Greenhouse gas emissions continue unabated and are not being offset by reductions; the world is not ready to complete the transition to net zero. Even if all net-zero commitments and national climate pledges are fulfilled, research indicates that warming cannot be kept below 1.5°C above pre-industrial levels and that the likelihood of the most destructive effects of climate change, including the risk of biotic feedback loops, will increase.
Net zero must be considered alongside economic development and inclusive growth
Solving the net zero equation cannot be separated from the pursuit of economic development and inclusive growth. The short-term risks of poorly prepared or uncoordinated action must be carefully balanced against the long-term risks of insufficient or delayed action. Indeed, a more disorderly transition could negatively impact energy supply and reduce energy access and affordability, particularly for low-income households and regions. It could also have broader knock-on effects on the economy and potentially trigger a backlash that slows the transition.
Achieving net zero will require a fundamental transformation
Achieving net zero will mean a fundamental transformation of the global economy, as it will require significant changes in the seven energy and land use systems that generate the world's emissions: energy, industry, mobility, buildings, agriculture, forestry, and other land use and waste. Implementing these changes will require overcoming numerous economic and political challenges, encompassing physical infrastructure, economic and social regulations, governance, institutions, and commitments.
This means addressing numerous complex questions, including the following:
- What is the appropriate technology mix that should be used to achieve emissions reductions while staying within the carbon budget, limiting costs, and meeting the necessary performance standards?
- Where are supply chain and infrastructure bottlenecks most likely to occur?
- Where might physical constraints limit the pace of the transition, whether related to the availability of natural resources or the expansion of production capacity?
- What level of expenditure will the transition require for physical assets?
- Who will pay for the transition?
- How will the transition affect companies' markets and activities?
- What does it mean for workers and consumers?
- What opportunities and risks will it create for companies and countries?
- How can consumers be encouraged to change their consumption and spending habits to facilitate the transition?
Governments and companies are making increasing commitments on climate change. However, significant challenges remain, such as the scale of the economic transformation required for the transition to net zero and the difficulty of balancing the significant short-term risks of poorly prepared or uncoordinated action with the long-term risks of insufficient or delayed action.
While this transformation creates opportunities, sectors with high-emission products or activities, which account for approximately 20% of global GDP, will face significant impacts in terms of demand, production costs, and employment. In the NGFS (Network for Greening the Financial System) Net Zero 2050 scenario, coal production for energy use will almost cease by 2050, and oil and gas production volumes will be approximately 55% and 70% lower, respectively, compared to today. Process changes will increase production costs in other sectors, and by 2050, steel and cement will face increases of approximately 30% and 45%, respectively. In contrast, some markets for low-carbon products and support services will expand. For instance, electricity demand could more than double by 2050.
Poorer countries will be more affected by the changes in the transition to net zero
Poorer countries and those dependent on fossil fuels are the countries most affected by the changes in the transition to net zero, despite their growth expectations. These countries are more sensitive to changes in output, capital stock, and employment because the exposed sectors constitute a relatively large part of their economies.
Exposed regions, including Sub-Saharan Africa and India, will need to invest 1.5 times or more of their current GDP share than developed economies to support economic development and build low-carbon infrastructure. The impacts in developed economies may also be uneven; for example, fossil fuel extraction and refining, fossil fuel-based energy, and automotive manufacturing are significant sectors in the US.
Achieving net-zero emissions by 2050 will require a fundamental transformation of the global economy. To achieve these changes, three categories of fundamental requirements—physical infrastructure, economic and social regulations and governance, and institutions and commitments—will need to be met despite numerous economic (e.g., inflation) and political challenges (e.g., polarization within and between countries).
The main uncertainties can be summarized as follows:
- Warming scenario and emission pathway. A higher warming scenario (e.g., 2.0°C above pre-industrial levels), given a lower degree of emission reduction and deviation from current production and consumption patterns, may lead to smaller transition impacts compared to a 1.5°C warming scenario (though physical risks will naturally be higher).
- Decarbonization actions and activity levels across sectors. An alternative technology mix could result in lower costs and different transitions, and more technological innovation could result in a different, lower-cost pathway. The world could also follow a different path to decarbonization. An alternative scenario could involve greater use of carbon capture and storage (CCS) technologies and a focus on decarbonizing the hydrocarbon value chain; for example, if capture costs decrease, regulatory frameworks are put in place to encourage CCS use, and markets mature for the use of recycled CO₂ as a raw material.
- The magnitude of direct and indirect socioeconomic impacts. If the supply of key materials or low-emission energy sources cannot meet demand, this could lead to shortages and price increases. Higher-level impacts could amplify risks and increase costs, particularly in the short term. For example, depending on how the transition is financed, the impacts on the overall economy could be much higher than estimated. Finally, impacts could also be greater in the event of an abrupt or delayed transition.
- Economic and social arrangements required for the transition. Costs and investments could exceed expectations, for example, to implement social support programs that will assist with economic and social arrangements. Similarly, especially if it becomes clear that limiting warming to 1.5°C is not possible, delays, disruptions, and additional costs arising from urgently needed adaptation measures may arise.
Stakeholders must act with determination and cooperation
In the transition to net zero, all stakeholders, including governments, businesses, and individuals, will have roles to play. To facilitate stakeholders' adaptation to these impacts, governments and businesses must adopt a long-term perspective and act in a coordinated manner with a spirit of unity, determination, and cooperation, while also taking short-term steps to manage their own risks and seize opportunities.