New technologies represent a critical part of the world’s decarbonization tool kit—and the world does not yet have all the technologies that it would need to solve the net-zero equation by balancing sources and sinks of greenhouse-gas (GHG) emissions. The good news: McKinsey research on Europe’s net-zero pathway suggests that climate technologies that are already mature could, if deployed widely, deliver about 60 percent of the emissions abatement that will be needed to stabilize the climate by 2050. The challenge is that further abatement must come from climate technologies that aren’t quite ready, including 25 to 30 percent from technologies that are demonstrated but not yet mature and another 10 to 15 percent from those still in R&D.
This need for innovation makes the pace of decarbonization difficult to predict. When, for example, will clean hydrogen cost $1 per kilogram: in 2025 or 2050? The answer will affect the speed at which industries from aviation to steel can decarbonize. Similarly, unless manufacturers of utility-scale batteries can make them at low cost, power producers will have to keep running fossil fleets to cope with the intermittency of renewables. Uncertainty about the availability of financing for innovation limits capital formation and slows scale-up. Integrating most climate technologies into existing infrastructure, hardware, software, and operational systems will be complicated, too.
Yet there are reasons to be optimistic. Recent history suggests that researchers and businesses can deliver the necessary advances and cost reductions (see sidebar, “Charting cost reductions for climate technologies”). Over the past decade, the cost of some renewable-energy projects came down by almost 90 percent, as did the costs of electric-vehicle (EV) batteries, LED lighting, and other energy-efficient hardware. Capital is increasingly plentiful, evidenced by the revaluation of cleantech stocks that began in June 2020, and by the growth in investments earmarked for sustainability and environmental, social, and corporate governance (ESG) objectives. Governments are lending strong fiscal support to low-carbon innovation. Pledges from big companies not only to cut emissions but also to decarbonize operations and product lines—to buy only renewable fuel or make only EVs—give confidence to entrepreneurs and their backers. Talk of regulatory mandates lends weight to these demand signals.
And, again, the need for climate technology is vast—which creates large potential markets and investment opportunities. Our estimates suggest that next-generation technologies could attract $1.5 trillion to $2 trillion of capital investment per year by 2025.
To enter these markets and navigate them successfully, established companies, …….