What is net zero?

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A net-zero gain of greenhouse gases (GHG) in the atmosphere would be achieved when the level of GHG emissions released into the atmosphere is equal to the level of emissions that are removed. This is also referred to as “carbon neutrality.”

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Bernd Heid is a senior partner in McKinsey’s New York office, where Humayun Tai is also a senior partner; Diego Hernandez Diaz is a partner in the Geneva office; Jesse Noffsinger is a partner in the Seattle office; Mark Patel is a senior partner in the Bay Area office; Martin Linder is a senior partner in the Munich office; Sean Kane is a partner in the Southern California office; Stefan Helmcke is a senior partner in the Vienna office; Thomas Hundertmark is a senior partner in the Houston office; and Tomas Nauclér is a senior partner in the Stockholm office.

One of the most common GHGs, CO₂, is found in the Earth’s atmosphere and, along with nitrogen, oxygen, methane, and other gases, is part of the planet’s air. CO₂ helps trap heat on Earth, like a greenhouse traps heat to grow tomatoes in cold climates. But too much of it can cause problems, such as heat waves and ocean acidification. It occurs both naturally and as a byproduct of human activities, such as burning fossil fuels.

Today, the world is undertaking the net-zero transition, an ambitious effort to reach net-zero emissions of CO₂ and reduce emissions of other GHGs. The goal of the transition is outlined in the Paris Agreement adopted at the United Nations in 2015: to limit global warming above preindustrial levels to well below 2.0°C and ideally to 1.5°C.

Accomplishing this would avoid the most catastrophic effects of a permanently warmer planet. At present, the world is not on track to achieve this goal. Read on to learn more about what net zero means and what’s required to realize it.

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What is decarbonization?

Decarbonization is the mitigation, cessation, or reduction of carbon in the atmosphere. It’s achieved by switching to energy sources or materials that emit less carbon (and often, by moving away from high-carbon-emitting fossil fuels) and by counteracting the carbon that’s emitted.

Limiting the rise in global temperature to 1.5°C above preindustrial levels by curbing the buildup of atmospheric GHGs will be necessary to prevent catastrophic consequences. Many companies, countries, and institutions have pledged to decarbonize, or to make the net-zero transition, in coming years.

Seven energy and land-use systems (power, industry, mobility, buildings, agriculture, forestry, and waste) are heavy GHG emitters, and all of them will need to undergo transformation. They will also need to transition concurrently, given their interdependencies. But in other cases, individuals and organizations can set their own net-zero aspirations by choosing low-carbon alternatives to fossil fuels (such as solar and wind power) and removing excess carbon from the atmosphere. Circularity, or the reduction of waste by reusing existing materials, can also be a significant lever of decarbonization.

It’s not fully feasible to reduce carbon emissions to zero. The wide implementation of carbon removal and long-term storage will thus be necessary to halt the progression of global warming.

What would a net-zero transition involve?

McKinsey’s research simulates one hypothetical, orderly path toward 1.5°C, based on the Net Zero 2050 scenario from the Network for Greening the Financial System (NGFS). This scenario includes an estimate of the economic costs and societal adjustments required to achieve net zero, and McKinsey analysis suggests six characteristics that would define such a global transition to net zero:

Universal. All energy and land-use systems would need to be transformed. This would affect every country and every sector of the economy either directly or indirectly.
Significant. The annual spending on physical assets would need to rise from $3.5 trillion today to $9.2 trillion by 2050. Total spending through 2050 could reach $275 trillion.
Front-loaded. The spending on physical assets could be more significant in the early stages of the shift, likely rising to almost 9 percent of global GDP in 2026–30 (compared with just under 7 percent in 2022) before falling. Likewise, electricity costs could increase over 2020 levels for a time before they stabilized or potentially decreased.
Uneven. Sectors that represent about 20 percent of the global economy would see the most economic exposure to the transition. Developing countries and fossil-fuel-rich regions would also be especially susceptible to changes in output, capital stock, and employment because highly exposed sectors make up relatively large parts of their economies.
Exposed to risks. A transition in which high-emission assets are retired before low-emission assets come to market could lead to volatile energy supply and prices if it weren’t managed carefully.
Rich in opportunity. The net-zero transition would create new efficiencies and new markets for low-emission products.

