SERIES – The Net-Zero Transition in the Wake of the War in Ukraine: A Detour, a Derailment, or a Different Path? PART 3

In this series, we attempt to offer a more granular view of what might be in store. We examine the possible effects of the war and its ramifications on the key requirements for a more orderly net-zero transition. We explore the war’s potential effect on key sectors and how shifts in energy and finance markets could play out in the aggregate, both globally and within major regional blocs. Finally, we suggest steps that stakeholders could take as they navigate this turbulent period while continuing to drive toward as orderly a transition as possible. 

To get a clearer idea visit PART 2 of the series, SERIES – The Net-Zero Transition in the Wake of the War in Ukraine: A Detour, a Derailment, or a Different Path? PART 2 – Earth5R.

The War’s Impact on the Key Requirements for the Net-Zero Transition

In earlier research, we described the nine key requirements that we believe must be met to bring about the net-zero transition. These fall into three broad categories: necessary physical building blocks; economic and societal adjustments; and governance, institutions, and commitments, including public support for progress toward cutting greenhouse gases. Understanding the war’s potential impact on each of these could help leaders better assess the prospects for the net-zero transition.

In the near term, the availability of necessary physical building blocks could be reduced in the aggregate.

The transition requires three main physical building blocks: technology innovation, the creation of the supply chains that enable the deployment of new technologies, and the availability of the key natural resources needed. These three factors are subject to developments such as the interruption of production centers in Ukraine, economic sanctions against Russia, and reduced economic cooperation between nations. In the near term, technological innovation would likely speed up as stakeholders affected by rising energy or commodity inputs look for more economical substitutes or further see the importance of compensating measures such as carbon capture and sequestration. Indeed, since the war began a substantial influx of capital into renewable energy funds has taken place, reversing a multi-month downward trend. On the other hand, while in the short-term desire to expand net-zero infrastructure may increase, its execution may be challenged by the logistical stresses of market reorganization (due to sanctions) and rising energy prices, which could stress the often complex, multinational (and therefore transport-intensive) supply chains for net-zero technology.

In our view, however, the dominant near-term impact on the physical building blocks would be negative and come from reduced access to key natural resources. For example, Russia’s strong position in natural resources, including key minerals such as copper, nickel, and silicon, has already delivered a significant supply-side shock (Exhibit 1). These materials are essential inputs to four of the most important net-zero technologies: onshore and offshore wind turbines, solar panels, electric vehicles, and battery storage. Shortages driven by the war in Ukraine would overlay an already stressed renewables supply chain, which drove long-term contracts for wind and solar generation up 19 and 12 percent, respectively, over the past year.

Exhibit 1

That said, the impact of shortages on the attractiveness of net-zero technologies is not straightforward. For example, renewable-generation assets require one-time capital expenditures but minimal operating costs. As a result, input cost increases may impact the power sector less than sustained increases in fossil-fuel prices. Resource supply shocks may be felt less in Europe (which is more susceptible to sustained fossil-fuel price increases) than in the United States, where energy prices would provide less of a counterbalance to input costs. Furthermore, some large net-zero technology-producing countries are not participating in sanctions against Russia and could retain access to supplies, potentially leading to uncertainty in cost impacts for their trading partners. Likewise, the prospect of the ongoing shortages is already spurring a wave of prospecting for alternative sources, which would likely have a positive impact in the medium term.

Finally, it is important to note the near-term impact on a critical but often overlooked natural resource for the net-zero transition: land. In addition to their role in exporting a wide range of minerals, Ukraine and Russia are important producers of key agricultural commodities. Shortages resulting from sanctions and the destruction of Ukrainian production centers are likely to reduce the availability of key agricultural commodities including wheat and fertilizer. Additionally, climate forecasts for 2022 indicate it could be a below-average period for breadbaskets globally, resulting in an additional reduction in supply. Supply shortages and price increases in agricultural markets could lead to the conversion of additional land to agricultural production across the globe, which would increase deforestation rates and agricultural emissions.

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Source: McKinsey

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