Half of global corporate profits needed to tackle climate change: McKinsey

The extra amount the world must spend every year to create a net-zero emissions economy is equivalent to half of the profits currently generated by companies worldwide, according to McKinsey, a consulting group.

It stated that its calculations were much higher than most other estimates by economists but stressed that investments could be lucrative and the long-term costs of not doing enough to tackle climate change would be greater.

The transition would be universal, significant, and front-loaded, with uneven effects on sectors, geographies, and communities, even as it creates growth opportunities, it concluded.

The world could reach net-zero carbon emissions by 2050, if the world's temperature rises at 1.5 degrees Celsius above pre-industrial levels - avoiding the worst fall-out from climate change.

The report stated that this would require spending on physical assets for energy and land-use systems of around US $275 trillion, or US $9.2 trillion per year on average - an annual increase of US $3.5 trillion on current spending.

It calculated that the increase is equivalent to half of global corporate profits, one-quarter of total tax revenue and 7 per cent of household spending in 2020.

The amount of cumulative spending would be equivalent to 7.5 per cent of world output from 2021 to 2050, much higher than the 2 to 3 per cent of global output that climate economists polled by Reuters in 2021, which was predicted to be needed each year.

McKinsey said the difference was due to the fact that it included spending by households, businesses, agriculture and forestry, as well as some continued spending on high-emissions assets like fossil fuel-based vehicles.

It added that many investments have favourable return profiles and should not be seen as costs despite the fact that these spending requirements are large and financing has yet to be established.

Gernot Wagner, a climate economist at New York University who was not involved in the report, welcomed the report's attempt to come up with a comprehensive view of the investments needed.

Climate policy means massive investment, and a massive rejigging of market forces from the current high-carbon and low-efficiency path onto a low-carbon and high-efficiency path, said Wagner.

We spent trillions of dollars because of COVID relief. Is it possible to do this? The McKinsey report noted large uncertainties relating to how such a transition would take place and that some populations and sectors would be more exposed to disruption, notably poorer countries and those relying on fossil fuels.

It said that the social and economic costs of a delayed or abrupt transition would raise the risk of asset-stranding, worker dislocations, and a backlash that delays the transition.