Developing and deploying climate technologies is critical for the world’s net-zero agenda. Growth could await businesses willing to innovate quickly and to collaborate across value chains. According to the Mc Kinsey report 2022
Reaching net-zero emissions will require an immense effort to invent, refine, and deploy climate technologies: those expressly intended to accelerate decarbonization. Research suggests, for example, that annual production of clean hydrogen, a low-carbon energy carrier, would need to increase more than sevenfold for the world to hit net zero in 2050.1 The global capacity of long-duration energy storage, which supports the use of renewable energy, must increase by a factor of 400 by 2040 to help the power sector achieve net zero by that year, according to one study.2
Already, we see ten families of climate technologies as critical to meeting the net-zero challenge, and we expect others to emerge (exhibit). As demand for them swells, companies will have opportunities to create significant value while helping to curtail emissions. McKinsey analysis suggests that, in a scenario where the world reaches net zero by 2050, capital spending on equipment and infrastructure with relatively low emissions intensity would average $6.5 trillion a year—more than two-thirds of the $9.2 trillion in annual capital spending during that time.3 Our view is that almost all of those low-emissions assets would include climate technologies.
This is not to say that innovation and the adoption of climate technologies will be straightforward. More likely, these processes will be disruptive. During the net-zero transition, the world’s energy system, as well as its stock of emissions-intensive equipment and infrastructure, will be re-engineered—through climate technologies—to work with renewables instead of fossil fuels. That means not only making and using renewable energy but also transporting it to end markets from production centers, such as sunny regions that generate solar power inexpensively. As these shifts happen, some value chains will break and new ones will form.
Innovation must also accelerate. For most climate technologies, costs are declining too slowly to abate emissions in line with midcentury net-zero targets. Breaking the cost curve will require unorthodox approaches to the development, integration, and scaling of technology—including a degree of collaboration seldom seen for other types of technologies.
Our experience working with hundreds of climate tech companies and value chain participants suggests that effective organizations recognize three fundamental aspects of the climate technology realm: climate technologies are highly interdependent; competing in these interdependent markets requires cooperation across value chains and industrial ecosystems; and powerful first-mover advantages can be gained through risk-taking and bold action. Here, we offer a closer look at these considerations and how leaders can respond to them.
Climate technologies rarely stand alone
Most climate technologies are viable only if other climate technologies are also implemented at the level of facilities, enterprises, regions, or value chains. Green methanol, for example, is considered the most technically advanced available fuel to power green shipping—methanol engines for ships are already on the market. One form of green methanol, e-methanol, can be made by combining green hydrogen with biogenic CO2 (CO2 derived from biomass). In the near term, expanding production of green methanol is thus likely to involve scaling up carbon capture for industrial sources of biogenic CO2.4
A critical prerequisite for the success of many climate technologies—including green methanol and green hydrogen, other synthetic fuels, green steel, and carbon capture—is the buildout of capacity to generate and store renewable electricity. Access to resources other than renewable energy can also constrain the pace at which climate technologies scale up: for instance, batteries for electric vehicles and utility-scale energy storage systems require steady inputs of hard-to-find materials, such as cobalt and nickel.
A critical prerequisite for the success of many climate technologies—including green methanol and green hydrogen, other synthetic fuels, green steel, and carbon capture—is the buildout of capacity to generate and store renewable electricity.
Added complexity arises because climate technologies take different forms, which might have their own particular interdependencies. Take long-duration energy storage. This technology suite includes four main categories: chemical, electrochemical, mechanical, and thermal. Each category comprises multiple technologies, and each of them has reached a different level of maturity and market readiness. A look at possible uses of long-duration energy storage in one sector—electric power—also reveals that the economics of each use case can depend on changes (in other parts of the energy system) that alter the grid’s flexibility and storage needs.
