Michael Spence, a Nobel laureate in economics, is Emeritus Professor of Economics and a former dean of the Graduate School of Business at Stanford University. Anu Madgavkar is a partner at the McKinsey Global Institute. Sven Smit is a senior partner at McKinsey & Company and Chair of the McKinsey Global Institute.
MILAN – With the 78th session of the United Nations General Assembly and Climate Week NYC about to begin, and the next UN Climate Change Conference (COP28) approaching fast, it is imperative that the world clarify the relationship between economic growth and environmental sustainability. Far from being mutually exclusive, the former is a prerequisite for the latter: economic dynamism and improvements in living standards are vital both to finance climate action and to ensure adequate public support for it.
Fortunately, this is now widely understood. In June, leaders of some of the world’s largest economies – including Brazil, the European Union, the United States, Japan, and South Africa – issued a joint statement describing poverty reduction and protection of the planet as “converging” objectives. Similarly, the declaration released after the just-concluded G20 summit in New Delhi affirmed that “no country should have to choose between fighting poverty and fighting for our planet.”
Recent research by the McKinsey Global Institute (MGI) attaches figures to these twin objectives, with sobering results. Begin with the cost of action to protect the planet. The cumulative additional spending on low-emissions technologies and infrastructure that is needed to close the net-zero investment gap by 2030 would cost $41 trillion, or the equivalent of 4% of global GDP annually. Fulfilling these investment needs and achieving the net-zero transition will require broad public support and participation. Because people living in poverty are less likely to support climate action, especially if they feel that their needs are being given lower priority, simultaneous efforts to improve living standards are essential.
This is not a matter merely of lifting more households above the World Bank’s extreme poverty line ($2.15 per day at purchasing power parity). To achieve sustainable development, we must clear a higher bar, which MGI characterizes as the “empowerment line.”
The precise placement of the empowerment line varies by country, reflecting cost-of-living differences. But the meaning is always the same. It is the threshold beyond which households have sufficient means to meet all of their basic needs – such as nutrition, decent housing, health care, and quality education – and to work toward economic security. Without the ability to save, households cannot build a buffer against shocks, including those created by climate change.
Globally, about 4.7 billion people do not qualify as fully economically empowered, with about 40% of this population residing in India and Sub-Saharan Africa, though India’s high growth, if sustained, is likely to reduce this figure. Moreover, many in middle- and higher-income countries who seem to have achieved “middle class” lifestyles lack an adequate buffer against emergencies and shocks, and struggle to afford housing and health care. While they might not formally qualify as “poor,” they are unable to realize their full potential and may be at risk of slipping into poverty. Closing the “empowerment gap” by 2030 would require the world to boost cumulative consumption by these 4.7 billion people by $37 trillion – about 4% of GDP annually. (The specifics vary considerably by region.) Together with the $41 trillion to close the net-zero investment gap, we are talking about 8% of GDP each year until 2030.
The scale of the challenge is daunting, but this should not lead to paralysis. On the contrary, there is good news embedded in our research that should galvanize all stakeholders: we estimate that accelerated growth, business-led innovation, and technological advances could get the world halfway to the combined goals.
Current momentum will not be enough. We must actively protect baseline growth from headwinds and commit to increasing productivity through investment in technology, new businesses, and skills development. Relevant opportunities are plentiful: innovations in artificial intelligence, financial technology, biomedical science, materials science, and more can contribute to productivity gains, inclusive growth, and the energy transition.
If accelerated growth creates better-paying jobs, and employers ensure that workers have the skills to fill them, almost two-thirds of the global empowerment gap could be eliminated, with just over two billion people crossing the empowerment line, and 600 million more escaping poverty. Meanwhile, almost $10 trillion of low-emissions spending could become viable for private actors by 2030. Economic growth, together with technological advances, could reduce the net-zero investment gap by some 40%.
What can be done to close both gaps? On the empowerment side, options include more investment in affordable housing, health care, and education, as well as direct support to vulnerable households. On the net-zero side, stronger public support and bolder policies could mobilize an even larger amount of private capital, further driving down the costs of low-emissions technologies. Overall, societal commitments averaging 2% of global GDP annually – $20 trillion cumulatively – could close both gaps by 2030, though these commitments risk adversely affecting the baseline economy.
In any case, creative financing mechanisms will be essential. Multilateral institutions, in particular, must devise new facilities for developing economies – an effort that would be bolstered by increased capitalization of these institutions and new risk-intermediation platforms to help crowd in private capital. Other innovative solutions – say, channeling surpluses from rising energy prices toward green investments – will also be needed. For this, the global financial system must find innovative ways to accommodate large cross-border flows.
Progress will be difficult, and the price tag large. But investments in closing the empowerment and net-zero investment gaps today would lead to a more prosperous, stable world. There is perhaps no more valuable payoff.
