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Electricity costs could rise by a quarter in move to net zero

The cost of electricity could rise substantially as the world transitions over to zero-carbon forms of production, a study from McKinsey has found.

The global effort to reach net zero carbon by 2050, not just limited to the energy sector, is expected to cost around $9.2tr (£6.7tr) annually, equivalent to one-quarter of total tax revenue or half of global corporate profits, the report entitled 'The Net Zero Transition' has found.

This figure represents an annual increase of as much as $3.5tr from today’s levels as well as an additional $1tr of current annual spend that would need to be reallocated from high-emissions to low-emissions assets.

Governments are facing increasing pressure to announce more stringent policies to tackle climate change in order to provide a pathway for the world to stick below 2°C global warming.

Last year, researchers found that even though some of the world’s most polluting countries have made stronger climate change pledges in recent years, the level of expected warming is 2.4˚C by the end of the century, nearly a degree higher than the 1.5˚C of warming considered necessary to avoid the worst impacts of climate change.

The McKinsey report suggested that the initial expenditure needed to maintain the 1.5˚C target would need to be “front-loaded”, rising from 6.8 per cent of GDP today to as much as 8.8 per cent between 2026 and 2030 before falling. However, it also offered hope that technological innovation could reduce capital costs for net-zero technologies faster than expected.

With much focus being placed on reducing emissions from energy production, the global average cost of electricity is expected to spike in the near term before falling back below that peak.

“As the power sector builds renewables and transmission and distribution capacity, the fully loaded unit cost of electricity production, accounting for operating costs, capital costs, and depreciation of new and existing assets, in this scenario could rise about 25 per cent from 2020 until 2040 and still be about 20 per cent higher in 2050 on average globally,” the report states.

Costs could be even higher if issues such as grid intermittency are not rapidly addressed, although energy costs are expected to eventually fall below 2020 levels due to the lower operating cost of renewables.

Major climate action will also see large swings in the job market. The transition is estimated to create a gain of about 200 million jobs in new sectors and industries, although much of this will be offset by a loss of about 185 million direct and indirect jobs globally by 2050.

Sectors with high-emissions products or operations are particularly vulnerable, and they also generate about 20 per cent of global GDP. For example, the Centre for Aviation recently warned that climate commitments could force airlines out of business in just “three to five years”.

It is also expected that almost 3,000 coal plants will need to be shut down by the end of the decade for there to be any chance of keeping temperature rises to within 1.5°C.

“We find that the transition would be universal, significant, and front-loaded, with uneven effects on sectors, geographies, and communities, even as it creates growth opportunities,” the McKinsey report concluded.

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