The urgency for a global leaders to implement net zero transition

WHAT IS NET-ZERO TRANSITION??

Climate change is the greatest danger being encountered by humankind and its repercussions are already directly visible. Flooding, fires, and drought are just an indication of the disruption to occur if the planet does not lessen emissions of greenhouse gases to reduce warming. Preventing a climate disaster will require a reconstruction of the global economy from one that relies devastatingly on fossil fuels for energy to an economy that takes as much carbon out of the atmosphere as it puts in. Simply put, it is very imperative to the reduction of greenhouse gas emissions to net zero. The 2015 Paris Agreement set a goal of preventing the worst effects of climate change by limiting global temperature rise to well below 2 degrees Celsius (2°C), preferably (1.5°C), above preindustrial levels by the end of the century. But absent large-scale reductions in emissions, average global temperatures are highly likely to exceed the 1.5°C thresholds by 2040 and continue to rise for at least a decade thereafter. Net-zero may on the surface seem straightforward. But companies, countries and organizations, and institutions across society need to do the work of aligning their emissions with the global goal. Net-zero is becoming increasingly important for investors now, so deliberation on the imperative to find a solution to the financial risks and opportunities of climate change. Addressing climate change wants bold commitments and funds from countries and companies. Annual spending on low-emissions assets and the infrastructure to enable them needs almost $3.5 trillion more than what is currently billed in the Net Zero 2050 scenario.

?PROJECTING NET ZERO

?A transition to net-zero emissions would necessitate an economic transformation that would affect all countries and all sectors of the economy both directly and indirectly. This change comes with both opportunities and risks. We can figure out what the net-zero transition could look like, as well as some of the challenges leaders and the global population could confront. Demand for green products and services?is growing strongly in categories such as energy and materials, vehicles, food, and packaging. As the net-zero transition advances,?markets for zero-emissions offerings?should expand further while markets for emissions-intensive offerings shrink. We estimate that burgeoning demand for net-zero offerings could create unprecedented opportunities: 11 value pools could generate up to more than $12 trillion of annual sales by 2030. While the rate of electric-vehicle (EV) embracing?has varied across the globe, depending on regional regulatory pressure and consumer interest, a transformation is well under way. China, the European Union, and the United States, for example, could end new internal-combustion-engine sales and shift fully to EVs by 2035 as EVs need to make up 75 percent of all passenger car sales within the next decade to aid in gaining net-zero emissions.

Low-carbon products,?including steel, recycled aluminum, recycled plastic, and batteries, could all be headed for supply shortages in Europe as?a need for greener materials?continues to grow. While supply shortfalls ought to ease as more production capacity comes online, companies that have not already locked in supplies of low-emissions resources could face rising price premiums. Those businesses will have to choose between paying higher prices to meet climate pledges and satisfy customer demand or risk breaking their promises. A rationalization of labor?across the economy could result from the net-zero transition. About 200 million direct and indirect jobs could be gained and 185 million could be lost by 2050. The job gains?would be largely associated with the transition to low-emissions forms of production, for example, to renewable power, while losses would particularly affect workers in fossil-fuel-intensive or other emissions-intensive sectors. The effects of climate change?could affect the global population unevenly. In a 2.0°C warming scenario, more than?half the world’s total population?could be exposed to at least one climate hazard. These hazards include heat stress, agricultural drought, flooding, and urban water stress. As per an estimate, in the United States alone, 160 million people almost 40 percent of the population could be affected.

THE NET-ZERO TRANSITION: ?COST AND BENEFIT

?The challenges of all countries encountering some exposure to the net-zero transition by 2050 are universal. The entire world would need to decarbonize, all would have some exposure to the transition, all would face some degree of physical risk, and all would have growth potential resulting from the transition. But the exposure and its effects would be unevenly distributed. ?Lower-income and fossil fuel resource-producing countries would need to spend more relative to GDP to build a low-emissions economy and support economic development. These countries also have comparatively greater shares of their jobs, GDP, and capital stock in sectors that would be most exposed to the transition. And some of them will face a double whammy being exposed both to the transition tunings and to rising physical risks. This could challenge progress on economic development goals in these regions, reinforcing the case for unparalleled global cooperation in solving a unique global problem. The uneven exposure may have consequences for trade. Concurrently, the transition could create possible economic growth in many geographies.?Developing countries and those with large fossil fuel sectors would likely have to expend the most on physical assets, relative to GDP, on decarbonization and low-carbon growth. Every country and region would spend to reduce emissions and develop low-emissions energy sources to power their economic growth. The need for capital expenditures varies considerably across geographies, given differences in their economies, and that they do not all decarbonize at the same rate.

PROBABLE CONSEQUENCES OF THE NET-ZERO TRANSITION ON GLOBAL TRADE

?The world’s largest economies, the?United States, China, the European Union, Japan, and the United Kingdom would account for about half of global spending on physical assets and would spend about 6 percent of their combined GDP from 2021 to 2050. In developing regions, spending on energy and land would represent a substantially larger share of national GDP: about 10 percent in sub-Saharan Africa, India, some other Asian countries, and Latin America. For developing countries, higher projected rates of economic growth naturally create higher spending needs relative to GDP than in developed countries. Therefore, total expenses in India, sub-Saharan Africa, and Latin America would total more than 9 percent of GDP. ?But the investment would increase slightly more than from these levels in the net-zero scenario. For example, in the Net Zero 2050 scenario, India’s capital requirements would be 11 percent of GDP, compared to the global average of about 7.5 percent of GDP. It would moreover be spent differently than in the Current Policies case. Some 60 percent of annual average investments in India would be on low-emissions assets. Large capital would be used to reduce the use of existing coal power and expand low-emissions electricity. Fossil fuel-based economies would also see a significant outlay on physical assets as a share of their GDP: above 15 percent in the Middle East and North Africa, Russia, Ukraine, and the Commonwealth of Independent States. More expenditure would be continued expending on fossil fuel assets. Though, even these economies would assign half or more of their spending to low-emissions assets under a net-zero transition. Developing countries and fossil fuel–producing regions have relatively large exposure to the transition, raising concerns about growth and inequality.

?Even after spending, there is more required on decarbonizing their existing assets and building low-emissions assets, economies will also need to transform under a net-zero transition. It is important that current efforts undertaken by countries could reduce this exposure going forward. Every country has some exposure to the transition, but low-income households everywhere would be most exposed to any cost increases that feed through to consumers. The highest levels of exposure are in countries with relatively lower GDP per capita, such as Bangladesh, India, and Kenya, and in countries with relatively higher shares of jobs, GDP, and capital stock in sectors that are more exposed to the transition—that is, sectors with emissions-intensive operations, products, and supply chains. Significant fossil fuel resource production also creates high exposure for some countries, such as Qatar, Russia, and Saudi Arabia. Secondary effects from direct exposure could also extend to government tax revenues and exports, which are often linked with exposed sectors like fossil fuel extraction and steel. By contrast, countries with higher GDP per capita tend to be less exposed because most of their economies are in service sectors, which have relatively lower exposure.

Thus, for many lower-income and fossil fuel–producing countries, challenges associated with climate change could compound. These countries would need to balance multiple imperatives: decarbonizing their economies and funding associated capital expenditures, managing exposure of large parts of their economies to a net-zero transition, and enabling economic development and growth, particularly by expanding access to affordable, secure energy. But these challenges will be aggravated for some countries by sensitive physical climate risks, such as the growing probability of lethal heat waves in parts of India. Inequity concerns would grow as an issue, particularly as developing economies reason that they have contributed less than others to emissions and yet are being asked to shoulder a large burden in the net-zero transition. Countries can use natural endowments or technological, human, and physical resources to harness the transition’s growth potential. All countries have opportunities to tap into the transition’s potential for growth and secure advantages through their endowments of natural capital, such as sunshine and wind, and through the availability of technological, human, and physical capital.

