NewEnergyNews: A Net Zero Cost For Net Zero Emissions In Europe

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    Monday, December 21, 2020

    A Net Zero Cost For Net Zero Emissions In Europe

    How the European Union could achieve net-zero emissions at net-zero cost

    Paolo d’Aprile, Hauke Engel, Stefan Helmcke, Solveigh Hieronimus, Tomas Nauclér, Dickon Pinner, Godart van Gendt, Daan Walter, Maaike Witteveen, December 3, 2020 (McKinsey and Company)

    In December 2019, the European Commission introduced an ambitious proposal to make the bloc climate-neutral by 2050. Although the proposal set specific 2030 and 2050 emission-reduction goals, it did not explain how much each sector and member state should contribute to the desired emissions reductions or what achieving those reductions would cost.

    To help inform the planning efforts of policy makers and business leaders, McKinsey has attempted to find a societally cost-optimal pathway to achieving the emissions targets. Countless possible pathways exist, covering a wide range of costs and economic impacts. This report describes the least costly pathway among the many we identified.

    This cost-optimal pathway illustrates the technical feasibility of reducing the European Union’s emissions 55 percent by 2030 compared to 1990 levels and reaching net-zero by 2050. It also shows that decarbonizing Europe can have broad economic benefits, including GDP growth, cost-of-living reductions, and job creation.

    To achieve these benefits, the European Union has a long road ahead (Exhibit 1). In 2017,1 the EU-27 countries emitted 3.9 GtCO2e, including 0.3 GtCO2e of negative emissions.2 Although this accounts for only 7 percent of global greenhouse gas (GHG) emissions, the European Union achieving climate neutrality could serve as a blueprint for other regions and encourage other countries to take bolder action.

    Five sectors emit the bulk of the European Union’s greenhouse gases: 28 percent comes from transportation, 26 percent from industry, 23 percent from power, 13 percent from buildings, and 13 percent from agriculture (Exhibit 2). Across sectors, fossil fuel combustion is the biggest source of GHGs, accounting for 80 percent of emissions.

    To reach net-zero, the investments and cost savings would be higher in some of these sectors than others. However, if the decarbonization costs and savings were passed through to households, the aggregate cost of living for an average household in a climate-neutral European Union would be the same as it is today and lower-income households would see reduced costs of living. In other words, we found that the European Union could achieve net-zero emissions by 2050 at a net-zero cost.

    In the following sections, we break down that cost-optimal pathway by sector, region, technology, and energy and land-use system.

    Sector perspective: The speed of decarbonization depends on the availability of mature technology and the ability to scale supply chains

    Although achieving net-zero emissions will require sustained effort across sectors, some could meet the target more quickly than others (Exhibit 3). In our pathway, the sectors would reach their emission-reduction goals in the following order:

    Power: Because wind and solar power generation technologies are already available at scale, power would be the quickest sector to decarbonize, reaching net-zero emissions by the mid-2040s. The demand for power would double as other sectors switch to electricity and green hydrogen, requiring renewables production and storage capacity to be rapidly scaled.

    Transportation: This sector would approach climate neutrality by 2045. EVs are already in early adoption, but it will take some ten years to set up supply chains to support a switch to 100 percent EV sales, from mining the raw materials for batteries to assembling EVs. Once this happens, emissions can be reduced quickly, except for those from aircraft and ships that are too big and travel too far to rely on battery power. They must opt for the more expensive solution of switching to biofuels, ammonia, or synfuels.

    Buildings: Most of the technology required to decarbonize the buildings sector is already available. However, renovating large portions of the European Union’s building stock is a massive undertaking. The share of dwellings using renewable heating sources would need to increase to 100 percent from just 35 percent today. Gas usage in buildings would also need to fall by more than half. The buildings sector would reach net-zero in the late 2040s.

    Industry: The most expensive sector to decarbonize, industry would need some technology that is still under development. As a result, it would reach net-zero by 2050. Even then, the sector would continue to generate some residual emissions from activities such as waste management and heavy manufacturing, which would have to be offset.

    Agriculture: Using more efficient farming practices could reduce agricultural emissions. But it’s by far the hardest sector to abate because more than half of agriculture emissions come from raising animals for food and can't be reduced without significant changes in meat consumption or technological breakthroughs. Like industry, our cost-optimal pathway requires offsetting agriculture emissions with negative emissions in other sectors and increasing natural carbon sinks.

