Difficulties of the Net-Zero Transition for Countries

How to Start the Net-Zero Transition

Analysts at McKinsey Sustainability published a report this year on the net-zero transition for countries and how much it would cost to decarbonize. Their research suggests reinforces the idea that climate risk exposure and its effects will be distributed differently across countries, however, all countries will face some exposure to physical climate risk. Countries with a lower GDP per capita and with greater fossil fuel resources would need to invest more in the low-emission transition. Subsequently, these countries will also be facing rising physical risks, which could halt progress in economic development in the future. This is a serious consequence these countries must consider.

The report identifies six main archetypes of countries based on their transition exposure: fossil-fuel resource producers, emissions-intensive producers, agriculture-based economies, land-use-intensive countries, downstream-emissions manufacturers, and services-based economies. Fossil-fuel producers face rising physical risks and potential loss of government revenue from exposed sectors. Emissions-intensive producers will need to focus on decarbonizing their industrial processes and expanding renewable power capacity. Agriculture-based economies will need to adopt low-emission farming practices. Land-use-intensive countries will need to balance land-use needs and support the communities whose livelihoods depend on them. Downstream-emissions manufacturers will need to make further investments in sustainable research and development. Services-based economies will need to induce behavioral changes in their populations as they tend to have higher consumer emissions than others.

Future Concerns

Not only do countries have to worry about the costs involved in funding the transition, but they also have to look out for increasing physical risks coming their way. Countries like Nigeria, India, Bangladesh, and Pakistan are becoming significantly hotter and more humid, with India in particular predicted to see the rise of lethal heat waves in the near future. These physical risks pose a serious threat to the supply chains and operations of companies in these regions, as well as to the people living in these regions. 

There will also be the growing issue of equity, as developing countries argue that despite contributing less to global emissions than other countries, they are being asked to take the most responsibility in terms of the net-zero transition.

How Investors can help the Transition

Investors should be more concerned about where their investments lie. If a country poses a greater physical risk and there is not much being done to facilitate a net-zero transition, then companies operating in that country may pose a risk to an investors portfolio. This is not to say investors should entirely avoid investing in countries that may incur some physical climate risks in the future, especially if said country is investing in the transition to a net-zero economy and is allocating their funds accordingly, but rather to be wary of the risks involved. Additionally, not only can these risk metrics help to push forward the transition to net-zero, but it could be a useful metric when screening the long-term opportunity of an investment.

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