The transition to net-zero emissions presents significant physical and systemic challenges, requiring an overhaul of existing global energy systems. The McKinsey Global Institute identifies 25 key hurdles to achieving net-zero, with half of these involving complex, interconnected systems requiring systemic change. Solutions range from scaling renewable energy to rethinking industrial processes and overcoming material bottlenecks. Business leaders need to balance optimism with pragmatism, focusing on cost, scalability, and collaboration across sectors to drive innovation. A realistic, phased approach—prioritizing easier wins and tackling tougher problems in parallel—is essential for making meaningful progress toward a sustainable future.
Introduction: A Net-Zero Reality Check
The journey to a net-zero world is both inspiring and daunting. While optimism about renewable energy technologies and decarbonization efforts runs high, the physical realities behind this global transformation often get overlooked. A recent report by the McKinsey Global Institute underscores that reaching net-zero is far from straightforward. The global energy system, comprising vast networks of power plants, vehicles, and industrial materials, needs to be reengineered in ways that are both technically challenging and systemically complex.
For business leaders in New Zealand and Australia, particularly in industries with significant carbon footprints, understanding the intricacies of this energy transition is crucial. The report’s findings reveal that while some aspects of decarbonization are within reach, many others require innovation and a complete rethink of how energy is produced, stored, and consumed.
The Scale of the Challenge
The existing energy infrastructure that powers the world is massive. The report emphasizes that transitioning from fossil fuels to renewable energy sources is not just about building new technology but transforming the entire energy system. We’re talking about 60,000 power plants, billions of vehicles, and billions of tons of materials like steel and cement. Achieving net-zero requires systemic changes across these interconnected areas, and we’re only about 10% of the way there.
McKinsey identifies 25 key physical challenges that need to be addressed to accelerate this transition. They classify these into three categories:
- Easier Challenges – These involve scaling up existing technologies like wind and solar power.
- Less Easy Challenges – This category includes tasks like improving battery storage and decarbonizing certain industries.
- Tough Challenges – These are the systemic shifts, such as industrial decarbonization, carbon capture, and dealing with variability in renewable energy.
The Toughest Hurdles: Where Business Leaders Must Focus
Twelve of the 25 challenges fall into the “really tough” category, requiring changes in multiple interlinked areas. For example, renewable energy sources like solar and wind are variable; they don’t produce power consistently, which means businesses and governments need to rethink how they design and manage power grids.
One key question for business leaders is: Can new technologies like electric vehicles (EVs) and heat pumps fully replace their fossil-fuel-powered counterparts? While EVs show promise, their entire lifecycle emissions, including manufacturing and disposal, still need to be addressed. Similarly, heat pumps have improved, even in cold climates, but scaling these solutions remains a major challenge.
In New Zealand and Australia, where industries like agriculture, manufacturing, and transport dominate, tackling these tough decarbonization challenges is essential. Businesses in these sectors should begin by focusing on “low-hanging fruit,” such as improving energy efficiency and reducing waste, before addressing the more difficult systemic challenges.
Scaling Low-Emissions Technologies: A Practical Outlook
Business owners may wonder if it’s even possible for low-emission technologies to match the performance of fossil fuels. The answer is: Yes, but it’s going to take time and innovation. Solar and wind power costs have come down significantly, making these technologies competitive with traditional energy sources in many regions. However, other areas—like industrial processes requiring high temperatures, which currently rely on natural gas—remain difficult to decarbonize.
Critical raw materials like lithium, cobalt, and rare earth metals are also essential for low-emission technologies, particularly in battery manufacturing. The demand for these materials is expected to increase by up to seven times by 2030, raising concerns about supply shortages. While there isn’t a fundamental lack of these materials, the bottleneck lies in how quickly we can access and process them.
A Systemic Approach to Innovation
What’s clear from McKinsey’s report is that a piecemeal approach won’t suffice. Achieving net-zero requires systemwide innovation and collaboration across industries, supply chains, and even governments. For instance, hydrogen has been touted as a potential game-changer for industries like shipping and heavy transport, but its infrastructure is still underdeveloped.
Generative AI is emerging as a tool to accelerate this transition, helping businesses optimize resource extraction and improve efficiency in production. Mining companies, for example, are already using AI to locate new deposits and reduce production costs, but scaling these solutions across industries will be essential.
For business leaders in New Zealand and Australia, partnering with tech innovators and sustainability consultants will be critical. They should also pay close attention to the role of government policies and incentives, which will shape the speed and scale of the energy transition.
The Cost of Transition
While McKinsey’s report focuses on the physical realities of achieving net-zero, cost remains a significant factor. The current global energy system requires an annual investment of $5.7 trillion. Under a net-zero scenario, this will rise to $9.2 trillion by 2050, with the majority of this capital needing to shift from high-emission to low-emission technologies.
The challenge for businesses is to make this transition economically viable. Carbon capture, for example, works well for industries with high CO2 concentrations, but it becomes prohibitively expensive for others. Similarly, building the infrastructure for hydrogen and renewable energy storage will require substantial upfront investment.
New Zealand and Australian businesses can start by exploring government grants, green loans, and other financial incentives to offset these costs. At the same time, they should prepare for rising energy prices and disruptions to supply chains as the global energy market evolves.
What Business Leaders Should Do Next
Business owners need to take a pragmatic, phased approach to decarbonization. Start by identifying areas where the technologies and infrastructure are already in place, such as energy efficiency upgrades, transitioning to electric vehicles, and installing renewable energy systems. For harder challenges—like industrial decarbonization or hydrogen adoption—businesses should collaborate with industry partners and policymakers to develop long-term solutions.
Additionally, CEOs should engage in continuous learning and collaboration. Decarbonizing a business is not just a technical challenge; it’s also a strategic one that requires ongoing partnerships across industries, sectors, and governments. Companies that successfully navigate this transition will not only reduce their carbon footprints but also create long-term competitive advantages.
Conclusion: The Path Forward
The road to net-zero is a long and challenging one, but it is not insurmountable. By understanding the physical and systemic challenges involved, business leaders can make informed decisions about how to decarbonize their operations. Prioritizing easier wins and planning for long-term systemic change will allow businesses to navigate the complexities of this transition while staying competitive in a low-carbon economy.
For businesses in New Zealand and Australia, the transition to net-zero represents both a challenge and an opportunity. Those that act early and strategically will be well-positioned to thrive in the coming decades, ensuring that their operations are both sustainable and profitable.
