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Climate technologies can limit emissions by 60%, McKinsey research

Engineering resilient technology

. Says solutions could attract about $2trn investment/year by 2025

McKinsey & Co. research on Europe’s net-zero pathways suggest that climate technologies that are already mature could, if deployed widely, deliver about 60% of the emissions abatement that will be needed to stabilize the climate by 2050.

New technologies represent a critical part of the world’s decarbonization tool kit—and the world does not yet have all the technologies that it would need to solve the net-zero equation by balancing sources and sinks of greenhouse-gas (GHG) emissions.

The challenge is that further abatement must come from climate technologies that aren’t quite ready, including 25 to 30% from technologies that are demonstrated but not yet mature and another 10 to 15% from those still in research and development (R&D).

This need for innovation makes the pace of decarbonization difficult to predict. When, for example, will clean hydrogen cost $1 per kilogram: in 2025 or 2050? The answer will affect the speed at which industries from aviation to steel can decarbonize.

Similarly, unless manufacturers of utility-scale batteries can make them at low cost, power producers will have to keep running fossil fleets to cope with the intermittency of renewables. Uncertainty about the availability of financing for innovation limits capital formation and slows scale-up. Integrating most climate technologies into existing infrastructure, hardware, software, and operational systems will be complicated, too.

The need for climate technology is vast, which creates large potential markets and investment opportunities. Our estimates suggest that next-generation technologies could attract $1.5 trillion to $2 trillion of capital investment per year by 2025.

Renewable energy projects

According to McKinsey, recent history suggests that researchers and businesses can deliver the necessary advances and cost reductions. Over the past decade, the cost of some renewable-energy projects came down by almost 90%, as did the costs of electric-vehicle (EV) batteries, LED lighting, and other energy-efficient hardware.

Capital is increasingly plentiful, evidenced by the revaluation of cleantech stocks that began in June 2020, and by the growth in investments earmarked for sustainability and environmental, social, and corporate governance (ESG) objectives.

It also noted that governments are lending strong fiscal support to low-carbon innovation. Pledges from big companies not only to cut emissions but also to decarbonize operations and product lines—to buy only renewable fuel or make only EVs give confidence to entrepreneurs and their backers.

“The need for climate technology is vast, which creates large potential markets and investment opportunities. Our estimates suggest that next-generation technologies could attract $1.5 trillion to $2 trillion of capital investment per year by 2025.”

To enter these markets and navigate them successfully, McKinsey said established companies, start-ups, and investors will need a nuanced and ever-evolving understanding of technical advances, customer demands and commitments, and policy environments.

It went on to suggest five groups of technologies could attract $2 trillion of capital per year by 2025 and abate 40% GHG emissions by 2050:

  • electrifying transportation, buildings, and industry
  • launching the next green revolution in agriculture
  • remaking the power grid to supply clean electricity.
  • delivering on the promise of hydrogen
  • expanding carbon capture, use, and storage

Noting that coal, oil, and gas have been the main fuels used to power buildings, industrial machines, and vehicles since the early 20th century, McKinsey argued that getting to net-zero emissions will require electrifying most equipment and processes that now run on hydrocarbons and converting the electric-power system to renewable sources.

Furthermore, many forms of electric gear – from EV batteries to heat pumps to industrial furnaces, remain expensive, as such further innovation will be needed to reduce costs and increase uptake of the electric hardware that will drive a net-zero society.

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