Picking up speed on the road to carbon-neutrality

The drive to achieve a carbon-neutral future is accelerating. Through the 2015 Paris Climate Agreement, nations committed to curbing climate change by limiting global temperature increases to no more than 2°C above pre-industrial levels. To achieve this result, collective global emissions must reach net-zero by 2050, if not sooner.

The past five years have seen a proliferation of net-zero and other climate-related commitments by governments, businesses and institutions across the globe. While the rapid increase is striking, the commitments and related road maps are not uniform. Historically, EU-based corporations have been more proactive in adopting climate-related targets, largely driven by stringent regulations and a strong emphasis on sustainability within the European Union. However, US corporations are catching up, driven by increasing pressure from investors, consumers and government incentives. Businesses in sectors including, technology, finance, power generation and fossil fuels, are significantly ahead of those in biotechnology, healthcare and retail sectors. Growing global emphasis and healthy skepticism are driving companies to ensure the integrity of net-zero commitments and to develop plans to achieve them by 2050.

Reaching net-zero will require one of the largest investments in human history, as well as fundamental changes to the global economy, business operations and consumer preferences. The costs and opportunities of such a transformation are staggering. The UN Special Envoy for Climate Action, Mark Carney, estimates that at least US$1 trillion a year will be needed for the clean energy transition alone and that as much as US$3 trillion a year may be needed by 2030.

Far-reaching change

The effort to achieve net-zero is redefining the global economic landscape and regulatory environment. In turn, it is altering the paths to corporate success.

Consumer demand

Consumers in developed nations are altering their preferences and consumption patterns as they strive to reduce their own carbon footprints or take advantage of incentives to do so. A recent study found that 57 percent of consumers would consider whether the next vehicle or major appliance they purchase was produced in accordance with net-zero targets, with many willing to pay a green premium for net-zero production. As a result, some markets are shrinking and others are rapidly expanding. Electric vehicles (EVs) are perhaps the most notable example, with 3.5 million more EVs sold in 2023 than in 2022, a 35 percent year-on-year increase and a six-fold increase since 2018. However, affordability and the need to achieve scale to meet global demand for green production remain obstacles, as recent developments in the EV market have shown.

Access to capital

Financial institutions have committed to managing more than US$130 trillion in capital in ways that advance net-zero. Many sophisticated investors are taking companies' carbon initiatives into account in analyzing risks and opportunities. Sustainable finance products, such as sustainability-linked or green bonds and loans, have proliferated, altering the availability and costs of capital for projects aligned with net-zero goals. By the end of 2023, climate bonds had a total volume of more than US$4.4 trillion. According to the International Finance Corporation, emerging market green bond issuances increased 45 percent in 2023 to nearly US$210 billion, with sovereign states tripling their green bond sales last year.

Public-private partnerships are also emerging as effective mechanisms for funding large-scale renewable energy and infrastructure projects, enhancing the overall financial landscape for the energy transition. Many governments are making new capital available to green businesses, offering robust incentive programs, such as the US Inflation Reduction Act, Japan's Green Transformation Act and various elements of the EU's Green Deal, which offer subsidies, tax benefits, or other capital resources for net-zero-aligned investments. International financial institutions and UN climate funds provide preferential capital for sustainable projects, reducing both the risks and costs of net-zero-aligned investment. Additionally, private sector involvement is growing, with infrastructure funds and private equity firms increasingly focusing on sustainable investments.

Regulatory environment

Some governments are implementing regulations to enforce net-zero or other climate-related commitments. Disclosure requirements, which now operate in the PRC, UK, Canada, EU, India, New Zealand, South Korea and Switzerland, among others, were a first step. In many jurisdictions, businesses now must consider and report not just their own direct emissions, but also those up (and in some cases down) the supply chain. Other regulations impose direct emissions limits on businesses and/or consumers. In 2024 alone, US regulators imposed significant new emissions standards, such as the EPA's rules to reduce pollution from fossil fuel-fired power plants and vehicles.

Broader jurisdiction-wide efforts to regulate carbon are being introduced or expanded. In 2021, the EU adopted the European Climate Law, pledging carbon neutrality by 2050. To achieve that goal, the EU has updated and expanded the Emissions Trading System (ETS)—a cap-and-trade-based carbon emissions market—and the Carbon Border Adjustment Mechanism—a levy on the import of certain carbon-intensive goods into the EU market. Some jurisdictions, including EU member states, have implemented or are considering putting a price on carbon more directly through a carbon tax.

Different strategies and even identities

Meeting the net-zero challenge will require countries and businesses to redefine identities, objectives and strategies. This process is well underway, with sovereign states changing their national priorities, policies and energy security strategies. For example, the European Green Deal recognizes climate change as an "existential threat to Europe." The 2022 US National Security Strategy is built around the premise that "of all the shared problems we face, climate change is the greatest and potentially existential for all nations."

Business too is changing its approach, developing new mission statements, business plans and operating strategies. The next few years will see the continued development and refinement of corporate net-zero planning, with profound implications for how businesses define their objectives and operations. Many companies seek to develop comprehensive plans that integrate sustainability into every facet of their operations. Some are forming strategic partnerships and collaborations to accelerate technology deployment. This involves not only setting targets but also transparently reporting progress and engaging with stakeholders to drive collective action.

New challenges, new opportunities

The path toward net-zero has now been laid, legislative frameworks implemented and pilot projects tested. Achieving net-zero will, however, require unprecedented effort, investment, cooperation and action. The challenges ahead include continued technological developments, scaling of existing technologies and financing their deployment on a global scale. New industries, such as carbon capture, utilization and storage (CCUS) are already attracting significant investment. Others have been transformed as, for example, fossil fuel producers diversify into renewable energy and automakers pivot toward EVs.

As the drive to achieve net-zero moves from conceptualization to implementation, opportunities abound. Businesses that are prepared to adapt, innovate and lead will not only contribute to a sustainable future but also secure a competitive advantage in the evolving global economy.

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