Natural-capital bequests

Countries could gain from the transition if they hold rich stocks of natural capital, such as ample sunlight and wind, forestland, mineral resources, and CO2 sequestration potential. Normally, many developing countries have the natural resources to put up solar power production and?forestry protection or restoration efforts, which could be reinforced by flows of capital through mechanisms such as voluntary carbon markets. And most countries, developing or not, have at least some of the natural-capital endowments that would likely be in demand during the transition. For example, Australia and Saudi Arabia have extensive solar resources, Argentina and the United Kingdom have high wind power potential, and Chile and China have large reserves of minerals.

Accessibility of technological and human capital

Some countries have already gained strong positions in the markets for?cultured low-carbon goods, such as solar panels and EVs. Nevertheless, these markets offer extensive growth potential, which should be most accessible to countries with adequate technological capital. For example, South Korea has almost 6,600 patents on technologies related to climate-change mitigation and human capital. Countries like China and Singapore have a high share of STEM graduates in the population, which provides an indication of the workforce’s technical skills. This in order might be applied to developing solutions for the climate transition. A country’s physical capital, in the form of low-emissions infrastructure and industrial systems, could also create growth potential in a net-zero transition, for example, if consumers shift their preferences or carbon border taxes are applied. Even currently high-emissions infrastructure could be a benefit if it can readily be rebuilt, for example, with alternate low-emissions fuel sources.

We can outline some of these prototypes:

FOSSIL FUEL SOURCE CREATOR’S COUNTRIES

These comprise Australia, Bahrain, Canada, Egypt, Kuwait, Nigeria, Norway, Oman, Qatar, Russia, Saudi Arabia, the United Arab Emirates, and Venezuela. Fossil fuel resource-producing sectors combine a significant share of GDP, ranging from 3 percent in Australia to 39 percent in Kuwait, and the most of physical capital but an average of about 15 percent, compared to 2 percent from the remaining countries. The scale of contact varies among countries. For instance, Saudi Arabia has about 25 percent of its GDP in fossil fuel–producing sectors, and Qatar has about one-third of its GDP and its capital stock in those sectors which is about 3 percent of GDP and 13 percent of capital stock in Australia. For the countries with higher shares, in particular, many tasks could exist, including the likely loss of government revenues from exposed sectors, the reordering of capital spending from high- to low-emissions assets, and the potential need to diversify their economies. Many countries could also experience rising physical risks; countries in this grouping that are near the equator will become hotter and more humid as warming increases. Concurrently, a net-zero transition provides balances that these countries can employ, though taking them and suitably reimbursing for loss in revenues and exports could also come with challenges by harnessing latent solar power or wind power, which they could use to advance the size of renewable energy to create green hydrogen. Some of these producers, like those in the Middle East, also have relatively low levels of carbon intensity associated with their oil and gas abstraction and have relatively lower costs; thus, they could be the last standing providers of the remaining fossil fuels needed in a net-zero economy.

?MASSIVE EMISSIONS PRODUCERS COUNTRIES?

These comprise Bangladesh, China, India, Indonesia, Pakistan, South Africa, Thailand, Turkey, Ukraine, and Vietnam. These countries most of their GDP, on average about 18 percent, from highly exposed sectors such as high-emissions manufacturing, fossil fuel-based power, and agriculture. Occupations focused on agriculture over 20 %, whereas their capital stock is engaged in manufacturing and fossil fuel-based power. These countries might regulate the transition primely by decarbonizing industrial processes, increasing renewable-power capacity, and assisting farmers to employ low-carbon performs or transitioning away from agriculture. The said countries should make a significant investments to decarbonize their economies and save low-carbon growth but also observe a specific risk of asset trapping as capital stock in these countries, like, coal-fired power plants, mostly newer than in advanced economies. The average age of coal power plants in China and India is less than 15 years whereas over 30 years in the United States. Poor countries may also find that some low-carbon technologies (for example, electric-arc furnaces for steel production and CCS equipment for steel or cement factories) are very costly to adopt or unprepared for intensive deployment. Alongside, these countries will have the potential to serve the growing markets for low-emissions goods. After careful planning, however, they are prone to the risk that continual spending on lower-cost, high-emissions assets could result in the need to hastily retire or reduce utilization of these assets after only a few years as the world transitions to a net-zero path. Many Asian countries largely own resources that could be favorable to low-emissions origination. That capital spending for the transition may need to be added by investment in adaptation measures since many countries would become hotter, more humid, and more prone to flooding as warming increases.

?AGRICULTURE-DEPENDENTS ECONOMIES.?

It consists of Ghana, Kenya, Morocco, the Philippines, Senegal, and Sri Lanka. Agriculture is the main source of employment and income for a large share of the population in these countries, accounting for up to about 55 percent of jobs and up to about 30 percent of GDP. A vital tuning for these countries will be adopting low-emissions farming practices, which would require mobilizing millions of stakeholders. Many of these countries are expected to invest greatly in new assets as they grow their economies, chiefly related to the power sector; securing financing would thus be a key priority under a net-zero transition. These countries also have importantly probable to produce solar power and use forestland to generate carbon credits. Almost all these countries are exposed to physical climate risk because rising heat and humidity affect their agricultural workers and increase the instability of agricultural yields.

LAND-USE CONCENTRATED COUNTRIES

It comprises countries like Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, Honduras, Malaysia, Panama, Peru, and Uruguay. In these countries, which have generally reached the early or middle stages of industrialization, the agriculture and forestry sectors together represent significant shares of GDP (more than 5 percent), jobs (more than 10 percent), and capital stock (more than 5 percent). They would have to balance land-use needs with the protection of forests and would have to support communities whose livelihoods depend on them. With their stocks of natural capital, these countries would have growth potential in sectors such as renewable energy, minerals needed for the transition, and forest management; reforestation and afforestation projects could generate valuable carbon credits and ecosystem services.?The contribution of other sectors such as fossil fuel production, power, and industry to GDP, jobs, and capital stock is also sizable for some countries in the archetype, like Brazil, which could also, therefore, be exposed to issues?described for other archetypes.

DOWNSTREAM-EMISSIONS MANUFACTURERS

These countries are ?Austria, Bulgaria, the Czech Republic, Germany, Hungary, Italy, Japan, Mexico, Poland, Romania, Slovakia, South Korea, and Sweden. The main exposure for these middle- to high-income countries relates to the manufacturing of goods, such as automobiles and industrial machinery, that could experience falling demand because they use fossil fuel-based energy. They could manage their exposure to shifts in demand for these products by reinventing products and supply chains. Many make large investments in R&D, which place them well to develop and commercialize low-emissions technologies.

?SERVICES-BASED ECONOMIES

These countries consist of Belgium, Denmark, Finland, France, Greece, Ireland, Israel, the Netherlands, New Zealand, Portugal, Singapore, Spain, Switzerland, the United Kingdom, and the United States. These countries have high GDP per capita and derive most of their economic output from service sectors, so their overall exposure to net-zero transition adjustments is low. However, in certain regions and sectors, exposure could be high. These countries are also inclined to have high consumer emissions of 1.6 tons per capita on average, and 0.9 tons per capita on average for other countries and will therefore need to induce behavioral changes in their populations and incur up-front capital costs to decarbonize. ?These countries could use their ample natural, technological, and human capital to develop new low-emissions industries or provide services, such as financial or information services, favoring the transition.

THE NET-ZERO TRANSITION: COST AND BENEFIT

?It would be universal, significant, and front-loaded, with uneven effects on sectors, geographies, and communities, even as it creates growth opportunities. Governments and companies?are gradually pledging to climate action. In spite of notable risks against the way, not least the scale of economic transformation that a net-zero transition would require and the struggle of harmonizing the large short-term risks of poorly prepared or ungainly action with the longer-term risks of scarce or behind the action. ?The transition’s economic effects on demand, capital allocation, costs, and jobs to 2050 across sectors that produce about 85 percent of overall emissions and assess economic shifts for 69 countries. It is the simulation of one hypothetical, orderly path toward 1.5°C using the Net Zero 2050 scenario from the Network for Greening the Financial System (NGFS), to provide an order-of-magnitude estimate of the economic costs and societal adjustments associated with the net-zero transition. These features depict the shifts in energy and land-use systems, economic sectors, and countries in the net-zero transition.

