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A reply to McKinsey and its Net-zero transition report by the MD of One Earth

Paul Hobcraft's picture
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I work as a transition advocate for innovation, ecosystems, within IIoT, and the energy system as my points of focus. I relate content to context to give greater knowledge and build the...

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  • Feb 7, 2022
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I have been providing extracts from the recent McKinsey report in two posts recently,

My first post was  explaining their scenario limitations with the message "we hope that this scenario-based analysis will help decision-makers refine their understanding of the nature and the magnitude of the changes the net-zero transition would entail and the scale of response needed to manage it."

Then the second post was to re-produce and show their summary of costs and outcomes.

I did not make any personal comments in these two posts, I found the report difficult to comprehend and have been hoping someone far more qualified could provide a view to add or to challenge this report view

I personally found the costs absolutely staggering. I find the disruption frightening. So we face significant electricity increases, very limited job gains over job destructions, whole industries and supply chains wiped out, steel and cement increases of 30 to 45%, investment inequality even more. Seriously, do any of the energy experts here in Energy Central contributors recognize this as the future conversation in the boardrooms or public institutions? Now if we have a disorderly transition it gets worse.

I felt this report needs understanding, hence my staying to the report faithfully. I made an appeal of "I can't get my head around this"- can anyone offer insights to counter this was a reply I made on comments provided to where I had equally posted this on the energy-central site.

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Today I was reading a reply to this McKinsey report by Karl Burkart, Managing Director One Earth, formerly DiCaprio Foundation Dir. Science & Technology.

I reproduce this here as it challenges the work of McKinsey significantly and gives me a better framing of my concerns and shock.

No McKinsey, it will not cost $9 trillion per year to solve climate change.

Karl Burkart

Karl Burkart

Feb 1 · 7 min read

 

A new report by McKinsey on the costs of transitioning the world to net zero carbon emissions by 2050 is making the rounds, brandishing a shocking top line figure of $9.2 trillion per year. But if you dig into the report, you quickly see that this headline is disingenuous, creating an impression that it would be nearly impossible to raise the volume of capital required to solve the climate crisis. In reality, according to the math, it will only cost a small fraction of this amount — roughly $1 trillion per year in additional spending. The folks at Carbon Tracker and I break down some of the issues with the report, and why investing in a clean, renewable future is a financial no-brainer.

 

1. The real cost of the energy transition is lost in the headline.
Top line, the report puts the total cost of a net zero aligned global energy transition at $275 trillion over 30 years, $3.5T more per year than we spend today. But deeper inside the report, we find that this is a misrepresentation. Business as Usual (BAU) would cost $250 trillion. So based on McKinsey’s own analysis, the real incremental cost is less than $1T per year in additional investments. And to be clear, this is before counting the rapidly rising costs of climate-related disasters (floods, fire, famine) and deaths.

2. The model does not account for rapidly accelerating innovation in clean energy.
The McKinsey analysis uses a model by Network for Greening the Financial System (NGFS), and like most Integrated Assessment Models, it assumes the continuity of our current fossil-fuel dependent energy system, despite a “cambrian explosion” of innovation in the clean energy sector. In reality, rapidly falling costs of clean technologies combined with the existential threat of the climate crisis will drive further innovation and economies of scale. A recent model published by Oxford’s Institute of New Economic Thinking (INET) offers a more realistic approach to modeling anticipated disruptions in the energy system, finding savings from the clean energy transition in the range of $14–26 trillion (PDF).

3. Like other conventional models, this one vastly underestimates the growth of solar and wind deployment.
Like a lot of mainstream energy modeling, this one is almost comical in its estimations of the pace of renewable energy adoption. For example, NGFS assumes 20 PWh of solar in 2050. This is half the level that the leading (and quite conservative) energy research firm Rystad forecasts. According to NGFS, the growth rate of solar would have to slow down from today’s level — from about 25% annual growth today to around 10% in annual growth. This one modeling decision makes a huge difference. Low growth in solar means you would need more carbon capture and storage (CCS) to remove fossil fuel emissions, and this significantly raises the total transition price tag.

