We can limit climate change and reduce carbon emissions to zero if leaders in key industries act now. Here’s an action plan to reach those ambitious targets.
In this episode of the McKinsey Podcast, Diane Brady speaks with Kimberly Henderson and Christer Tryggestad about what can be done to truly decarbonize global business at scale. An edited transcript of their conversation follows.
Diane Brady: Welcome to the McKinsey Podcast. I’m Diane Brady. Along with ushering in a global pandemic, 2020 was another record year for global temperatures. But in Washington, DC, and beyond, there is a renewed sense of urgency to do something about it. I’m joined today by two colleagues who have created a detailed road map for what actions need to happen to limit warming to 1.5°C.
Kimberly Henderson is a partner in McKinsey’s Sustainability Practice in Washington, DC, and Christer Tryggestad, a senior partner in Oslo, is a leader of McKinsey’s Oil & Gas and Electric Power & Natural Gas practices. Kimberly and Christer, welcome.
Christer Tryggestad: Thank you.
Kimberly Henderson: Thanks, Diane.
Diane Brady: Kimberly, let’s start by explaining why 1.5°C is so critical.
Kimberly Henderson: Sure thing. So Diane, if you think about how climate change will progress, there are obviously a number of events that will become more severe and more frequent. Those include wildfires, hurricanes, severe storms, drought, flooding, and high temperatures.
Those events will progress over time, and we would expect to see them becoming more and more severe. And there’s one aspect of limiting climate change that is purely about limiting the severity and the frequency of these extreme events. However, there are also fundamental changes in the Earth’s system that we’re seeing.
These are called climate feedbacks. Essentially what’s happening is that climate change is triggering certain changes on planet Earth that then will lead to more climate change. It becomes a vicious cycle. And these feedbacks have increasingly high risk of happening the higher the temperature level is.
A 1.5°C change is considered likely to stabilize the climate and limit these feedbacks. But if we see temperature levels much beyond that, it’s likely we would trigger many of these feedbacks. Should I bring to light a little bit for you what kinds of things could happen?
Diane Brady: Sure. To some extent, people aren’t clear as to whether we’ve reached a point of no return or what 1.5°C will look like. Is it more of the same?
Kimberly Henderson: So there will be some climate change at this point, no matter what we do. We have seen 1.1°C of global warming already. We’re already seeing the implications of that. So at 1.5°C, we could still expect to see more climate change. But it’s a matter of degree.
It’s a question of risk level. And again, I think it’s important to understand these feedbacks. Because there are things like losing our forests. If we lose our forests, which would happen at higher-climate-change levels, that will cause more global warming. It will be self-reinforcing.
And similarly, losing ice cover warms the Earth. And so the global warming that is leading to the ice loss could then drive further global warming. And that’s what we really want to avoid. We want to be able to stabilize the climate. And at a certain level, we would lose the ability to do that. But now we still have the capacity to stabilize the climate. And 1.5°C gives us the best chance to do that.
Diane Brady: Christer, I’m used to talking about these issues through the prism of sustainability and renewable energy. You lead the Oil & Gas Practice. Can you talk a little bit about how the priorities are playing out there?
Christer Tryggestad: Yes, I’m very happy to do that, Diane. So the sustainability trend actually hit both the oil and gas and the power industries some time ago. If you look at the drivers of climate change, energy is a very important part of that; 75 percent of emissions are related to energy.
For the electric-power industry, we saw the change starting quite a few years ago with incumbent power companies shifting their portfolios away from the more traditional coal and gas burning toward renewables, mainly solar and wind power. And we also saw a series of new entrants moving into the solar- and wind-development space. You could almost say that what we’re now seeing is the next wave of that, which is more focused on storage and hydrogen—clean hydrogen, often green hydrogen—as the new growth avenues for power companies that want to make a business and create value based on the sustainability trend.
For the oil and gas industry, the trend is a little bit newer. But it’s happening, especially with many European oil and gas companies now making significant shifts in their portfolios and creating renewable-power generation with quite some force.
Diane Brady: What’s motivating that? Is it public pressure?
Christer Tryggestad: I think it’s a combination of various things. Public pressure and reputation certainly could be a driver. But I think many of these companies would not do anything unless they also saw a clear business rationale for doing it. So they clearly see good value-creation opportunities related to renewable energy.
Diane Brady: Kimberly, talk about the study that you both worked on. What sectors did you look at, and what levers really are critical?
Kimberly Henderson: We looked at every sector that generates greenhouse-gas emissions directly. So we looked at the oil and gas industry, cement, steel, mining. We looked at agriculture. We looked at power, of course, all types of transport. We covered the full suite of industries that are significant greenhouse-gas emitters.
We worked with our experts in each of these sectors; we work with each of these sectors in our client work to determine what is the pathway for each sector that would be consistent with the 1.5-degree pathway and what needs to happen technically to get there.
So what measures can each industry, each company, take to reduce its emissions? When we stepped back and looked across all industries, we found that there were ten things that need to happen that could lead us to a zero-carbon economy.
There’s one category that’s around demand: how we power and fuel our lives. That is what people often think of and much of what Christer spoke about. How we power and fuel our lives includes electrifications—electrifying our transport systems and industry and buildings.
It includes the renewables adoption where we already see renewables at scale. But we need them at a much greater scale for a 1.5-degree pathway. It includes hydrogen that’s produced in a low-carbon way and bioenergy. That’s all the things that need to happen in powering and fueling our lives differently.
There’s an additional category in managing carbon. So we need certain industries to capture carbon at the point where it’s emitted, and then either store it underground or use it in a product. We also need to start managing the carbon balance in the atmosphere. That means taking CO2 out of the atmosphere. The easiest way to do that is reforestation, since plants absorb carbon. If we reforest areas of the Earth, that will help reduce the CO2.
Diane Brady: Christer, from a fuel and gas perspective, would you call this aspirational or doable?
Christer Tryggestad: Both. We’ve shown by a bottom-up, segment-by-segment analysis that it is actually feasible to get there. At the same time, it’s extremely challenging.
Diane Brady: When you look across your sector, Christer, where is the energy being placed?
Christer Tryggestad: There are several things. First, many of the oil and gas companies are addressing their own emissions from their core operations. The other thing is that we see a change of portfolio. So companies are moving away from the fuels that have a significant impact on climate change—heavy oils, for example—toward cleaner fuels or cleaner types of energy, like renewable power.
Kimberly Henderson: Diane, I want to come back to the point made previously about policy. I think it’s important to understand that private-sector actions will largely be dictated by policy or at least enabled by policy. So policy and regulation are critical to achieving a pathway that’s anything like this.
Without policy, a lot of the decisions that need to be made aren’t economical. For companies to reduce their emissions, for instance, there’s a better business case if there’s some sort of a consequence from having those emissions, which in many parts of the world right now there is not.
Or if you want to build a new business, for that business to make money, there needs to be a policy or a regulatory framework that allows for that. In many of these technology areas, such as carbon capture, that is a pure cost. So unless there is some sort of regulation or subsidy or incentive or tax, carbon capture will not make sense as a new business model. This is a critical enabler. I want to make clear that it’s inseparable from the private-sector actions.