Because of such relationships, it’s helpful for leaders, senior managers, and staff to learn about many technologies and how they interact. They will want to study the way enabling conditions—including industrial capabilities, infrastructure requirements, and public policies—might favor or restrain technologies. They’ll also want to understand constraints on critical materials. Experience suggests that much more sophisticated forecasting techniques will be needed, along with near-term and long-range plans for coping with limited supplies. Informed by this knowledge, leaders can define integrated scenarios for technological innovation and use them to identify promising opportunities.
Cooperation creates a competitive edge
The interdependence of climate technologies means that scaling them up often requires organizations to work together on building new value chains and industrial ecosystems—a more cooperative approach than businesses might be accustomed to, and one that can disrupt existing networks.
The hydrogen industry offers a good example. A report by the Hydrogen Council (an industry consortium) and McKinsey notes that more than 520 projects, representing $160 billion of investment, have been announced and that an additional $540 billion of investment would probably be needed to achieve net zero by 2050. The report also explains that high demand for hydrogen would encourage organizations to invest in infrastructure and production capacity—yet demand will reach mass scale only when infrastructure and production capacity are in place to make low-cost clean hydrogen. To stimulate action, the council is facilitating coordination among prospective suppliers and buyers of hydrogen, as well as ecosystem players such as financial institutions (many seeking low-emissions projects to invest in) and governments, which might consider offering incentives or guaranteeing hydrogen offtake to support a new industry.
Similar approaches could advance other climate technologies, too. Research on the nascent market for zero-emissions trucks, for example, indicates that industry groups could help not only to coordinate the rollout of vehicles and the corresponding infrastructure (such as charging stations) but also to arrange financing models for the purchase of both trucks and infrastructure. The World Economic Forum’s Clean Skies for Tomorrow Coalition, a multistakeholder group McKinsey has supported, suggests that supportive regulations, demand-stimulating measures, and new financing mechanisms could help scale up production and lower the cost of sustainable aviation fuels.
Executives who see potential in a climate technology shouldn’t wait for a supportive ecosystem to form. To accelerate deployment, they can step forward, organize peers and partners, gather engineers and scientists, and establish networks that bring together demand, production, infrastructure, funding, and knowledge. By developing shared plans, or road maps, to commercialize climate technologies, ecosystems can stimulate change, create markets, and prevent effort from being wasted on duplicative projects.
Fast followers might never catch first movers
For many decarbonization needs, no climate technology has yet prevailed as the standard. And because ecosystems are needed to support many climate technologies, the formation of networks like those described above can help a climate technology become entrenched as an industry’s solution of choice. First-mover advantages are therefore available to companies that organize or join climate tech ecosystems early. Fast followers could struggle to enter such alliances after they take shape.
These pressures will force all leaders, especially those in established industries, to make tough choices. They will need to weigh the near-term earning potential of their current holdings against possible opportunities for exponential growth in climate tech markets. They will need to decide how much more of their resources they should invest in serving markets that are likely to start shrinking—and how much to commit to producing mature climate technologies and inventing next-generation ones. Then they will need to organize or join ecosystems helping new technologies to gain acceptance and achieve scale.
Maneuvering through this uncertainty, let alone thriving in it, will be daunting. The contours of the eventual net-zero economy are still blurry, but waiting for them to become more clear could mean missing valuable opportunities. This pressure makes it worthwhile for organizations to identify
where they might compete and boldly stake out their positions, especially in markets where first movers have not yet gotten ahead.
The diffusion of digital technologies gave rise to dominant young firms and scrambled the hierarchy of incumbent businesses. Now, the growth of a multitrillion-dollar market for climate technologies is set to reconfigure industries and redistribute value across the economy, creating new success stories for both upstart green businesses and fast-moving established ones. These developments will define the legacies of leaders in the public and private sectors. Those who move boldly can better position their companies for long-term success—while supporting the urgently needed global response to climate change.
Senior Partner, Cologne
Senior Partner, Munich
Senior Partner, Bay Area