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Where are we in the energy transition?

The energy transition is in its early stages. The production and consumption of energy accounts for more than 85 percent of global CO₂ emissions. So the adoption of low-emission technologies (including solar and wind power and electric vehicles) and of a broader low-emission energy system is critical to achieving net zero by 2050.

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To date, about 10 percent of the required deployment of low-emission technologies has been achieved. Advancing the transition will require faster deployment and adoption of several interrelated low-emission technologies (including renewable-energy sources, electrification technologies, and heat pumps), as well as less mature technologies (such as carbon capture, utilization, and storage [CCUS]; green and blue hydrogen; and sustainable fuels).

Each of the seven domains of the energy system will need to be transformed to achieve net zero by 2050. Here’s an overview of the requirements for each:

Power. Addressing physical challenges to emission abatement in power is fundamental to the entire energy transition. That’s because abating emissions in the sectors that consume the most energy—mobility, industry, and buildings—will require a sweeping shift toward electrification. Managing the growth of wind and solar power will be crucial here.
Mobility. The energy transition requires the decarbonization of transportation, including cars, trucks, aviation, and shipping. There remain fundamental performance gaps between electric vehicles and internal combustion engines in longer-range mobility, including trucking, aviation, and shipping.
Industry. Fossil fuels are critical to the four material pillars of modern civilization: steel, cement, plastic, and ammonia. Decarbonization of these four industries will be a major challenge. Other industries will be marginally less challenging but will still require extensive retrofitting of existing industrial sites.
Buildings. Heating accounts for the largest share of emissions from buildings. Heat pumps are a solution here: according to the McKinsey 2023 Achieved Commitments scenario, they could provide most of the heat required by buildings by 2050. The challenges here include ensuring that heat pumps perform well enough in the coldest geographies and managing the impact of peak demand on heat pump performance.
Raw materials. Lithium, cobalt, and select rare earth minerals are critical in scaling the low-emission technologies that are needed to decarbonize multiple sectors. The challenge here is ensuring that these minerals can be unearthed quickly enough to meet demand.
Hydrogen and other energy carriers. Hydrogen and biofuels will be needed to decarbonize many domains. Scaling to the necessary extent will require significant land use (for biofuels) and new infrastructure (in the case of hydrogen).
Carbon and energy reduction. Replacing high-emission technologies with low-emission technologies is important. But reducing overall energy consumption—along with capturing the reduced amount of CO₂ that’s still emitted—will also be vital to a successful transition. CCUS will require further technological advancements and the scaling up of technologies that may not even exist today.

What is climate technology?

Climate technology is any technology that works to reduce emissions or address the effects of global warming. It involves many subcategories of use, all aimed at achieving net zero and transitioning operations to a greener state. Some of that abatement technology is still in the R&D stage, but McKinsey estimates that 60 percent of the emission abatement that’s necessary to reach net zero in the European Union will come from widely deploying proven technologies.

Investment in climate technologies is growing quickly. Government programs in Europe and the United States are unleashing a flood of capital to meet the challenge of achieving net zero by 2050. The US Inflation Reduction Act, passed in 2022, allocates more than $370 billion in funding to mitigate climate change. The EU Green Deal could dedicate more than €1 trillion in public and private funds. Taken together, these measures could open more opportunities for investors in a market that McKinsey estimates could reach up to $12 trillion in annual investment by 2030.