4. Like other conventional models, this one vastly overestimates the costs of solar and wind deployment.
Despite the continued drop in renewable energy costs, McKinsey still seems to think that delivered electricity costs from renewables in 2050 will be 25% higher than they are today! Their justification for adding a huge premium on solar and wind is to account for higher grid integration costs, based on the assumption that there will be no innovation in the transmission or storage of intermittent renewables. This argument is old and has been largely debunked. For example, it was recently determined that the U.S. electricity grid can handle as much as 80% renewables with almost no enhancements. Getting to 100% will require additional upgrades but these are already underway — high voltage lines, smart grid technologies, sophisticated utility storage systems, computer-optimized load balancing, wind and solar shedding, distributed urban solar arrays, and many other strategies make getting to 100% renewable power entirely feasible.

5. The report fails to disclose pricing models for key renewable technologies.
Given that renewable energy deployment of solar, wind, geothermal, and green hydrogen is the world’s primary instrument of change in the transition to net zero emissions by mid-century, it certainly would be helpful if McKinsey disclosed how they have chosen to model the cost of deployment over time in their analysis. It’s likely they are not incorporating any benefits of scale or policy incentives that will reduce future deployment costs, even though all evidence points to declining, not increasing, costs. Oxford’s INET paper projects a continuation in the trend of declining costs, as do other models: IRENA, BloombergNEF, ETC, APCAG.

Even the IEA, which has historically been extremely conservative about the role of renewable energy, is now jumping on the bandwagon in their new Net Zero by 2050 roadmap. When the Paris Agreement was signed in 2015, the IEA thought the cost of solar electricity in 2040 would still be higher than that of electricity from fossil fuels, and expected deployment of only a cumulative 360 GW of solar by 2020. Just five years later, BloombergNEF finds that 90% of new electricity generation from renewables was cheaper than from fossil fuels, and 710 GW of solar was deployed. Battery prices have fallen even faster, halving from 2015–2020 and sparking a four-fold increase in deployment. McKinsey should be transparent about how and why they are modeling renewable costs in light of these developments.

6. McKinsey seems to have forgotten about fossil fuel rents.
This is surprising given McKinsey’s expansive knowledge about extractive industries and expertise from decades advising the fossil fuel industry. Our current fossil fuel system involves paying rent to fossil fuel producers beyond operating expenses and capital expenditures (CAPEX). Today, these rents amount to about $2T per year. These costs are not captured if you only model CAPEX. Adding rental costs, even with the McKinsey model, you would basically spend $1T on clean energy to save $2T on fossil fuel rents. And it’s likely rents will go up, increasing net savings from a renewable energy transition. For example, in the U.S. there is now a big push to eliminate the huge discounts on rents currently provided (they’re still at 1980s levels), thereby increasing the cost of fossil fuel extraction and the ROI for renewable energy investments.

7. The report is pessimistic in nature, highlighting the downside of the transition away from fossil fuels.
The McKinsey report seem overly focused on the loss of revenues for countries that are heavily reliant upon the fossil fuel industry for their GDP. It’s true that a lot of governments (and investors) highly exposed to the fossil fuel industry will be big losers over the coming years. But they have a choice. Transitioning to renewables will provide a huge economic advantage to the countries that move the quickest. These will come in the form of a large net increase in long-term jobs, far less volatility in energy markets, fast and cheap energy access for rural areas that currently lack grid connectivity, less oil spills and contaminated water from fracking operations, less deaths from poor air quality, a safer and healthier climate with less risk of environmental disasters, and on and on. All thing considered, countries have a lot more to gain than to lose, and many are now waking up to the large net benefits a renewable energy transition will deliver.

Kingsmill Bond, now at Rocky Mountain Institute, says it well: “There is now a new logic to the energy transition — the pursuit of gain. The shift of energy from scarce to abundant; from concentrated to distributed; from decreasing to increasing returns; from extraction by the lucky to manufacturing by the diligent; and from generating rents for a few to bringing prosperity for the many”.