?Each of the seven major energy and land-use systems pays markedly to emissions, and every one of these systems will thus need to endure transformation if the net-zero goal is to be achieved. Moreover, these systems are highly inter-reliant.?Actions to reduce emissions?must therefore take place in concert across the systems. For instance, electric vehicles lead to overall emissions reductions only to the extent that low-emissions electricity production has been achieved. More clearly, all sectors and geographies must participate. All sectors of the economy engage in these energy and land-use systems across global value chains. Similarly, all countries contribute to emissions, either directly or through their role in value chains. ?Achieving net-zero emissions will thus require a universal transformation of the global economy. The economic transformation needed to achieve the transition to net zero will be significant, like, steep declines in demand for coal, oil, and gas production?and an eventual virtual end to manufacturing of cars with internal combustion engines, as sales of zero-emissions alternatives, increase from 5 percent of new-vehicle sales in 2020 to virtually 100 percent by 2050.

Several aspects of the transition to net zero would be more significant in the early stages of the shift. For example, the capital spending increase noted above would rise from 6.8 percent of GDP today to about 9 percent of GDP between 2026 and 2030 before falling. The delivered cost of electricity?could increase about 25 percent from 2020 levels until 2040 and still be about 20 percent higher in 2050, to build out renewable power assets and grid infrastructure. At last, it is likely that the delivered cost of electricity could be on par or potentially less than 2020 levels because renewables have a lower operating cost subject to the power system can find ways to overcome the intermittency of renewable power and build flexible, reliable, low-cost grids. The up-front capital spending for the net-zero transition could also lower other operating costs over time for consumers. Clearly, action is required during r the next decade to reduce the accrual of emissions and avert?rising physical risks?that might occur in future decades. Universally, the economic exposure to the transition will dissimilar across sectors, geographies, communities, and individuals. First, sectors that account for approximately 20 percent of GDP are most directly exposed to the transition; they have high levels of emissions in their processes, for example,?steel?and cement, which are to be used for making automobiles and fossil fuels. Sectors accounting for about another 10 percent of GDP are also exposed because of emissions in their supply chains, like, as construction. Many could see a decline in demand for products as of now. Many of these sectors would also incur cost increases as they decarbonize. For example, steel and cement production costs would rise by about 30 percent and 45 percent, respectively, by 2050, compared with today, in the scenario we analyze. Second, lower-income countries or those with economies that depend heavily on fossil fuel resource-producing sectors would also be more exposed; for example, sub-Saharan Africa, Latin America, India, and some other Asian countries would require capital spending of about 10 percent or more of GDP, about one and a half times more than the capital spending in other regions such as?Europe, the?United States, and?Japan, and deploying the capital may be more challenging for these regions; a greater share of their economic activity, employment, and the capital stock would also be exposed and may need to transform.

?Ultimately, within countries, certain communities could be more affected than others if their economies more depend on industries that have high levels of emissions or whose products are heavy emitters; in the United States, for example, more than 10 percent of employment in 44 counties is in coal, oil, and gas, fossil fuel-based power, and automotive. Workers in such exposed sectors are especially exposed; for example, by 2050 in the Net Zero 2050 scenario, demand for fossil fuel-based power jobs could be about 60 percent lower compared to today’s direct jobs related to operational activities due to the net-zero transition, while millions of new jobs could be created in the renewables sector. Any increase in costs or prices would affect more on lower-income families more.

HIGH ENERGY PRICES CAUSE RISKS

?Administration of the transition to net zero will substantially influence outcomes and any net-zero transition scenario including the Net Zero 2050. These risks range from the potential for?surging physical climate risks?if any transition is abrupt or delayed, to heightened labor market disruption if the nature of any change is so abrupt that workers have insufficient time to adapt. Large-scale asset-stranding is also a significant risk if an abrupt transition means that even relatively new high-emissions assets are retired or replaced with low-emissions ones before their normal replacement cycles. In the power sector that about $2.1 trillion of assets could be prematurely retired or under-utilized in the net-zero scenario analyzed here between now and 2050. One of the most immediate risks is that of a disorderly energy transition if the ramp-up of low-emissions activities does not take place fast enough to fill gaps left by the ramping down of high-emissions activities. That mismatch could potentially affect energy markets and the economy more broadly if energy supply and prices become volatile. This in turn could potentially create a backlash that delays the transition. Higher-order effects could include declines in market prices including for financial assets.

The opportunities for countries, sectors, and companies could be considerable if they are able to tap into growing markets as the world transforms to a net-zero economy. Nations that have abundant natural capital, such as more hours of sunshine, or that invest in technological, human, and physical capital could well be positioned to prosper in the net-zero economy. Companies could also gain from three categories of opportunity: first, through decarbonizing processes and products, which can make them more cost-effective in some cases or tap into new markets for relatively lower-emissions products; second, from entirely new low-carbon products and processes that replace established high-carbon options, for example, carmakers meeting new demand for electric rather than ICE vehicles; and third, through new offerings to support production in the first two categories. These could take the form of inputs such as lithium and cobalt for battery manufacturing, physical capital such as solar panels, and an array of technical services from forest management to financing to emissions measurement. And the most significant benefit of the net-zero transition is that it will prevent the build-up of physical risks and reduce the odds of initiating the most catastrophic impacts of climate change.

o???THE NET-ZERO TRANSITION: COST & Benefit

A net-zero transition would entail a significant and often front-loaded shift in demand, capital allocation, costs, and jobs. Global decarbonization?will be possible only if nine system-level needs?are met, encompassing physical building blocks, economic and societal adjustments, and governance, institutions, and commitment. Here, we illustrate the economic and societal adjustments by examining the economic transformation that would enable a successful transition to net-zero emissions by 2050. The economic transformation will be universal, substantial, and often front-loaded, with sectors, geographies and communities, and individuals facing uneven exposure. Among the challenges is the risk of short-term disorderly transitions in energy markets, and in the economy more broadly, if the ramp-down of high-emissions activities is not carefully managed in parallel with the ramp-up of low-emissions ones. A disorderly transition could come with high economic costs as well as a backlash that delays the transition. For all its short-term risks, the transition will also create rich new opportunities across sectors and geographies, for example in the form of new markets for low-emissions products and support services.

More broadly, in considering the economic and societal adjustments necessary for achieving net-zero emissions, it is important not to lose sight of the bigger context: the longer-term risks from increased warming and the further build-up of physical climate risks. In the net-zero scenario, high-emissions products would see shrinking demand, while uptake of low-emissions products would create growth opportunities. Changes in policies, technologies, and consumer and investor preferences would lead to considerable shifts in demand for various goods and services. By 2050,?oil and gas production?volumes would be 55 percent and 70 percent lower, respectively, than they are today. Coal production for energy use would nearly end by 2050. Similarly, the transition would affect the demand for products that use fossil fuels. Demand for internal combustion engine (ICE) cars would eventually cease as sales of battery-electric and fuel cell-electric cars increase from 5 percent of new-car sales in 2020 to virtually 100 percent by 2050.

In some sectors, demand could shift, with a substitution of products manufactured with emissions-intensive operations to lower-emissions alternatives. For example,?steel production?would increase by about 10 percent relative to today, but with low-emissions steel rising from one-quarter of all production to almost all production by 2050. In the agriculture and food system, the dietary shifts necessary for a net-zero transition would, over time and in the case of some consumers, move protein demand from emissions-intensive beef and lamb to lower-emissions foods like poultry.

In some areas, in particular, those related to low-emissions energy sources, demand would grow.?Power demand?in 2050 would be more than double what it is today. Production of hydrogen and biofuels would both increase more than tenfold between 2021 and 2050. Other industries, for example, those that manage carbon with?carbon capture and storage technology, could also grow.