McKinsey analysis suggests that 12 categories of climate technologies could potentially reduce as much as 90 percent of total manmade GHG emissions, if they are scaled together:

Batteries. The lifetime emissions of electric vehicles relying on lithium-ion batteries are as much as 85 percent lower than those of vehicles with internal combustion engines.
CCUS. CCUS technologies capture CO₂ emitted by industrial processes at point sources, then transport, convert, and store it over the long term.
Circular technologies. These technologies cover a range of approaches that aim to reduce emissions from materials over their life spans while simultaneously maximizing their lifetime value.
Energy storage. This will be needed as renewable energies scale up. The technologies include lithium-ion battery systems for short-term energy storage and longer-duration energy storage systems.
Engineered carbon removals. These removals cover a range of technology-based methods of removing atmospheric CO₂.
Heat pumps. These are up to 4.5 times more efficient than gas furnaces and boilers.
Hydrogen. Hydrogen offers deep decarbonization for hard-to-abate sectors, such as steel, cement, and chemicals, which currently account for about 20 percent of global emissions.
Nuclear fission technologies. These technologies are commercially mature: 440 reactors currently provide about 10 percent of global electricity generation. The challenges to future scaling include high construction costs and unresolved questions of long-term storage.
Renewables. Renewable-power capacity almost doubled between 2015 and 2020. Most energy production technologies that use renewable resources are already technologically mature. Solar photovoltaics and onshore and offshore wind turbines have demonstrated the greatest growth and the most successful efforts to scale but are still not growing as fast as needed to hit 2030 targets.
Sustainable fuels. These, as well as other alternatives to fossil fuels, are needed to decarbonize hard-to-abate transportation sectors that account for more than 15 percent of today’s total global emissions.
Technologies supporting NCS. These solutions remove carbon from the atmosphere and can also prevent emissions from being produced. They include terrestrial ecosystems, as well as carbon removals and reductions on agricultural lands.
Technologies to produce alternative proteins for human consumption. Around 15 percent of current global emissions come from the production of animal-based proteins, such as meat, dairy, eggs, and aquaculture. Alternative proteins include plant-based proteins, microorganism-based fermented proteins, and cell-cultivated proteins from animal cells that are made using bioreactors and centrifuges.

Climate technology helps existing processes become less carbon intensive and can actively prevent atmospheric emissions or remove carbon from the atmosphere. There have been some important strides in climate technology in the past decade—for example, the cost of some renewable-energy projects has dropped by almost 90 percent. With capital increasing and some governments already providing fiscal support for low-carbon innovation, there’s a lot of potential in climate technology, even if the net-zero challenge is formidable.

How will industries achieve net zero through decarbonization?

Each industry and company is subject to different factors in decarbonizing its operations. So companies that are looking to decarbonize will want to opt for the approaches that best suit their needs and context. Here’s a look at the world’s highest-emitting sectors; together, they account for about 85 percent of global GHG emissions:

Fossil fuels. The combustion of fossil fuels produces 83 percent of global CO₂ emissions. In the pursuit of decarbonization, fossil fuel players are focusing on energy efficiency, electrification, the management of fugitive methane emissions (methane losses from leaks), and more. More specifically, oil and gas companies are making the low-carbon transition by working several levers, including transforming into diversified energy players.
Power. Decarbonizing the power sector will require phasing out power generation from fossil fuels and adding capacity for low-emission power sources.
Mobility. Road transportation accounts for three-quarters of all mobility emissions. Efforts to decarbonize here could involve replacing vehicles that have internal combustion engines with vehicles that have battery electric power or hydrogen fuel cells.
Industry. Steel and cement are core components of this category, and together they account for about 14 percent of global CO₂ emissions. Decarbonization efforts might involve installing equipment for carbon capture and storage and switching to processes or fuels with lower emissions.

How can machine learning and AI help organizations decarbonize their buildings?

The real estate industry accounts for about 40 percent of global combustion-related emissions, a quarter of which come from building operations. This means that most of the emissions come from running buildings, as opposed to building them.

Organizations in the real estate sector are increasingly turning their attention to decarbonization, as the pressure on them by investors and governmental bodies to address their carbon footprints increases. But done right, decarbonization can be a driver of value. In the case of Ventas, a real estate investment trust and S&P 500 company, achieving operational net zero (Scope 1 and 2 emissions) will result in lower energy and maintenance costs and more resilient assets, among other benefits. Ventas recently announced its intention to achieve operational net zero by 2040.

In the past, real estate companies have approached decarbonization in a couple of stages. First, they send an engineer to each building to assess conditions at the property. Second, they implement the recommended efficiency measures. For organizations with many buildings in their portfolios, this traditional method would take years and significant cost to accomplish.

