KPMG published the Net Zero Readiness Index in 2021,1 a few weeks before the COP26 UN climate change conference in Glasgow. The event resulted in 153 countries putting forward new emissions targets for 2030 and more than 90 percent of world economic output and global emissions being covered by net zero agreements. Attempts to phase out the use of coal, the single biggest contributor to climate change, failed with weaker language to ‘phase down’ its use in the final agreement. COP26’s chairman Alok Sharma said that the conference had kept alive the hope of keeping global temperature increases within 1.5 degrees Celsius this century but added “its pulse is weak.”
The last two years have seen many countries taking steps in the right direction towards net zero, even if most have a long way to go. Some have announced significant new policies to support decarbonization, including the REPowerEU in Europe. Emissions trading schemes are expanding in several countries and the EU is phasing in its Carbon Border Adjustment Mechanism, an idea that other countries look likely to adopt. The bloc is also introducing regulations to block the import of products linked to deforestation, showing how some jurisdictions plan to go further faster to meet net zero pledges.
Next year will see companies in many countries starting to report on their climate change risks and plans.
Renewable energy production continues to expand rapidly around the world, investment is rising fast and there are indications that it is becoming harder to raise funding for some fossil fuel projects. Renewable production and the reshaped electricity grids it requires will inevitably impact on some local environments, their biodiversity and communities. We are going to see more conflicts between the local and the global, but if we want to reach net zero while keeping the lights on, we have to build new power infrastructure somewhere.
These issues are among those discussed in this Net Zero Readiness Report. It explores the readiness of 24 countries based on interviews with local KPMG specialists. This report also examines global trends in sectors that are key to tackling climate change: the economy, electricity, transport, manufacturing, buildings, infrastructure, oil and gas, agriculture and the blue economy.
Across these countries and sectors we can see plenty of examples of progress on decarbonization including growth in electric vehicle sales, although from a low level in most countries. On behalf of all the KPMG specialists involved, we hope this report can contribute to helping organizations quicken their pace on the long walk towards net zero.
Key insights and observations
The Net Zero Readiness Report 2023 draws on the expertise of KPMG specialists working at an international level as well as in each of the countries covered. The following insights are based on their observations, with more details in the sector and country profiles.
1. Several of the world’s biggest emitting countries have increased their net zero ambitions.
In February 2021 the US, the world’s second-largest producer of greenhouse gases by volume, formally rejoined the UN Paris Agreement on climate change, and the Inflation Reduction Act, introduced major tax incentives and benefits for decarbonization work with US$370 billion allocated to energy security and climate programs.
China’s President Xi Jinping said in September 2020 that the country, the largest producer of greenhouse gases by volume, would aim to reach peak carbon emissions before 2030. The government has since published more detail on how it hopes to achieve this, including coal consumption starting to fall by 2030 and energy produced without fossil fuels rising to 20 percent by 2025 and 25 percent by 2030. For the next few years China sees electricity from coal as providing energy security, but massive investments in renewable energy and infrastructure indicate that it is looking beyond coal for the long term.
Australia, which has among the highest levels of greenhouse gas emissions per person, introduced new federal policies that amount to a quantum leap in the country’s legislative architecture following a change of government in May 2022. These include enshrining a 2050 net zero target date in law, increasing interim reduction targets and supporting laws, targets, regulations and initiatives. Canada, which has similarly high per person emissions, included billions of dollars of incentives for ‘clean economy’ investments in its 2023 federal budget. Brazil, where per person emissions have fallen over the last two decades but remain higher than the global average, is discussing the introduction of a regulated carbon market that would build on the progress the country has made to reduce emissions from electricity production and road vehicles.
The EU includes some of the world’s most climate-conscious countries which as a group have already made significant progress on decarbonization. However, Russia’s invasion of Ukraine in February 2022 and the resulting loss of Russian natural gas from European markets caused the bloc to increase its ambitions through the REPowerEU plan, which aims to accelerate the implementation of renewable energy.
2. Net zero is weaving itself into the world’s economic systems.
Jurisdictions around the world have introduced emissions trading systems that require those producing greenhouse gas emissions to buy tradable allowances or permits, although many apply only to some sectors. But the EU, which established the first such scheme in 2005, is in the process of extending it to new sectors including maritime shipping as well as reducing the number of allowances and phasing out free allocations. China is planning to extend its scheme, which covers only power generation, to eight major industries and South Korea will move to the next phase of its system in 2026, similarly extending its coverage.