?Capital allocation will also change. Almost $275 trillion in cumulative spending on physical assets, or approximately $9.2 trillion per year, would be needed between 2021 and 2050 across the respective sectors. Changes in demand during the net-zero transition would trigger the retirement or transformation of some existing physical assets and the acquisition of new ones. These moves would influence spending on physical assets in two ways. First, spending would increase significantly relative to today. Second, a portion of the capital that is now being spent on high-emissions assets would be spent on low-emissions assets, including those with CCS installed. This represents spending related specifically to the deployment of new physical assets and to the decarbonization of existing assets. It does not include spending to support adjustments—for example, to reskill and redeploy workers, compensate for stranded assets, or account for the loss of value pools in specific parts of the economy. Spending could also be higher than sized here to build idleness into energy systems during the transition to avoid supply volatility. Other research to date has largely focused on estimating required energy investment. Here we expand this to include additional spending categories such as assets that use energy (for example, the full cost of passenger cars and heat pumps), capital expenditures in agriculture and forestry, and some continued spending on high-emissions physical assets like fossil fuel–based vehicles and power assets. As a result, it looks reasonable and meaningful degree the $3 trillion to $4.5 trillion of annual spending for the net-zero transition. The amount is equivalent to about 7.5 percent of GDP from 2021 to 2050. The required spending would be front-loaded, rising from about 6.8 percent of GDP today to about 9 percent of GDP between 2026 and 2030 before falling. In dollar terms, the increase in annual spending is about $3.5 trillion per year, or 60 percent, more than is being spent today, all of which would be spent in the future on low-emissions assets. This incremental spending would be worth about 2.8 percent of global GDP between 2020 and 2050. The increase is approximately equivalent, in 2020, to half of the global corporate profits, one-quarter of total tax revenue, 15 percent of gross fixed capital formation, and 7 percent of household spending. The other aspect, the reallocation of spending, would also be significant. At present, $3.7 trillion—or 65 percent of total spending—goes annually toward high-emissions assets, such as coal-fired power plants and vehicles with internal combustion engines. In this net-zero scenario, about $1 trillion of today’s spend on high-emissions assets would need to be reallocated to low-emissions assets. Of the overall $9.2 trillion needed annually for a net-zero transition over the next 30 years, $6.5 trillion—or 70 percent of total spending—would be on low-emissions assets, reversing today’s trend. Three sector groups—mobility, power, and buildings—would account for approximately 75 percent of the total spending on physical assets in this net-zero scenario.

If we consider the likely evolution of this spending given population growth, GDP growth, and current momentum toward the net-zero transition, the capital outlay would be smaller but remain significant. This accounts for expected income and population growth as well as for currently legislated policies and expected cost reductions in key low-emissions technologies—the incremental annual spend in a net-zero scenario would be about $0.9 trillion rather than the $3.5 trillion increase. ?About 50 percent of the $8.3 trillion in annual spending in the Current Policies scenario would be on low-emissions assets, which highlights that already some shift to low-emissions spending is anticipated in this scenario from existing technological trends and policies today.

The transition could also lead to asset stranding, whereby existing physical assets are either underutilized or retired before the end of their useful life. In the context of the net-zero transition, the capital stock associated with fossil fuels and emissions is worth many trillions of dollars, a significant share of the total global capital stock—and even more capital stock depends indirectly on these assets. Stranding large portions of this capital stock in a disorderly or abrupt way could impede value generation in many industrial sectors, and indeed the global economy, and would need to be carefully managed. In power alone, for example, it is estimated that some $2.1 trillion worth of assets could be stranded by 2050. About 80 percent of these stranded assets would pertain to fossil fuel-based power plants in operation today, primarily coal-fired plants in countries such as China and India that are relatively new (less than 15 years old) and would normally have many more years of productive life. Moreover, many assets that could be stranded are capitalized on the balance sheets of listed companies. Early retirement of these assets would potentially lead to the reduction of (currently perceived) value and to bankruptcies and credit defaults, with potential knock-on effects on the global financial system. And markets may well pronounce their verdict before the actual stranding has taken place. Unsurprisingly, then, the possibility of asset stranding has prompted concerns about financial-sector risk and the need to build the capabilities to quantify and manage it.

While the scale of the capital that would need to be deployed in a net-zero transition is substantial, it is important to put it in context. First and foremost, as we discuss later, the economic adjustments involved in reaching net zero in a coordinated and orderly manner would prevent the further buildup of physical risks and the additional costs arising from a more disorderly transition. Second, in the long run, the up-front capital expenditures for a net-zero transition could result in operating savings for some sectors through reduced fuel consumption, improved material and energy efficiency, and lower maintenance costs. It is important to recognize that capital spending is not merely a cost. Much of this investment is already cost-effective and comes with a return.

Sectors including steel, cement, and power would see cost increases but the cost of ownership of EVs would fall. The transition’s financial implications reach beyond spending on physical assets. Production costs, which reflect changing operating costs as well as capital costs for new investment and asset depreciation, would also shift as processes are changed and high-emissions assets are replaced or retrofitted. And any changes in production costs could affect the costs of consumer goods if costs are passed through. We examine these effects in turn.

In the steel and?cement?sectors, production costs would rise by about 30 and 45 percent, respectively, from their current levels. In the power sector, It is indicated that the global average delivered cost of electricity across generation, transmission, distribution, and storage would increase before falling from its peak. ?The impact would be front-loaded: costs, including operating costs, capital costs, and depreciation of new and existing assets, would increase by about 25 percent by 2040 from 2020 levels. This is for two main reasons: first, the investment will be needed in building renewables and grid and storage capacity, creating capital costs and depreciation charges. Second, some fossil fuel-based power assets would continue to incur capital costs, even if they are underutilized or retired prematurely. This shows a scenario, costs would subsequently decrease from the 2040 peak; for example, by 2050, operating costs for generation could drop by more than 60 percent relative to 2020 as the energy mix shifts to renewables. Some of the reduction in operating and other costs for a generation would be offset by an increase in the operating and other costs associated with grid flexibility, transmission, and distribution. As a result, the delivered cost of electricity in this scenario would still be about 20 percent higher in 2050 than in 2020 levels. Finally, there is more uncertainty about how the delivered cost of electricity could evolve, and costs could at some point be lower than 2020 levels, depending on innovations to power technologies, grid design, and evolution of the power system to manage flexibility issues.

Other sectors could see overall cost decreases. The total cost of ownership for electric cars could be cheaper than for ICE vehicles in most regions by 2025, and even sooner in some regions. Consumers would face up-front capital costs and may need to spend more in the near term on electricity if cost increases are passed through. The net-zero transition could also affect consumer spending. Consumers may face higher prices and up-front capital costs in the near term and may need to adjust their spending patterns if significant emissions reductions are to be achieved, although the extent of the impact could vary depending on the composition of consumers’ spending baskets and whether companies pass on costs, among other factors. Low-income households are particularly at risk.

First, consumers’ spending habits may be affected by decarbonization efforts, including the need to replace goods that burn fossil fuels, like transportation vehicles and home heating systems that rely on fossil fuels, and potentially modify diets to reduce beef and lamb consumption. Second, any rise in electricity prices would affect consumers, particularly lower-income consumers, whose spending on energy makes up a large share of wallets. However, this depends on how cost recovery is allocated among consumers, up to and including the extent any increases in delivered cost of electricity are passed through to end consumers. Third, consumers will incur up-front capital costs related in particular to the mobility and building transition. For example, as ICE vehicles are phased out, households would shift spending to EVs, which cost more than comparable ICE cars because of their large batteries. Even though in the long term, consumers would benefit over the life of the asset—for example, because of the lower total cost of ownership for EVs or savings from energy efficiency—up-front capital spending may be challenging, especially for lower-income households. The total cost to own an EV, which considers purchase price, maintenance, fuel cost, and resale value, would reach parity with the figure for an ICE car by 2025, or even sooner in most regions, assuming battery costs fall as expected. For example, the total cost of ownership for electric cars in Europe may be cheaper compared to that of ICE vehicles by 2022, and in the United States by 2027. A faster decline in battery prices or local subsidies could accelerate this break-even point. Food costs are one area where consumer costs could fall if the dietary shifts required to decarbonize the agriculture and food sectors manifest—that is if eating habits move away from emissions-intensive and higher-cost ruminant protein like beef and lamb to other forms of protein like poultry.

Finally, higher production costs could also affect the price of consumer goods and services in other areas. Higher costs for low-emissions shipping could be passed on to the consumer for goods shipped internationally; however, the extent to which this will flow through to higher costs for consumers will likely be country- and product-specific. Likewise, rising costs in hard-to-abate sectors such as steel and cement could raise the cost of end products, though this effect will depend on the fraction of the cost of these materials in final goods and services. All of these could be addressed through a range of compensating mechanisms to ease the transition.

