for collective and global action and entails hard choices. This action would need to be taken in a spirit of unity as the burdens of the transition would not be evenly felt, and, for some stakeholders, the costs would be much more difficult to bear than others. Indeed, the effects of climate change and any near-term effects of the climate transition are likely to be regressive and hit the poorest communities and populations the hardest.7 Without a real effort to address these effects in a spirit of fairness, it appears unlikely that the most affected stakeholders would be either able or willing to do their share to advance the transition. In the words of Frans Timmermans, the European Commissioner for Climate Action: "Without [a] just transition, there will just be no transition."
Third, stakeholders would need to act now to avoid an unrelenting accumulation and compounding of physical risks in the future, which would require a different time horizon and discount rate than currently guide decisions.8 The challenge is that there are both perceived and real trade-offs between securing net-zero emissions in the future and capturing growth opportunities today. Indeed, actions to secure the transition are often perceived as costs incurred today, rather than investments in humanity's collective future.
Fourth, meeting these requirements would involve changing business practices and lifestyles that have been established for decades, if not longer, and that have provided many benefits in the past. Shifting these patterns and overcoming the prevailing inertia-without immediate benefits necessarily accruing differentially to those who make the shifts-has so far proven elusive.
Together, these four factors highlight why the prevailing notion of (enlightened) self-interest alone is unlikely to be sufficient to help achieve net zero.
Finally, the central role of energy in all economic activity and the profound consequences that disruptions to energy markets can entail highlight the criticality of an orderly transition-one where the ramp-down of high-emitting assets is carefully coordinated with the ramp-up of low-emitting ones and which is supported by the appropriate redundancy and resiliency measures. Such a transition, however, is nontrivial, both intrinsically and against the backdrop of other political, economic, and societal issues (see sidebar "What is an orderly transition?"). Indeed, the transition involves the transformation of the most important systems supporting our life and well-being-energy- and land-use systems. Even small disturbances to these systems could affect daily lives, from raising producer and consumer costs to impairing energy access, and could lead to delays and public backlash.
Achieving net zero is, in its essence, solving an equation that balances sources and sinks of emissions by reducing GHG emissions as much as possible while increasing GHG stores to remove any remaining emissions from the atmosphere. This is what we refer to in shorthand as the "net-zero equation." In reality, this is not a single equation but a system of equations, as the emissions equation is coupled with a capital and a labor equation; demand for capital and labor in a net-zero economy must match with supply, over time and across regions. And, these equations must be solved simultaneously while pursuing economic development and inclusive growth. This is a nontrivial task both for the reasons noted above and because of a number of technical challenges. First, the emissions equation is still incompletely defined. The focus has so far been on man-made emissions, but it is becoming increasingly difficult to ignore the natural emissions resulting from biotic feedback loops. Second, the terms of this equation are a function of time and depend, sometimes nonlinearly, on a host of evolving variables. For example, the emissions associated with a given economic sector or geography depend on existing or yet-to-be-developed technologies that are deployed in them. Third, the emissions equation is intrinsically underspecified in mathematical terms. It could theoretically be satisfied with many different combinations of decarbonization and offsetting actions, which would require a greater degree of cross-sector and cross-geography coordination. Finally, like all real-world systems of equations, these equations are subject to initial and boundary conditions that will, in practice, constrain the solution space. For example, the age and recency of fossil-power assets in a country would influence how easily and quickly they could be ramped down; or the amount of sunshine a certain region receives will constrain its potential to produce solar power.
Given the complexities involved, a critical step at this juncture is to better understand the fundamental requirements to solve these equations, as well as the interdependencies between these requirements. What we present here is a holistic framework for doing so. Our framework entails nine key requirements (Exhibit 1). These requirements are not specific to a given sector, and indeed all stakeholders-in the public, private, and social sectors-will need to play a role if they are to be met. They can be seen as the fundamental chords that would all need to be resolved in concert, if not in unison, for a net-zero transition to materialize. The nine requirements can be grouped into three categories:
Physical building blocks, encompassing (1) technological innovation, (2) ability to create at-scale supply chains and support infrastructure, and (3) availability of necessary natural resources.
Economic and societal adjustments, comprising (4) effective capital reallocation and financing structures, (5) management of demand shifts and near-term unit cost increases, and (6) compensating mechanisms to address socioeconomic impacts.
Governance, institutions, and commitment, consisting of (7) governing standards, tracking and market mechanisms, and effective institutions, (8) commitment by, and collaboration among, public-, private-, and social-sector leaders globally; and (9) support from citizens and consumers.