My Say: Managing the net-zero transition

This article first appeared in Forum, The Edge Malaysia Weekly, on June 20, 2022 - June 26, 2022.
What would it take to reach net zero? And what kind of economic and social adjustments might be required?

What would it take to reach net zero? And what kind of economic and social adjustments might be required?

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Modernisation has taken Malaysia far, with the per capita GDP growing 46-fold to reach over RM46,000 in 2020 — which now positions the country as having the third highest GDP per capita in Asean. On a societal level, this has correlated in a rise in the average life expectancy from 60 years in 1960 to 76 years in 2020, and a sharp fall in the infant mortality rate from 68 per 1,000 live births to just seven in the same duration.

Despite the socioeconomic benefits modernisation brings, it has played a key contributing role to the global issue of climate change, which ironically threatens the quality of life that this progress has achieved. One of the most obvious and visible impacts is the recent spate of floods in 2021, which, according to estimates by Malaysia’s government, have caused a staggering RM6.1 billion worth of damage, with public infrastructure being the hardest hit. Referred to as a “once in a hundred years” weather phenomenon, the flooding has driven pleas for climate action as activists believe such incidents could become more frequent.

The effects of climate change will only get worse if emissions of greenhouse gases (GHGs) are not radically reduced. “Net zero” refers to the goal of eliminating or offsetting all GHG emissions, in order to limit the rise in the earth’s temperature to no more than 1.5°C.

More than 70 countries have announced their net zero/carbon neutrality pledges, including Malaysia, which has pledged conditional carbon neutrality by 2050 in its 12th Malaysia Plan, a 2021-2025 development roadmap established by the government. In conjunction, Malaysia’s government has also adopted other initiatives that aim to reduce their carbon impact, like the New Urban Agenda — an urbanisation blueprint with a focus on creating more sustainable, safe and inclusive cities, and the Green Technology Master Plan, which aims to accelerate the development of the green technology industry.

Other countries in the region with similar plans and pledges are China, Indonesia, Japan, South Korea and Thailand. All told, these countries account for the vast majority of both emissions (80%) and GDP (90%). Few, however, have backed up these promises with decisive action. That is understandable. Getting to net zero will not be easy or without cost — and the world still needs to grow.

What would it take to reach net zero? And what kind of economic and social adjustments might be required? In a recent report, McKinsey tried to answer those questions, based on a hypothetical scenario to achieve net-zero emissions by 2050 developed by the Network for Greening the Financial System (NGFS), a group of 105 central banks and financial supervisors. These are not predictions, but a simulation of what is required under the NGFS trajectory. The report looked specifically at energy and land use systems, including power, industry, mobility, buildings, agriculture and forestry. Together, these comprise about 85% of GHG emissions.

In economic terms, global capital spending on the course to net zero would reach about US$275 trillion by 2050, or US$9.2 trillion per year, an annual increase of US$3.5 trillion. Moreover, US$1 trillion of current spending would need to shift from high- to low-emission assets.

It is worth remembering that not all of this spending should be counted as a cost; many net-zero-related investments already deliver economic returns, and more will likely do so as the transition matures. And these capital expenditures could also cut costs through reduced fuel consumption, improved material and energy efficiency and lower maintenance costs.

Another important point is that these investments would need to start now; indeed, based on the NGFS scenario, the biggest spending will take place in the next 10 to 15 years. Delay is itself costly. If countries invest in, say, new coal mines and then decide to shut them down before the end of their useful life, those assets are stranded, which is expensive. It also means that workers are more likely to be dislocated. An orderly, gradual and determined transition is far preferable to an abrupt and disorderly one. It will be important to coordinate the ramping down of high-emissions activities with the ramping up of low-emissions options to avoid supply shocks or price rises.

As for jobs, McKinsey estimates that getting to net zero could mean the loss of 187 million jobs globally by 2050. But there could be 202 million new ones, given the need for new large-scale capital investment and the growth of sectors like hydrogen and renewables.

In social terms, the most important fact about climate change is that it is not fair: some countries will have more difficulty reaching net zero than others, mainly due to either economic development (poorer/emerging economies) or high emission-driven sectors (land-use/fossil fuel intensive). Thus, they would need to invest more, relative to GDP, to reduce their emissions.

For example, according to a McKinsey report, Southeast Asia’s capital requirements would be 9.2% of the region’s collective GDP under the NGFS Net Zero 2050 scenario, which is above the global average (7.5%) and a developed economy like Europe (6.5%). Indeed, a land-use sector driven economy like Malaysia’s, where the sector accounts for 8% of GDP, 15% of employment and 6% of the capital stock, is far more exposed to emissions than, say, Japan, which is predominantly a service economy. As such, Malaysia would have to double down on its efforts to curb deforestation, practise reforestation and afforestation and support economic diversification. The country has already started taking steps in this direction, including the setting up of a voluntary carbon market by the end of 2022 to tap into its vast forest reserves and produce carbon credits. McKinsey’s in-depth analysis estimates that seven metric tons to 25 metric tons of CO2 equivalent (mtCO2e) worth of carbon credit demand could be generated by 2030 from the top 90 Malaysian companies. On the other hand, we also estimate there to be potential of creating 40-50 MtCO2e of feasible annual nature-based solutions in the country by 2030.In addition, various policy measures have also been initiated to subsidise clean energy projects such as the Green Technology Financing Scheme (GTFS).

Change will be difficult and disruptive, in effect requiring a transformation of the global economy, in everything from how we work to how we build our homes to how we get from place to place. But the common thread is that the benefits ultimately outweigh the costs, both in the state of the planet and also in day-to-day improvements, such as cleaner air and healthier land.

The story of human progress is the story of human ingenuity — one resource that is truly inexhaustible — and Asia is well-positioned to be part of the solution. Malaysia, for example, has installed renewable energy capacity of 8520mw, which is 23% of its energy mix. The aim is to increase this percentage to 31% by 2025. Multiple stakeholders have also recently announced many large-scale projects targeted at clean energy transition, including developing biogas plants, advanced solar tech and a green hydrogen and ammonia hub.

Thus, we believe that human ingenuity can ultimately solve the net-zero equation. But we need to make the decision to do so — and to start now.


Vaibhav Dua is a partner and Abdul Qavi Mohammed is an associate partner at McKinsey & Company’s Malaysia office

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