Why globalisation is a greener prospect

- OLIVIA WHITE, MEKALA KRISHNAN

The debate about how to achieve climate goals – most notably, the transition to net-zero emissions of greenhouse gases – has fuelled speculation that the world will deglobalise. Some argue that, since trade flows generate GHGs from production and transport, a sustainable economy, by definition, must be less global.

But research by the McKinsey Global Institute suggests the opposite is true. The materials, innovation, and capital needed to reach net-zero emissions are not equally distributed and, as a result, must be shared around the world. Without cross-border flows of goods, services, financing, and intangibles, limiting global warming will be very challenging, if not impossible. The World Trade Organization reaches a similar conclusion in its most recent annual report, which outlines how trade can play an essential role in helping countries reduce emissions and build climate resilience.

For starters, no economy is self-sufficient. Our research finds that every major world region imports more than 25% (in value-added terms) of at least one important type of resource or manufactured good. At the country level, and for inputs needed to achieve the net-zero transition, that number can be much higher. Moreover, products that originate in only a few places are in every region and sector. For example, today, more than 75% of the global supply of lithium, a key component of electric-vehicle batteries, is sourced from Australia and Chile.

Decarbonising the sectors that produce the majority of GHG emissions, including power, transportation, and heavy industry, will require investing in low-emissions technologies and support infrastructure. Building and operating these assets will in turn depend on three vital inputs: new mineral resources, new fuels, and complex manufacturing at scale. The international network of interconnected supply chains is crucial to producing all of them.

Consider minerals, including copper, lithium, and rare earth metals. Given their importance for the production of electric vehicles, renewable power, and broader electrification, all are critical to achieving net-zero emissions. Yet to reach that goal, supplies will need to be scaled up rapidly – by as much as eight times in some cases (though the use of recycled materials, or innovation to reduce or entirely replace the need for certain minerals, could change exactly how much new supply is needed).

In the case of entirely new supply, sourcing many of these minerals will require global flows, because extraction and refining are geographically dispersed. About 70% of the world’s cobalt is mined in the Democratic Republic of the Congo, and nearly one-third of the world’s nickel is extracted in Indonesia, which is home to the world’s largest proven reserves. China processes many of the most critical minerals, including lithium, cobalt, and graphite, but also relies on other countries for key steps or technologies. Japan and South Korea, for example, specialize in coating spherical purified graphite.

As for the new fuels needed for the net-zero transition, hydrogen, and its derivatives, offers many potential use cases, particularly for long-haul freight transport and steel making. Here, too, a geographical mismatch between sources of supply and demand means that global trade is likely to be vital. The International Energy Agency estimates that about 12 million tons of low-emission hydrogen could be exported annually by 2030, if projects currently under development are completed as planned.

Finally, deploying manufactured goods such as solar panels and electric vehicles also relies on global supply chains. Broader participation of countries in trade flows can incentivise innovation, enhance efficiency, and help drive down the costs of these technologies.

The imperative for globalization extends beyond just goods flows. Ensuring a sustainable future will require massive investment, and developing countries will likely need to spend more on the net-zero transition as a share of GDP than developed countries. With constrained fiscal space to invest in climate solutions, many of these economies will need increased access to cross-border financial flows.

Innovation is equally important in developing and deploying novel climate technologies, and that, too, depends on cross-border flows, albeit of intangibles, such as intellectual property and data, and of skilled workers; both can foster invention, drive down costs, and increase access. These flows linked to knowledge and know-how have replaced trade in manufactured goods as the driving force of global integration.

All these types of flows are interconnected. If economies implement strategies to localize or diversify supply chains – either to reduce trade-related emissions or build resilience – there will be a greater need for capital and intangibles. Building a domestic plant to manufacture electric-vehicle batteries, for example, can cost billions of dollars.

Even in a highly connected world, delivering a reliable, secure, and affordable net-zero transition will require scaling up cross-border flows significantly. New sources of production must be developed, new supplier relationships built, and new forms of global integration pursued. Rising geopolitical tensions will make this task even more complex and challenging. But the alternative – giving up on globalization – will only make the effects of climate change more punishing.

White is a senior partner in McKinsey & Company’s San Francisco office, and a director of the McKinsey Global Institute; Krishnan is a partner at the McKinsey Global Institute