On the employments, the net-zero transition analyzed here could lead to a reallocation of labor, with about 200 million direct and indirect jobs gained and 185 million lost by 2050. The transition could result in an increase in demand for about 162 million jobs (referred to below as “job gains”) and a decrease in demand for about 152 million direct and indirect jobs (“job losses”) in operations and maintenance by 2050 across different sectors of the economy. In addition, about 41 million jobs could be gained and 35 million loss related to direct and indirect jobs associated with spending on physical assets needed for the net-zero transition by 2050. Jobs in the latter category, linked to shifts in capital spending, are likely to be more transitory than those in the former, related to operations and maintenance. Together, this results in 202 million direct and indirect jobs gained and 187 million lost by 2050, as a result of the net-zero transition. The effect on jobs would be especially notable not so much for its overall size in terms of net losses or gains as for its concentrated, uneven, and reallocation nature. The size of the job dislocation in the scenario analyzed here needs to be put in perspective with job dislocations from other trends. The automation, remote work, and e-commerce trends could lead to job losses of about 270 million to 340 million across eight countries between 2018 and 2030, with commensurate job gains—considerably more than our estimates for net-zero transition-related job losses and gains globally. Job gains would be largely associated with the transition to low-emissions forms of production, for example to renewable-power production, while the losses particularly affect workers in fossil fuel-intensive or other emissions-intensive sectors, a significant reallocation of jobs across the economy. ?The demand for direct operations and maintenance jobs in the fossil fuel extraction and production sector and the fossil fuel-based power sector could be lower by about nine million and about four million jobs, respectively. That is the equivalent of about 70 percent and 60 percent of today’s workforce in these sectors. Jobs in the agriculture and food sectors could also be reallocated as demand for animal protein is affected under a net-zero transition. About 34 million direct jobs, mainly in livestock and feed-related jobs, could be lost by 2050, including 19 million in ruminant meat farming. These could be partially offset by a gain of 12 million direct jobs, including for example ten million in poultry farming. Low-emissions sectors, by contrast, would likely see job gains. For example, the renewable-power sector could see an increase in demand for approximately six million direct operations and maintenance jobs by 2050 driven by the net-zero transition.

Disruptions would be substantially greater under a more disorderly transition. This transition is managed will be decisive. Yet substantial reductions in emissions take place, resulting in a relatively orderly transition. However, the complexity of the transformation may well lead to the reality being more disorderly, and indeed it may not be feasible to limit warming levels to 1.5°C. This makes the case for action even more critical. The key risks are threefold: the first concerns the choice of pathway to arrive at net-zero emissions, and whether this will be smooth or abrupt. The second relates to the measures taken by stakeholders to ease the adjustments needed for a net-zero transition. The third has to do with a range of constraints that could prove challenging even if the pathway chosen is a relatively smooth and gradual one. Some pathways to net-zero emissions assume that the decline in emissions begins immediately and progresses gradually to 2050, with appropriate measures in place to manage disruptions and limit costs. Others assume that the reduction of emissions begins later and progresses more quickly to achieve the same goal. The latter could involve significant and abrupt changes in policy, high carbon prices, and sudden changes to investment practices—along with greater socioeconomic effects and a larger-scale response. Making job transitions would be more challenging, and there could be a greater risk of stranded assets.

Second, if actions are not taken to manage transition disruptions, this could lead to more challenges, especially for vulnerable communities. For example, challenges could result if any increases in energy costs are passed through to low-income households or if displaced workers are not provided appropriate support to reskill and redeploy.

Finally, even if the pathway chosen is relatively orderly, given the scale of the transformation required, supply may not be able to scale up sufficiently, making supply and demand imbalances, shortages, and price increases or volatility a feature. Rapidly scaling up demand for low-emissions assets and other products needed for the transition without corresponding scale-up of supply could lead to supply shortages, price increases, and inflation. As already noted, a mismatch or mistiming between the ramping down of high-emissions activities and the ramping up of low-emissions activities could create energy price volatility and issues with reliability that may result in a backlash that delays the transition. Conversely, the risk exists that stakeholders maintain two parallel energy systems in a manner that is inefficient and not cost-effective. Thus, the transformation of the energy system needs to be carefully managed. And there may be other constraints, including accessing the volume of financing required in the initial phases of the transition when many of the investments would be front-loaded.

There could also be other costs incurred and investments needed beyond those mentioned in this report, for example, related to the reskilling of workers or to economic diversification efforts. A key area where additional spend would be needed is related to?adaptation investments. Adaptation action is needed to manage a continually increasing level of physical risk, irrespective of the decarbonization measures required to achieve net-zero emissions. Key adaptation measures include actions to protect people and assets, for example, installing gray infrastructure such as seawalls, building resilience and backups in systems with actions like increasing global inventories and diversifying supply chains, and reducing exposure where necessary, for example by relocating assets from regions. To illustrate the difference between transition pathways, it is analyzed under two scenarios consistent with limiting warming to less than 2.0°C from preindustrial levels. In the Below 2°C scenario, where emissions reductions start immediately on a pathway to 2.0°C of warming, our analysis suggests that only a relatively small amount of additional coal power capacity is added, amounting to about $150 billion between 2020 and 2050. Of this, $100 billion would be prematurely retired or underutilized. But in the scenario where emissions reductions toward 2.0°C warming start later, a substantially larger amount of capacity would be added; as much as $600 billion would be invested in coal-power capacity, with as much as $400 billion prematurely retired or underutilized. Perhaps the greatest risk from delaying emissions reductions is?physical climate risk. The longer initiating emissions reduction takes, the more of the world’s remaining carbon budget would be used up, leaving less time to cut emissions, and increasing the risk that warming is not restricted to 1.5°C or even 2.0°C.

While significant, these economic adjustments would create growth opportunities and prevent further buildup of physical risk. The changing demand outlook combined with the $3.5 trillion in incremental annual spending on physical assets would create substantial growth opportunities for companies and countries in the near term. Decarbonized forms of legacy products and processes:?Companies that reduce the emissions intensity of their processes and products could gain advantages as the transition progresses. In some cases, decarbonizing processes and products can make them more cost-effective. For example, improving the energy efficiency of heating systems in steel plants lowers both emissions and operating costs. Even when decarbonizing adds to operating costs, companies can benefit from taking this step—for instance, if consumers are willing to pay more for low-carbon products or if companies are subject to carbon-pricing mandates. Low-emissions products and processes that replace established high-emissions options:?carmakers?might produce EVs instead of ICE vehicles, for example.?Steelmakers?can implement low-carbon production processes such as direct reduced iron–electric arc furnaces powered by green hydrogen.?Utilities?might set up wind or solar farms to generate renewable electricity, while energy companies?could introduce biofuels and hydrogen.

Inputs, physical capital, infrastructure, and support services:?New offerings will be needed to support production in the other two categories. These offerings include inputs such as lithium and cobalt for battery manufacturing, physical capital such as solar panels and batteries, and infrastructures such as EV charging?stations and hydrogen refueling?stations. Technical services such as forest management, engineering and design, and power-system integration will help with the management of low-carbon assets. Services such as financing, risk management, certification, emissions measurement, and tracking solutions, and worker training will also be needed. The incremental capital spending on physical assets, which we estimate at about 3 percent of GDP annually through 2050, and the broader economic transformations under a net-zero transition would have another essential feature: reaching net-zero emissions and limited warming to 1.5C would prevent the buildup of physical risks and reduce the odds of initiating the most catastrophic impacts of climate change, including limiting the risk of biotic feedback loops and preserving the ability to halt additional warming.

?In concert fault to create value in the net-zero transition

?Decarbonization will reshape the economy, opening new markets and imperiling others. Now is the moment for companies to spot green growth opportunities and move boldly to take advantage. It can be coined the Great Reallocation.?As the dangers of climate change have become more apparent and urgent, investors, customers, and regulators have raised their expectations for companies, demanding that they set targets for reducing net emissions of greenhouse gases (GHGs) to zero and offer clear plans for achieving them. The momentum toward net zero is undeniable: nearly 90 percent of emissions are now targeted for reduction under net-zero commitments,?and financial institutions responsible for more than $130 trillion of capital have declared that they will manage these assets in ways intended to hold warming below 1.5°C.