Ventas wanted to try a novel, tech-enabled approach. According to Kelly Meissner, its vice president for corporate environmental, social, and governance issues and sustainability, the organization supplied data to an AI-powered tool that could “create detailed and unique plans for each of our 800 or so buildings. . . . The tool then applied a machine learning algorithm to . . . [produce] the equivalent of a unique energy audit for each building. Then it created a detailed description of how each building could achieve our goals, including each step we had to take for that building, the cost of that step, and the energy it would save.”

According to McKinsey partner Brodie Boland, this approach has major potential for saving both time and costs: “These machine learning tools can . . . basically do the equivalent of what before had to be done through a manual energy audit.”

Buildings. Decarbonizing buildings and the real-estate sector will involve improving energy efficiency (for instance, through more efficient insulation) and replacing heating and cooking equipment that are powered by fossil fuels with low-emission systems (see sidebar, “How can machine learning and AI help organizations decarbonize their buildings?”).
Agriculture and food. Using GHG-efficient farming practices can help reduce agriculture emissions, as can changes at a consumer level—for example, if people eat less meat.
Forestry and land use. CO₂ emissions in this sector often come from land clearing and deforestation. What can curtail these emissions? Efforts could include preventing deforestation and investing in natural climate solutions (NCS), which can be a net sink for emissions.
New energy sectors (hydrogen and biofuels). There will be a lot of opportunities to expand low-emission energy technologies. And even if expanding capacity and infrastructure for low-carbon fuels requires additional capital spending of $230 billion per year through 2050, the hydrogen and biofuels sectors could create around two million jobs by then.

Learn more about McKinsey’s Agriculture, Automotive & Assembly, Electric Power & Natural Gas, Oil & Gas, and Real Estate Practices.

How can business leaders create value in the net-zero transition?

As the momentum toward net zero accelerates, investors, customers, and regulators have raised their expectations for companies. Nearly 90 percent of emissions are now targeted for reduction under net-zero commitments, and financial institutions responsible for more than $130 trillion of capital have pledged that they will manage these assets along a 1.5°C commitment pathway.

Put simply, companies can’t thrive in a world with cascading crises and unmanageable climate risk. Leading companies can set an example by demonstrating what’s possible and generating further momentum.

Some companies are already taking advantage of the net-zero opportunity at hand. After analyzing their approaches, four tactics stand out:

transforming business portfolios, giving special attention to industry segments with serious growth potential
building green businesses that enable the penetration of new markets
differentiating themselves from competitors with green products and new value propositions in relevant segments of existing markets—all of which can help gain market share and price premiums
decarbonizing their operations and existing supply chains

For business leaders looking to go on the offense, McKinsey has identified 11 high-potential value pools that could be worth up to more than $12 trillion of yearly revenues by 2030 (for more, read “Playing offense to create value in the net-zero transition”).

Do companies need to decarbonize their supply chains?

Yes, companies need to decarbonize their supply chains. Companies increasingly recognize the need to reduce emissions that occur in their upstream or downstream value chains, which are also referred to as “Scope 3 emissions.” For many companies, as much as 90 percent of their climate impact comes from Scope 3 emissions (rather than from Scope 1 and Scope 2 emissions, which are produced by companies either directly or indirectly through their purchase of energy). But targeting Scope 3 emissions will be challenging. Here are five issues that companies need to address to make supply chain decarbonization happen:

a lack of carbon-accounting foundations
overreliance on secondary data for Scope 3 emissions
uncertainty over the cost and technical feasibility of carbon reduction levers
the need for industry-wide collaboration to address many sources of emissions
the need for sustained engagement from both internal and external stakeholders in long-term-change programs

McKinsey has pledged to reach net-zero climate impact as a firm by 2030. For more in-depth exploration of decarbonization and net zero, see McKinsey Sustainability’s insights. Learn how McKinsey Sustainability helps clients, including work with decarbonization transformations and net-zero and environmental, social, and governance strategies—and check out sustainability-related job opportunities if you’re interested in working at McKinsey.

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