SIMPLE ECONOMICS:

[L]et's do what any good consultant would call a deep dive into the scenarios behind the McKinsey report.

McKinsey's estimates are based on climate scenarios developed by the Network for Greening the Financial System, a consortium of over 60 central banks and monetary authorities. The net-zero-by-2050 scenario leading to the additional $3.5 trillion in annual costs cannot stand in isolation. Instead, it must be compared to current policies already on the books. Those policies, too, lead to additional investments down the line, mostly (though not exclusively) on low-carbon assets.

All told, the difference between current policies and net zero by 2050 is only $25 trillion in total spending over the next 30 years, or less than an extra $1 trillion per year on average.

The all-important difference: The net-zero path ramps up spending this decade, reaching its annual peak of around $10 trillion in the 2030s, before falling again. The current policy scenario assumes a much slower ramp-up, reaching its peak by 2050. Essentially, the net-zero path front-loads investments. The reason why is what Saul Griffith, author of Electrify, describes as the shift from fuels to capital: upfront investments to save on fuel costs later. 

These fuel costs savings do not yet even include the minor detail of saving the planet by reducing climate risks. Another just-published report, by Aon Plc, found around $330 billion in weather and climate-related economic losses in 2021 alone, the third-costliest year on record after adjusting for inflation. The European Central Bank is looking to a climate stress test that factors in single-year losses of up to 45% in homes exposed to flooding, wildfires and other climate risks. Overall global climate damages easily exceed the cost of action, justifying limiting temperatures to 1.5°C through pure economic reasoning. 

Comparing costs now with benefits later is precisely the virtue and the political stumbling block of the low-carbon, high-efficiency transition. 

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