?This wholesale shift toward institutions and projects that emit minimal GHGs may create the largest reallocation of capital in history. At present, about 65 percent of annual capital spending goes into high-emissions assets. But in a scenario where the world reaches net zero in 2050, this pattern would reverse; 70 percent of capital outlays through 2050 would be spent instead on low-emissions assets. And as organizations adjust their operating budgets, they would pay trillions of dollars for renewable energy, circular materials, and other low-emissions inputs during this time frame. These dynamics mean that businesses must make bolder moves. For years, many large companies have responded to the prospect of a net-zero transition by playing defense—protecting their cash flows with sustainability programs that address regulatory mandates and the basic expectations of shareholders and nonfinancial stakeholders. But the reallocation under way to achieve net-zero goals will spur booming demand for climate-friendly goods and services and the green energy, equipment, and infrastructure needed to produce them. Some sectors will grow by several multiples.

Growth-conscious executives should see these sustainability-driven shifts in value as a call to play offense. Pivoting their strategy to embrace this moment, first movers are gaining the upper hand by using low-cost green financing to build out carbon-free production capacity and fill big, recurring orders for scarce commodities such as green steel or recycled plastics. Risk won’t disappear, of course, but leaders in the net-zero transition will be those companies that recognize new possibilities for?value creation?and make credible efforts to pursue them. Our approaches define the strategies of companies that are already taking advantage of the net-zero growth opportunity. First, companies are adjusting business portfolios with particular attention to industry segments with major growth potential. Second, building green businesses then enables companies to penetrate markets that their current models cannot serve. Third, differentiating with green products and value propositions in existing markets allows companies to gain market share and price premiums. Finally, decarbonizing legacy businesses boost their value. A net-zero economy would differ greatly from our present economy—which means the transition to net zero would involve profound, sometimes disruptive, changes.?If the world reaches net zero by 2050, economic output would progressively (and permanently) tilt away from goods and services that are emissions-intensive and toward those that can be made and used without emitting GHGs. These shifts would, in turn, ripple along entire value chains, altering the dynamics within industries.

Automakers, for example, would cease to manufacture cars with internal-combustion engines and roll out electric vehicles?(EVs) instead. Oil consumption would drop, in part because drivers would no longer need to fuel up—and electric-power generation would increase to help charge the world’s expanding fleet of EVs. A much greater share of that electricity would come from?renewable sources such as solar and wind, rather than today’s coal- or gas-fired power plants. Dynamics like these have already begun to play out. In categories such as energy and materials, vehicles, food, and packaging, demand for green products and services is growing strongly. And as the net-zero transition advances, markets for zero-emissions offerings should expand further, while markets for emissions-intensive offerings shrink. For example, in the net-zero scenario noted above, the production of hydrogen and biofuels would increase more than tenfold by 2050. Fossil fuels, however, would account for a dwindling share of energy use, with oil production dropping by 55 percent and gas production by 70 percent in 2050, compared with today.7?We estimate that burgeoning demand for net-zero offerings would create unprecedented opportunities: 11 value pools could generate more than $12 trillion of annual sales by 2030. These include transport ($2.3 trillion to $2.7 trillion per year), buildings ($1.3 trillion to $1.8 trillion), and power ($1.0 trillion to $1.5 trillion).

Certain markets for green products and services are also proving to be more lucrative than markets for conventional offerings, as green premiums start to kick in. The most profitable opportunities have emerged in fast-growing niches such as recycled plastics, meat substitutes, sustainable construction materials, and chemicals, where margins can be 15 to 150 percent higher than usual as demand for traditional products softens. In the plastics market, for example, consumer-packaged goods players are changing their sourcing practices to reach sustainability targets. According to the Ellen MacArthur Foundation, six of the top ten fast-moving consumer goods companies have committed to use less virgin plastic and more recycled content in their packaging by 2025.8?Now, recycled polyethylene terephthalate (PET) commands a price premium of $300 per metric ton, on average, over virgin PET (compared with an average premium of $40 per metric ton from 2011 to 2019).9?Other recycled polymers, such as high-density polyethylene (HDPE) or polypropylene (PP), are trading at even higher premiums. Green premiums may decline over time, as supply catches up to demand. In the near to medium term, though, we expect these premiums to widen in sectors with significant supply-demand imbalances—creating opportunities for suppliers. Some of the markets described above are for the low-emissions real assets—such as?solar and wind farms, industrial machinery, ships, and trains—needed to drive business operations in a net-zero economy. Demand for these would trigger unprecedented capital reallocation: $3.5 trillion in new spending on low-emissions assets each year through 2050. Another $1 trillion per year that now goes toward high-emissions assets would instead pay for low-emissions capital stock.

The flip side of increased spending on low-emissions assets is the stranding of today’s emissions-intensive assets. Some $2.1 trillion of assets in the global electric-power sector alone could be stranded by 2050. And since many assets that are prone to stranding now sit on the balance sheets of listed companies, their early retirement could erode enterprise values. Other signals herald the flow of capital toward enterprises and projects that exhibit readiness for a net-zero future. The more than 450 institutions belonging to the Glasgow Financial Alliance for Net Zero, which represents more than $130 trillion of financial assets, have promised to align their portfolios with net-zero goals. The European Union has pledged to mobilize €1 trillion in public and private financing to support the European Green Deal. And national governments are considering their own climate finance packages. Amid these developments, companies should be able to raise the funds they need to reposition themselves for a net-zero economy.

Considering there is much uncertainty about the pace at which the net-zero transition will progress, executives may be apprehensive about mistiming their companies’ net-zero moves. Understandably, many CEOs worry that their company will get ahead of its customers, investing in new assets and incurring production-cost increases before those customers demand low-emissions offerings or are willing to pay green premiums. In that event, the company could put itself at a disadvantage over rivals that sit back and wait. However, initial experience suggests that in many sectors, companies that are among the first to pursue net-zero opportunities enjoy greater success. First movers stand to gain the most in B2B industries in which demand for low-emissions offerings already exceeds supply, in part because incumbents with wide asset bases and thin margins have been reluctant to invest in new production capacity. In some industries, bold new entrants are getting ahead by locking in customers to tap green financing and set up operations. For example, H2 Green Steel, a Swedish start-up, secured purchasing contracts from automotive OEMs and construction companies in need of low-emissions steel, then used these contracts to help raise $105 million in initial funding—including stakes from some of the same OEMs that had agreed to become the company’s initial customers. Situations like these could pose challenges for companies lagging once first movers have won the earliest customers in a market where customer relationships are difficult to undo, and fast followers will have trouble making up ground.

With first-mover advantages still up for grabs in many new value pools, now is the time for companies to rise out of a defensive crouch and start playing offense. Until recently, many companies have responded to the transition only by issuing net-zero plans that show they are keeping pace with rising stakeholder expectations and regulatory requirements. This is playing defense—trying to prove that a company will survive, perhaps generating less free cash flow but avoiding the mortal risks of stranded assets and a nil terminal value.

The basics of managing transition risk

Playing offense means showing that your business model is built to outperform during the net-zero transition, with a free cash flow that grows relative to expectations. But because the world’s transition pathway is unclear and difficult to predict, companies will need to develop a “strategy under uncertainty” like never before. No single formula will work for every company, or even for all companies in each industry. In the oil and gas sector, for example, some companies are choosing to dispose of hydrocarbon businesses. Others are staying in these markets by seeking resources with low emissions intensity and low breakeven prices. These divergent strategies have in common is their intention to create value. Here, we describe four complementary moves for playing offense in the net-zero transition.