    Regional perspective: Collective action is critical to reducing transition costs…Technology perspective: Most of the required technologies are available, but accelerated innovation will be critical…Energy system perspective: The power sector would become the central switchboard…Land-use perspective: Reaching net-zero would require re-thinking land use…

    The socioeconomic implications of decarbonizing Europe

    Reaching net-zero would require investing an estimated €28 trillion in clean technologies and techniques over the next 30 years. About €23 trillion of this investment—an average of €800 billion a year—would come from redirecting investments that would otherwise have funded carbon-intensive technologies. This amounts to roughly 25 percent of the annual capital investments now made in the European Union, or 4 percent of the current EU GDP. Stakeholders in the European Union would also have to allocate an additional €5.4 trillion (an average of €180 billion a year) to clean technologies and techniques.

    Of that €5.4 trillion, about €1.5 trillion would be invested in the buildings sector (29 percent), €1.8 trillion would be used for power (33 percent), €410 billion for industry (8 percent), €76 billion for agriculture (about 1 percent), and €32 billion in transportation (less than 1 percent). About €1.5 trillion (28 percent) would fund infrastructure to improve energy transmission and distribution in all sectors.

    Although implementing clean technology would require additional investment (Exhibit 5), it would ultimately lower operating costs. From 2021 to 2050, the EU would save an average of €130 billion annually in total system operating costs. By 2050, these measures would reduce total system operating expenditures by €260 billion per year, more than 1.5 percent of the current EU GDP. Most of these savings would be in transportation.

    Mobilizing capital: Roughly half of the necessary investments require interventions…Mobilizing financing for these investments would require interventions, particularly in subsectors with high abatement costs…Impact on households: Lower- and middle-income households would see lower costs…The labor market: A net gain of 5 million jobs, but reskilling and support needed…Trade and production: Energy independence, new risks and opportunities…

    Charting a way forward

    Although the case for decarbonization and the pathway are clear, it will take decisive action to achieve the European Union’s climate goals. Stakeholders would need to address five hurdles to accelerate the transition:

    Shift social norms and consumer and investor expectations to zero-carbon as the new normal. Consumers and business leaders would need to make decisions in the expectation and in support of a shift to net-zero instead of business-as-usual as the public and business default.

    Create secure and stable policy frameworks and regulatory environments. Successful decarbonization depends on public sector leaders adopting regulatory frameworks that are ambitious enough to meet emission-reduction goals rather than incremental policies. This would provide stable planning and investment signals that could incentivize low-carbon technologies and business models.

    Encourage constructive industry dynamics. Business leaders that lean into the transition and demonstrate a commitment to overcoming transition hurdles through collective action rather than worrying about first-mover disadvantages will be critical.

    Mobilize green capital and investment. Much more public and private money would need to be invested in pre-commercial technologies and deploying commercially mature infrastructure. Investors that issue environmental, social, and corporate governance-aligned funding mandates that require businesses to quantify their exposure to climate risks and emissions could also help.

    Accelerate net-zero technologies along their learning curves. Achieving the necessary technological breakthroughs to reduce emissions in hard-to-abate sectors and accelerating their progress to market would require consistent public and private investment. It would also take greater willingness among business leaders and policymakers to adopt new technologies.

    Successful decarbonization requires deploying and scaling net-zero technologies. The journey for any single technology from early-stage R&D and proof-of-concept to early deployment and commercial competitiveness depends on a complex system of support models and stakeholders. Accelerated innovation is critical, along with commercial pilots and capturing scale effects to drive down costs. Achieving net-zero by 2050 would require the following immediate actions:

    Rapidly scale cost-competitive technologies and business models to reduce near-term emissions. Expediting the scale-up of mature and early-adoption zero-emissions technologies is crucial to meeting near-term reduction targets. These include solar and wind power, EVs and charging infrastructure, better building insulation, and district heating systems.

    Accelerate next-generation technologies and invest in enabling infrastructure to reduce emissions after 2030. To boost industry-wide innovation, funding mechanisms for deploying early technology should encourage collaboration. Policymakers could create regulatory certainty with CO2 and hydrogen price floors to mobilize capital for essential infrastructure such as carbon and hydrogen pipelines.

    Invest in R&D and negative emissions to close the gaps to net-zero by 2050. Increasing public and private investments in R&D that drive down the cost of such things as direct air capture technologies will be critical to achieving net-zero. It will also be essential to invest in reorganizing land use to generate negative emissions through efforts such as reforestation. Lawmakers can also start passing legislation that creates glide paths for each sector to reach net-zero emissions, such as automotive emissions standards now in effect in the transportation sector.

    As this report will show, the European Union can achieve net-zero emissions without compromising prosperity. Advances over the last decades have put climate neutrality within reach. But laying the foundation in the next decade will be critical to achieving this goal.

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