SERIES – The Net-Zero Transition in the Wake of the War in Ukraine: A Detour, a Derailment, or a Different Path? PART 6

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 5 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 5 – Earth5R.

A Short-term Detour or a Long-term Deviation?

Considering these new forces and differing effects, we believe that the war would overall have a negative impact on the key requirements in the short term and cause a detour on the path of a more orderly transition. The long-term impact, however, could still prove a positive turning point if leaders act with farsightedness and courage and if they are supported by a growing popular mandate in doing so.

This future hinges on two things. The first is that the scope of the war in Ukraine remains contained and does not widen. The net-zero transition would very likely be derailed by an expanding conflict, and a derailed transition could in turn multiply, by orders of magnitude, its catastrophic impact. The second is that an acceleration of the transition postconflict would only be possible given sufficient commitment from the public-, private-, and social-sector leaders to recognize that investments in renewables, energy efficiency, and decarbonization are not causes of energy price increases and insecurity but solutions to those problems. Forward-looking leadership will require leveraging the awareness of the moment to seek a broad public mandate and to leverage that mandate to make substantial, thoughtful, near-term investments in these solutions and their supporting supply chains.

For example, while commodity shortages and price increases may exhibit a negative impact on the transition in the near term, supply chain chokepoints, like lithium production in battery components, have long been identified as limiting factors to transition speed. The present supply shock highlights a clear need and opportunity to make investments in expanding and securing the supply of key minerals, which will not only have benefits for future transition speed but also for lowering the costs of other common consumer goods, particularly electronics, that require the same inputs.

While near-term energy price rises could result in an increase in fossil-fuel production and a revival of recently decommissioned generation assets, in the long term, energy-security concerns could drive investment into energy efficiency and renewable energy as a key tool for energy independence and price management. For example, the latest proposed RePowerEU plan put forth by the EU Commission on May 18 includes plans to almost double European biomethane production and triple the capacity of green hydrogen via production increases and imports by 2030, a massive deployment of 510 gigawatts of installed wind and 600 gigawatts of installed solar photovoltaic power by 2030, the installation of about 30 million heat pumps, the enhancement of domestic manufacturing capability, and a substantial simplification of approval and permitting processes for renewable generation and infrastructure development projects, all over the next eight years. Such policies could be further accelerated by the fact that despite input price rises, construction of net-new solar and wind capacity remains faster and more economical than coal or natural gas.

Energy-efficiency measures have long been economically viable, but have often failed to attract sufficient public mandate for deployment. Survey data now suggest that 80 percent of European citizens support government subsidies for improving home energy efficiency. Similar levels of support are also seen in the United States, where 89 percent of respondents to a March 2022 Gallup poll demonstrated support for tax credits for home renewable-energy systems, 71 percent set fuel-efficiency standards for cars, trucks, and buses, and 61 percent tax incentives for the purchase of electric vehicles, among other policies. Some of these tax incentive splits show majority bipartisan support.

In addition to driving the uptake of renewable energy and energy efficiency, current utility prices could make the business case for hard-to-abate industry decarbonization more attractive. Putting forward high-impact, ready-to-deploy cases could secure up to 40 percent energy-cost reductions and deliver significant additional earnings (Exhibit 2).

Exhibit 2

Finally, the current situation further underscores the importance and urgency of adaptation. Even a short-term detour is still a detour and a further accumulation of physical risk. Actions and investments in adaptation were already inadequate before the war and are even more so at this juncture.

To read the entire series, please stay tuned to https://earth5r.org/.

Source: McKinsey

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