Starting with the existing portfolio, sustainability leaders reallocate from emissions-intensive businesses to low-emissions businesses, either transforming emissions-intensive businesses through decarbonization, which we explain below, or divesting them. Neste, a fuel and chemicals producer based in Finland, earned more than 50 percent of its operating profit from oil products in 2015. But in 2018, the company’s renewable-products business contributed 70 percent of its operating profit. The company’s market capitalization tripled from 2015 to 2021, with 90 percent of the valuation based on the renewable-products business.?Major investments in new technology, feedstock platforms, and green-refinery capacity, along with targeted go-to-market strategies, played a large part in this transformation. Other leading companies look for transition-driven growth opportunities at the granular level?of industry subsegments and fund growth initiatives with capital taken from parts of the business that are less likely to see increasing demand during the net-zero transition. They also think creatively about ways to match their existing capabilities to growing niches. One industrial-equipment company identified growing end markets for components used in renewable energy and air treatment and applied its expertise in tooling to develop new machinery types. The business has earned significant green premiums from the sale of these new products, which now make up the bulk of its portfolio. Many portfolio-transforming moves require substantial capital outlays. They also carry real risk, not least because of undecided regulation, which could greatly influence the markets for emerging climate technologies?such as green hydrogen or carbon capture. Companies can mitigate some market risks by forming consortiums where buyers, sellers, financiers, and other value-chain participants might work together on innovation or reach offtake agreements that stabilize demand against regulatory uncertainty. The Mission Possible Partnership?is one effort to get institutions in hard-to-abate sectors to work together on advancing climate solutions.

Build green businesses

Innovative green upstarts are emerging across nearly every sector, from?transport?(for example, Einride, Northvolt, Tesla) to?nutrition?(for example, Beyond Meat, Impossible Foods). Incumbents, however, often struggle to build successful green businesses. Sometimes, practical challenges hold them back, such as the difficulty of incubating nimble new ventures within larger corporate structures. In other cases, the barrier is a lack of ambition—an unwillingness to create a new business that might overtake or disrupt the old one. Incumbents can also find it difficult to reckon with the uncertainties, in areas such as technology, regulation, and demand, that can surround emerging markets for green offerings. For these reasons, they can miss opportunities to create value.

Rather than surrender before these challenges, established companies should recognize that they can?endow in-house ventures with significant advantages?over independent start-ups. In our experience, this is a matter of exploiting three resources that start-ups typically lack: assets, capabilities, and relationships. Assets.?Incumbents can use their balance sheet to provide green ventures with capital. They can also share real and intellectual assets, reducing a new venture’s start-up costs. Polestar, the EV brand valued at more than $20 billion, built its first models using automobile platforms and technologies from its parent company Volvo Cars—allowing for an asset-light business. Capabilities.?Incumbents possess the talent, processes, corporate services, and technologies that new ventures often need. Hydro-Québec, for example, made use of the utility’s existing technical expertise, deep knowledge of power networks, and capital engineering capabilities to develop the Electric Circuit, the province’s largest and most reliable EV-charging interrelationships.?Incumbents can provide new ventures with an edge by giving them access to important stakeholders, particularly existing customers. In some instances, the parent company itself can act as a customer to the new venture—providing captive demand. Mercedes-Benz Group and Daimler Truck Holding have announced a joint plan to build a battery-recycling plant that will process end-of-life batteries from the EVs they make. Many of the portfolio companies in Launchpad, BP’s clean-energy ventures arm, sell into the parent company. Incumbents’ relationships with suppliers, investors, partners, and regulators can also be valuable to new green ventures.

Realize price premiums through differentiation

Companies can charge premium prices for goods such as recycled plastic that are in high demand because customers prefer their sustainability attributes. Some companies selling products with strong sustainability attributes—whether lower-carbon materials or items needed for climate resilience and adaptation—have seen their sales grow 50 percent faster, or more, than competitors selling conventional offerings. To capture such opportunities and identify others that might emerge, businesses should develop an outlook on markets for sustainable products. Two considerations stand out as especially important when gauging a customer’s willingness to pay green premiums: their commitments to lower supply chain emissions and their potential carbon-tax liabilities. To charge green premiums, companies should also help customers understand the green attributes of their products and the value conferred by these attributes. Customers often struggle to distinguish between sustainable and greenwashed products, so companies must explain their products’ sustainability attributes in clear, accurate terms. Leaders furnish customers with transparent, independently verified information, including environmental product declarations (EPDs) and life cycle assessments (LCAs). They also take care to teach marketing and sales teams how to communicate technical information in ways that customers can understand.

Smart branding can help companies reach sustainability-minded customers. New companies may have an easier time achieving a credible position of distinction. But some incumbent businesses have successfully repositioned themselves after making meaningful portfolio shifts. Florida Power & Light, for example, both transformed its business and rebranded as NextEra Energy and has since seen their shares increase in value more than sixfold.

Change operations and supply chains

Companies that decarbonize their operations can create value in other ways, too. When they use the discipline of sustainability to make their operations more efficient—in both environmental and financial terms—they can achieve cost savings that allow them to lower prices and gain market share, boost profits, or generate funds for other sustainability projects. Evonik Industries, the specialty chemicals player, reduced its operating costs and increased its sales by decarbonizing its operations.

There is considerable room for improvements in sustainability performance. In our experience, the heaviest-emitting mines can have 20 times the GHG intensity of the least-emitting mines. In metals, the spread can be a factor of up to 15. The financial spread could get wider still: as the cost of renewable energy falls and the price of carbon rises, companies with the least carbon-intensive assets and operations should find that their operating expenses decrease more. Decarbonizing often does require some up-front capital spending. Leading businesses prioritize investments in decarbonization and other sustainability efforts as they do other capital outlays—by seeking the most economical options. We see them using company-specific GHG abatement cost curves to identify initiatives with positive or neutral net present value (NPV). One materials company found that it could abate 30 percent of its GHG emissions with NPV-positive measures, plus 15 percent using measures that were NPV-neutral, and a further 15 percent at moderate cost. The total: 60 percent emissions abatement, all for less than €40 per metric ton of CO2?equivalent.

In some cases, companies can improve the sustainability of their products by working closely with suppliers. That is because energy, materials, and components account for much of the typical product’s GHG footprint. Switching to low-emissions inputs, however, can be complicated for various reasons. Scarcity is one of these. As noted above, demand for recycled plastics already exceeds supply, and the same is true for some other low-emissions materials. For example, the demand for flat green steel in Europe could exceed supply by up to 50 percent in 2030. To secure the green supplies they need, companies should move now and sign long-term contracts. Companies that achieve supply security can not only make good on their net-zero pledges but also distinguish themselves from competitors that run into shortages and fail to deliver low-emission offerings?as a result. Many companies will find it impossible to decarbonize completely—that is, to achieve net zero—without future breakthroughs in technology or end-to-end transformations of their products and operations. That is to be expected: the net-zero transition is, after all, a transition, a process expected to unfold over almost 30 years. But this reality should not discourage companies from initiating feasible changes today, for the first-mover advantages available now are too great to pass up.

The commitments and actions of governments, investors, and customers have gotten the net-zero transition under way. As it progresses, the economy will change, and vast new markets for low-emissions offerings will open. Companies that approach the net-zero transition only as a potential source of risk to their existing business run a risk of a different kind—the risk of failing to capitalize on the Great Reallocation. Instead, their task should be to anticipate where growth is likely to occur and go on the offensive, making bold moves in pursuit of immense opportunity.