8. The NGFS model used by McKinsey is not actually net zero by 2050.
A final point to make is that the model used as the basis for the McKinsey report does not actually deliver net zero by 2050:

 

It shows an 82% drop in actual CO2 emissions to roughly 7 GtCO2 per year in 2050 with 5 GtCO2 in carbon dioxide removal. In Glasgow, the Science Based Targets Initiative (SBTi) released a long-awaited standard for net zero emissions on the heels of the IPCC’s Sixth Assessment Report, calling for a 90–95% reduction in actual CO2 emissions by 2050, with the balance of emissions “neutralized” through carbon dioxide removal. The above NGFS model is +2 GtCO2 in 2050. It sounds like a small amount, but if we are to have at least a 50% chance of limiting global temperature rise to 1.5°C, there is almost no leeway room. The other issue is how those negative emissions are achieved. The NGFS model achieves its carbon removal using the controversial technology called Bioenergy with Carbon Capture and Storage (BECCS). A lot has been published on the limits of this technology to scale. At best, BECCS delivers carbon neutral energy, not carbon-negative energy. It would also require a huge amount of logging to reach anything like 5 GtCO2 per year. And those trees are needed for other services like timber and pulp, not to mention their role in global carbon sequestration.

As it turns out, shifting more quickly to 100% renewable energy will be a cheaper and more efficient way to get to actual net zero emissions by 2050, accompanied by carbon removal from reforestation and ecosystem restoration. One Earth has supported the work of a team of engineers and scientists who have estimated that a rapid, optimized energy transition will cost in the ballpark of about $1.5T per year. Why don’t we all start focusing on transition models that honestly seek to solve the problem of the climate crisis, rather than the problem of preserving profits for fossil fuel companies in a world that no longer wants the products they have on offer?

Written by Karl Burkart, Managing Director One Earth, formerly DiCaprio Foundation Dir. Science & Technology.

One Earth is dedicated to scaling philanthropic resources to achieve the 1.5°C goal of the Paris Climate Agreement

Article Sources of the views made above and by Karl Burkart and One Earth in reply to McKinsey was on Medium in this link  https://medium.com/oneearth/no-mckinsey-it-will-not-cost-9-trillion-per-...

Paul Hobcraft's picture
Thank Paul for the Post!
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Matt Chester's picture
Matt Chester on Feb 7, 2022

Like other conventional models, this one vastly underestimates the growth of solar and wind deployment.

This seems to be common in energy modeling-- and at least looking at the years that have passed that were previously modeled ahead of time the solar growth is undersold-- what do you think causes that? Is it intentional caution from modelers who don't want to be going out on a limb by forecasting more than others in the industry are comfortable doing? Or is there something about the solar sector that's shown conventional knowledge/models aren't treating them with the right lens? 

Paul Hobcraft's picture
Paul Hobcraft on Feb 7, 2022

I do think modellers are by nature of the job they do, simply cautious. Like Scientists or Researchers. No one likes to be "called out" as got that really wrong and cost the company or institute significant money.

 

That said, I like the independent modellers, they might have personal areas or bias but do try to push the envelope a little more.

 

Modelling just can't cope with these experience curves where ramping technology, production, dealing in scale and many unknowns and solar, hydrogen are ones that get caught up in this. Those learning curve rates where technology rapidly changes in scale and application.  I don't think it is specific to solar, although it is a good example of where they got the impact wrong.

 

I liked the comment made in this article above "Why don’t we all start focusing on transition models that honestly seek to solve the problem of the climate crisis, rather than the problem of preserving profits for fossil fuel companies in a world that no longer wants the products they have on offer?

Mark Silverstone's picture
Mark Silverstone on Feb 7, 2022

I agree. This is relevant to the article currently appearing, coincidentally, after this one: Texas: the (potential) renewable energy superstate

The fossil fuel companies have the expertise, manpower and capital to make the transition to renewables accelerate. But, as long as they enjoy big profits from the current boom without the regulation required to enforce environmentally responsible practices, especially the lack of any tax/fee on ghg emissions, they will continue with business as usual.  

Jim Stack's picture
Jim Stack on Feb 7, 2022

Paul, I still think it won't cost but will save similar to this message in your article. QUOTE=As it turns out, shifting more quickly to 100% renewable energy will be a cheaper and more efficient way to get to actual net zero emissions by 2050

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