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ON GREEN MARKETS
A practical approach to accelerate climate progress
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| In the 30 years since the first Conference of the Parties (COP) was held, in 1995, global efforts toward sustainability have had significant impact. Academics and scientists built a fact base and educated governments, companies, and the public on the dangers of climate change. Terms like “net zero,” “decarbonization,” and “energy transition” entered our lexicon. Renewable-energy sources, such as solar and wind, experienced tremendous growth, and electric vehicles (EVs) gained traction. Much of that progress was initially fueled by government subsidies and supportive policies, in turn enabling private sector innovation, investment, and deployment.
But there are new challenges and complications. In particular, four factors loom large today: Energy demand is growing, awareness of the link between energy security and national security is rising, some climate technologies are facing challenging economics, and a number of governments are reevaluating their climate and energy policies. Let’s take a brief look at each of these factors.
On rising energy demand: It’s happening in both the developing and the developed world. In the developing world, about seven billion people use only 60 gigajoules of energy per capita annually—less than half of the per capita usage in developed countries. The fruits of industrialization, including higher living standards, require reliable access to affordable energy. Meanwhile, in the developed world, demand is growing in part because of the rapid expansion of AI and data centers, which are notoriously energy hungry. By 2030, data centers could account for about 12 percent of total US power demand, up from about 4 percent today.
The second big factor to consider is that energy security has become a top priority for countries around the world. Amid geopolitical tensions and supply chain disruptions, governments are striving toward energy independence and resilience.
Third, although some green technologies are already commercially viable, many are not. Solar and onshore wind are cost competitive and profitable in many parts of the world. Others—including heat pumps and nuclear power—are cost competitive in very few regions.
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| | | “Companies will come up with innovative solutions to a stubborn problem: Who will pay for the energy transition?” | | | | |
| And fourth, amid macroeconomic concerns, there has been more uncertainty—and, in some cases, retrenchment—in climate policy. For example, the United States has pulled out of the Paris Agreement. France and Sweden have either reduced or declined to renew EV subsidies. After many years of growth, there has been a slowdown in the number of climate policies adopted by OECD countries (although the share of high-stringency policies seems to be inching up).
So what happens next? Look for six trends to emerge in what I see as a new era of sustainability, propelled more by market creation than by government subsidies. Trend one is that green investment will continue—and disproportionately go to projects that are (or are close to being) commercially viable, such as solar and battery storage. Two, investment in the decarbonization of existing energy infrastructure (such as energy efficiency, carbon capture, and drop-in fuels) will accelerate. Three, on our current emissions trajectory, global temperatures are expected to rise, which means investing in climate adaptation and resilience will become more important. Four, companies everywhere will strive to emulate the speed, innovation, and cost reduction trajectories of Chinese companies, which today are building vehicles and factories faster than anyone.
A fifth trend: New clean-energy tech will continue to surprise us and gain traction over time. We have seen solar, onshore wind, and batteries move down the cost curve as usage grows. While predicting winners—or timing—is always tough, the productivity growth trajectory for climate tech seems clear.
The final trend is that companies will come up with innovative solutions to a stubborn problem: Who will pay for the energy transition? Today, many decarbonization technologies need customers to pay a premium or companies to absorb the costs of decarbonization. The voluntary market is important but not enough. More will be needed to address who pays and to drive down the costs of these technologies.
Collaboration between corporations and governments could help create durable and predictable markets for green products and materials. A few such efforts are already in place or being discussed. Examples include the EU Emissions Trading System and Carbon Border Adjustment Mechanism, low-carbon fuel standards in some US states and Canadian provinces, and product-level carbon intensity standards, like those being proposed by the International Maritime Organization for shipping. What these systems all have in common is that they create opportunities for companies to generate returns from green products and encourage innovation and deployment. Standards like these can have meaningful impact on global emissions, especially when applied to high-emitting materials like steel, cement, and liquid fuels.
Of course, many implementation questions would need to be ironed out—What would the initial targets be? When and how would they ramp up? How would they apply across jurisdictions?—but, if done right, such efforts could benefit businesses, consumers, and our planet.
| | | —edited by Monica Toriello, editorial director, New York
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| | | | | Sanjay Kalavar is a senior partner in McKinsey’s Houston office and global coleader of McKinsey Sustainability. | | |
| | | | | | | Pankaj Sachdeva on data center investment | | | Over the next five years, $7 trillion could be invested in building data centers. Careful choices could help stakeholders generate ROI while also meeting AI’s compute capacity needs. | | | | |
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