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The Costs — and Opportunities — of Climate Change

By Alberto Saracho - McKinsey & Co.


By Alberto Saracho | Partner - Thu, 03/17/2022 - 13:00

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Over the last 30 years, life expectancy, education, and per capita income in Mexico have all improved. It’s a powerfully positive story but as in the rest of the world, there is also a twist to it. The essential condition that has made this progress possible — the stability of the Earth’s climate — is under stress. That is why more than 130 countries, accounting for almost 90 percent of greenhouse-gas emissions, have made a “net zero” pledge, meaning that they will either reduce or offset all emissions.

McKinsey recently evaluated what it would take to get to net zero. These are not predictions of what will happen but simulations based on the hypothetical scenario developed by the Network for Greening the Financial System. The answers were interesting, and a little sobering. Four things stood out.

First, the research estimated the total capital spending required would be $275 trillion by 2050, an annual increase of $3.5 trillion. For context, $3.5 trillion is roughly equivalent to half of global corporate profits, or a quarter of total tax revenue. In addition, $1 trillion of current spending would need to be reallocated from high- to low-emissions technologies.

Second, action would need to start now. Delay makes solving climate change more difficult, as emissions accumulate. It also makes it more expensive and disruptive. If low-emissions solutions do not keep pace with the retirement of their high-emissions counterparts, for example, the result will be shortages and/or higher prices.

Third, the burden of change is not distributed equally. The top three emitters — China, the EU, and the US — account for more than 40 percent of global emissions, or 10 times as much as the bottom 100. In general, poorer countries will need to invest more than richer ones, as a percent of their economy, to reach net zero. That is because more of their jobs, GDP, and capital stock are in emissions-intensive sectors, such as manufacturing, agriculture, and fossil fuel–based power. Latin America, McKinsey estimates, would need to invest more than 9 percent of GDP to get to net zero, compared to less than 7 percent for Europe and the US.

Finally, even if every country met its climate pledges, it wouldn’t be enough to keep global temperatures from rising no more than 1.5 degrees above preindustrial levels — the goal of the Paris accords. At the moment, most do not have detailed plans to do so.

Where does Mexico stand? It’s complicated. It is one of the Top 15 emitters but on a per capita basis, its footprint is more modest: less than half that of China or South Africa, and a quarter of the US. As for the risks, climate change could bring both water stress and its opposite, increased flooding. Economically, Mexico is a major manufacturer, with a great deal of employment in the auto industry, which will be greatly affected by a transition away from conventional cars and toward electric vehicles. It is also a significant oil producer and has a growing population. All these considerations make substantially cutting GHG emissions difficult. Nevertheless, Mexico has committed to reducing its emissions by 22 percent below the business-as-usual scenario by 2030.

While these challenges are real, so are the opportunities. Mexico’s land and forests already comprise a “carbon sink,” absorbing carbon dioxide. Reforestation could enhance this capacity. In addition, our sunny climate makes the use of solar energy a promising option, particularly since costs have been falling. In 2019, McKinsey research found that Mexico could “become a global leader in clean energy and help cut electricity costs for the industry in half by 2050.” Finally, there is the human dimension: Mexico is graduating more than 100,000 engineers a year. That is the kind of talent that can create the innovations needed.

Risk and opportunity: These are the two sides of the climate-change coin, both for the world as a whole and for Mexico.

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Photo by:   Alberto Saracho

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