Germany has comparatively good initial position for climate change

Achieving the climate targets will have consequences for all countries and regions worldwide – albeit to very different degrees. In an international comparison, however, Germany’s starting position is much better than that of other countries. The scope of economic change is considerable overall. By 2050, capital expenditure on property, plant and equipment is expected to total around $275 trillion worldwide – about $9.2 trillion per year. The good news is that only $3.5 trillion of this is true incremental investment. The remaining $5.7 trillion is replacement investment if, for example, emissions-intensive activities are consistently scaled back and low-emissions activities are expanded accordingly. A shift is also expected in the labor market, with some 200 million direct and indirect jobs created or added by 2050 and 185 million lost through the net-zero transition. The bottom line is that more jobs would be created worldwide than would be lost.

These are the key findings of a new study by McKinsey & Company entitled “The net-zero transition – What it would cost, what it could bring”. The new study provides a comprehensive overview of the global economic changes and societal adjustments required to achieve net-zero emissions worldwide by 2050, or the 1.5-degree target. Developments in 69 countries (including Germany), which account for around 85% of total global emissions, were analyzed.

Difficult transition for developing countries and commodity exporters

“In an international comparison, Europe and Germany in particular are in a much better position than other regions when it comes to climate change,” McKinsey partner Hauke Engel explains the study results. “The transition will be most difficult for developing countries and states that are very agriculturally oriented or primarily export fossil raw materials.” Germany, on the other hand, is among the wealthy countries that mainly export material goods and have a strong service industry, he said. Germany is also already well positioned in terms of energy efficiency and due to the quality and resilience of its infrastructure. In addition, the country’s location in Central Europe means that it is likely to be comparatively less affected by weather and climate extremes such as water shortages, floods or hurricanes than other regions.

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According to the study, the next ten years are economically crucial for the climate turnaround, as the most important investments are to be made during this period. Spending on “green” tangible assets needed to reach the 1.5-degree target would rise globally from 6.8 percent of global gross domestic product (GDP) today to as much as 8.8 percent between 2026 and 2030, before declining from that peak. Consumers could also face upfront costs in switching to low-emission products such as electric vehicles. In the longer term, however, costs are expected to fall for them as well, he said.

The study illustrates the different starting positions of the countries studied in achieving climate neutrality. The transition will have a very uneven impact across economies and regions: Countries with lower incomes and those with large fossil fuel resources will be most affected. These include populous countries such as India, Indonesia, Bangladesh and China, but also Russia or the Middle Eastern countries – Qatar, Saudi Arabia or the United Arab Emirates.

In economic terms, the sectors most affected are those with emissions-intensive products or activities. These currently account for around 20% of global GDP. Sectors whose supply chains have high emissions, such as construction, account for another 10% of GDP. Low-income households everywhere are the most affected by rising electricity prices in the short term and the investment costs they face for low-emission products such as new heating systems or electric cars, according to the study. In the long term, energy costs could fall below today’s levels because the operating costs of renewables are lower – provided power producers build flexible, reliable and low-cost grids.

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Growth opportunities and lasting benefits

“An orderly transition to climate neutrality offers growth opportunities and lasting benefits. These include a long-term decline in energy costs and better health conditions for large segments of the population,” notes McKinsey partner Hauke Engel. Growth areas could also include more efficient operations through decarbonization and the creation of new markets for low-emission goods, especially in Germany. Despite the foreseeable high, necessary economic investments and social challenges of the transition to climate neutrality, a ‘business-as-usual’ approach is not a serious option, he says. This is because the costs and dislocations of not making the transition to net-zero emissions, or making it in a disorderly fashion, would likely be far greater and would also involve a significantly increased risk of being at the mercy of climate extremes.

The McKinsey study concludes that to achieve climate goals, governments and business should cooperate more closely and planning and investment horizons should be extended. Action by individual companies and governments, as well as coordinated support for weaker sectors, countries and communities, could facilitate the necessary economic and societal adjustments.

At the same time, immediate action should be taken to manage risks and seize opportunities:

  • Companies should define, implement, and develop decarbonization plans for Scope 1 and Scope 2 emissions, and potentially extend these plans to Scope 3 emissions, depending on the nature of their operations.
  • Financial institutions would also need to play a central role in supporting large-scale capital redeployment.
  • Governments and multilateral institutions could use existing and new policy, regulatory, and fiscal instruments to create incentives, support vulnerable actors, and encourage collective action. The pace and scale of transition mean that many of today’s institutions will need to evolve and new ones will need to be created to disseminate best practices, establish standards and tracking mechanisms, drive large-scale capital deployment, address disparate impacts, and support further collective action.
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McKinsey recently calculated the material investments required for the climate turnaround in Germany by 2045 in its “Net-Zero Germany” study. They consist of 1 trillion euros in additional investments in “green” tangible assets, e.g., in new plants, vehicles and heating technology. Added to this are around 5 trillion euros in replacement investments. These are investments that are spent on replacing or maintaining existing infrastructure, plants and buildings anyway. “In order to achieve the goal of climate neutrality, these 5 trillion euros should be invested in green or more climate-friendly goods at the time of rotational renewal, e.g., in an electric vehicle instead of a vehicle with an internal combustion engine,” says Senior Partner Stefan Helmcke, co-author of “Net-Zero Germany,” explaining the calculations. According to the study, the total investment of 6 trillion euros corresponds to an average annual investment of around 240 billion euros by 2045, or about 7% of gross domestic product – of which 40 billion euros per year is additional investment (about 1% of GDP).