?CONCLUSION

?Aligning to Net Zero, the business leaders can get on board with the transition. They must act with urgency—winning slowly is the same as losing. The scientific consensus is crystal clear humanity needs to limit global warming to below 1.5 degrees C to avoid a dramatic increase in adverse climate impacts and unpredictable feedback loops in the climate system. Considering the urgency and scale of the challenge, and the accelerating pace of change in the regulatory context, they now have a responsibility to take immediate action. Different businesses carry different responsibilities and capabilities, but none should ignore this challenge. They have a historic opportunity and obligation to align their businesses to net zero. Businesses around the world face both existential risks and enormous opportunities from the climate crisis and clean economy transition. They proactively address the changing landscape and will be able to build a long-standing competitive advantage while playing a vital role in shaping a climate-safe global economy. Those who do not may disappear. Net zero means collectively cutting net CO2 emissions by 50% by 2030 and getting to zero by 2050. Climate change is driven by the cumulative greenhouse gas emissions in the atmosphere. To reduce the risks, we now face we must move fast to cut emissions and compensate for any residual emissions using nature-based and engineered solutions. Net zero means eliminating emissions to the greatest extent possible and offsetting any residual emissions with measurable removals. The transformation is underway by bringing unprecedented opportunities and risks Net zero implies a complete transformation of the economy. And this is already happening. We are seeing a major scale-up of clean power in a wide range of countries. The automotive sector has begun the transition to a fully electric future and long-distance transport sectors are developing zero-emission propulsion options, including synthetic fuels. Energy efficiency measures are being rolled out, and carbon capture and zero emissions fuels offer to transform processes in the industrial and manufacturing sectors. Farmers are being asked to reduce their carbon emissions and consumers are taking up climate-friendly diets. As well as solutions to cut emissions, we will likely see a huge scale-up in carbon removal solutions to compensate for hard-to-cut activities and historic emissions. Verifiable enhanced removals of greenhouse gases in the atmosphere may include reforestation, peatland and mangrove restoration projects, and direct-air capture technologies. We will see a massive turnover in capital stock. High-carbon emitting assets must be retired early to be replaced or retrofitted with low-carbon alternatives. There will be creative destruction and stranded assets in many sectors across the economy; internal combustion engines will be retired early, buildings will be retrofitted rapidly, and fossil power generation will be obsolete. CEOs must anticipate unprecedented physical and transitional risks. Climate change threatens economic stability, disrupts supply chains, reduces workforce productivity, and causes mass migration on an unprecedented scale. Rapid changes in policy, market preferences, norms, and technology have impacts on company profit and loss and cause devastating reputational damage for brands. As the climate rapidly deteriorates and governments respond with accelerating commitments, these risks are already hitting many unprepared hard. Those who anticipate these risks and align their businesses to a net-zero emissions trajectory avoid stranded assets and anticipate spiraling costs of inaction. Those who act early can capture major opportunities and build a competitive advantage. Those who align their businesses to a net-zero future not only shield themselves from risks but also position their businesses for growth in new green markets. Fortunes will be made and lost in this shift. We have already seen a sizable transition in the power sector with the rapid decreases in the wind and solar costs—some players are now reaping the rewards, while others commit to major write-downs. The rapid growth in green financing is enabling those who act now to access lower capital costs for new projects. Making progress on emissions is becoming table-stakes for brands. As emissions targets are increasingly added to procurement criteria, climate action is becoming a prerequisite to becoming a trusted supplier across all sectors of the economy. Increasing expectations among employees and end consumers mean that securing brand equity and attracting future talent now depends on a baseline level of climate action. Those who become “green champions” will streak ahead, while laggards will be increasingly perceived as pariahs. Those who engage have the opportunity to shape the context. CEOs who take an active role in policy discussions to achieve national net-zero targets and develop sector-level standards with industry peers can shape the context and support needed for full decarbonization. Taking a proactive stance will speed progress and reduce collective risk. Recommended steps to play our part Set the overall ambition and low-carbon strategy, then measure and disclose. CEOs and their boards need to ensure they have a fundamental understanding of climate science, climate risks, and the implications for their business. They should report on their emissions baseline (e.g., using TCFD guidelines, and via CDP), set clear short- and longer-term reductions targets (e.g., via the Science-Based Targets initiative), and adjust their business strategy to minimize climate risk and ensure lasting competitive advantage in a net-zero world. Implement initiatives that save money or cost little. Many emissions reduction measures can save money or have short payback periods on minimal upfront investment. Reducing waste, increasing circularity, and implementing energy-efficiency measures are actions every CEO should be looking to roll out immediately while developing the deeper, longer-term transformation needed. Redesigning products for lower-carbon materials and switching facilities to renewable power are major levers. Collaborate in ecosystems to address more costly levers—especially in hard-to-abate industries. For those sectors where decarbonization costs are high, margins are slim and products are commoditized, it is hard for companies to move alone. Overcoming these hurdles requires a joint effort. Coalitions among industry peers and along value chains can enable companies to share costs, share risks, and shape policies (as, for example, we see in the Forum’s Mission Possible Partnership which aims for sector-level targets and industry collaborations). Develop new, low-carbon business models. To thrive in the low-carbon future, leading CEOs should explore new revenue streams and invest in the technologies, goods, services, and business practices of tomorrow. Develop new premium consumer products with low-carbon inputs, set up green fuel production facilities as demand for zero-carbon shipping and aviation takes off, and stay one step ahead of the green technology curve by developing R&D capabilities for further technological innovation. Engage with the growing base of climate-conscious investors. A recent analysis by the CFA Institute showed the majority of investors surveyed have net-zero targets. CEOs can take advantage of this to support their long-term transition plans by engaging with those investors who are increasing pressure on sectors to decarbonize. Enable your organization with low-carbon governance. CEOs need to align their organizations to drive net-zero pathways by linking core business functions to decarbonization priorities. Introducing a meaningful carbon pricing mechanism and linking key performance indicators to decarbonization efforts can be a valuable tool to align internal incentives and fund green projects. Advocate for policy support. To enable the context change that we all need to fully transition the economy to net zero, CEOs should engage in advocating for regulation in their sectors and in the countries where they operate. Many countries can benefit from investments in a low-carbon economy. Making the case for stronger policy support and promoting a message of green growth and jobs provides reassurance to policy-makers who look to business leaders to confirm support for national net-zero targets and policy frameworks. Closing words The transition to net-zero emissions is bringing about a transformation of unprecedented scope and pace. As crucial leaders of the economy, CEOs have a critical role to play in driving the race to net zero—within their own businesses, among their peers and along their value chains, and in relation to the broader ecosystem of investors and governments. It is up to all of us to use the platform we have for positive change—it is only when every leader acts on their responsibility that humanity will be able to avert the worst of the climate crisis. Annex Further information Limiting warming means sticking to a carbon budget— Net zero by 2050 and 50% GHG reduction by 2030. Although estimates of our total remaining carbon budget vary, the science is clear. Reducing emissions rapidly enough to avoid catastrophic global heating will involve a blistering pace of change. The IPCC and others show that for even a [60%] chance of staying within the 1.5-degree goal, we must reduce emissions by 50% by 2030 and hit net zero globally by 2050. The risk of devastating outcomes increases dramatically if heating rises from 1.5 to 2 degrees, and catastrophically with every percentage of a degree higher. We need global emissions to peak and start declining rapidly as soon as possible. Every additional tonne of greenhouse gases emitted today adds to the risks we collectively face. The international goal of the Paris Agreement is that man-made emissions are stopped or compensated fully by removing emissions from the atmosphere. Net zero means eliminating emissions to the greatest extent possible and offsetting any residual emissions with measurable removals. Immediate action across all sectors is required to reduce emissions dramatically, hitting the lowest level possible by the middle of the century. Any residual emissions that are impossible to reduce will need to be removed via nature-based and engineered solutions. Those removals solutions must be developed now to reach the scale required by 2050 and deliver negative emissions in the second half of the century. For a detailed definition of net zero that can serve as a shared point of departure for global business, refer to SBTi. Useful resources The World Economic Forum’s Mission Possible Partnership provides a valuable example of an initiative founded to enable collaboration among peers, push sector-level targets and scale demand-side commitments. Other platforms for collaboration include WBCSD SOS 1.5 from We Mean Business and the Task Force on Climate Related Financial Disclosures (TCFD). Companies in different sectors may wish to review net-zero case studies of leaders from their industry. Many are included in the Race to the Zero platform leading up to COP26, and notable examples include: – Food and beverage: Nestlé – Consumer products: Unilever – Oil and gas: Shell – Shipping: Maersk – Aviation: Airbus – Steel: ArcelorMittal – Power: Orsted – Mobility: Volkswagen Finally, we suggest reviewing other World Economic Forum reports and Global Future Councils on related topics. First, the Net-Zero Challenge report provides further background information on this topic and The Supply Chain Opportunity shows how an end-to-end supply chain view provides companies with an opportunity for multiplied impact by tackling Scope 3 emissions. Related Global Future Councils include Nature-Based Solutions, Clean Air, and Energy Transition.