The EU is introducing its Carbon Border Adjustment Mechanism from October 2023, which will eventually require those importing some goods to pay an equivalent price for their emissions to manufacturers based in the bloc. Australia and the UK, which both have emissions trading, are considering similar mechanisms. India may challenge the EU mechanism and South Africa is considering how it should respond, but over time border adjustments look likely to reinforce the importance of low carbon production as a source of competitive advantage.
Companies in many countries will soon provide more information on climate change risks and plans under a range of new standards. These include a global baseline drawn up by the International Sustainability Standards Board, which countries including the UK plan to implement. Other jurisdictions are introducing regimes that build on this, including the EU’s European Sustainability Reporting Standards, while new disclosure rules are expected from the US Securities and Exchange Commission and the Australian authorities.
3. Production of low carbon energy is growing rapidly.
At present, fossil fuels – coal, natural gas and oil – provide 82 percent of the world’s primary energy but many of the decarbonization policy initiatives of the last two years have focused on extending low carbon energy. While China and India are adding both fossil fuel and low carbon generation to meet rapidly increasing demand, the International Energy Agency predicts that clean energy will receive US$1.7 trillion of investment globally in 2023, encouraged by incentives from jurisdictions including the US and the EU, compared with US$1 trillion for coal, oil and gas.2
Countries can choose from a wide range of low carbon technologies. Those with large areas of territorial waters are turning to offshore wind, which at present means fixed turbines in shallow waters. New floating platforms under development will allow wind power production in deeper seas, a particular opportunity for Japan given the depths of many of its territorial waters. Denmark is developing an artificial energy island as a connection and maintenance point for offshore wind while Ireland recently auctioned rights to construct turbines in its waters.
India is developing significant amounts of solar generation for domestic use. Some countries with plentiful sunlight and land are looking to export it through interconnectors or pipelines for green hydrogen made with solar energy, with plans for a 3,300 kilometer hydrogen-ready pipeline project between Italy and northern Africa while Singapore has approved an interconnector involving more than 1,000 kilometers of subsea cables to import renewable electricity from Cambodia. There is renewed interest in nuclear power, with the United Arab Emirates due to put the fourth and final unit of its new Barakah plant live shortly.
Scaling up production of renewable energy is regarded as one of the most critical actions required to achieve the Paris Agreement target of limiting global temperature rises to 1.5 degrees Celsius. However, at present most renewable energy developers face several serious challenges that endanger the rapid growth of renewables this decade the target requires. These include shortages of critical minerals, grid infrastructure, energy storage facilities and skilled workers along with policy inhibitors and planning bottlenecks. Tackling these requires the immediate adoption of innovative approaches, given that not doing so will have significant consequences for the global climate.
KPMG believes that a greater understanding of the practical challenges involved in scaling up renewable production is needed if global climate ambitions for 2030 and beyond are to be achieved. In response, KPMG is undertaking a comprehensive study to identify and understand the global, regional and practical challenges that hinder rapid deployment of renewable energy, outline potential solutions and make specific recommendations as to how to overcome the challenges.3
Nuclear power, which while not a renewable energy source produces low carbon electricity reliably, remains politically unacceptable in several countries. Some have reconsidered this and are planning new capacity, given the way in which nuclear power contributes towards decarbonization in countries such as France.
4. Increasing electric vehicle sales show how rapidly some sectors can decarbonize.
The global sales share of electric cars tripled from 4.2 percent in 2020 to 14 percent in 2022. It rose fivefold in China to 29 percent while nearly 9 in 10 cars sold in Norway in 2022 were electric.4 Although from a low base and at levels that vary greatly by country, road transport is increasingly powered by electricity or, in the case of Brazil, ethanol biofuels produced from sugarcane or corn. Other road vehicles, including commercial vehicles, buses and trucks, are increasingly moving to batteries or green fuels. Other forms of transport such as shipping and aviation are starting to decarbonize by adopting green fuels, but the poor availability and high cost of such fuels as well as much longer lifespans of vessels and aircraft means change is taking place more slowly.
The growth in electric road vehicles is creating capacity issues, with several countries having problems increasing vehicle charger numbers and local electricity grid capacity quickly enough to support growing electric fleets. Charger shortages could be addressed by ‘dynamic charging’ that recharges vehicles in motion, which Sweden is planning to introduce on thousands of kilometers of road. In many cases growth in electric vehicles has required high levels of government subsidy, which in Norway has involved tax breaks and price incentives, although this has also helped the country develop an ecosystem of start-ups in this field.
5. Impacts of low carbon power projects on local environments are causing ‘green on green’ conflicts.
Most kinds of power production have a local impact and this can be amplified for renewable generation sited in remote rural locations. Linking large numbers of remote sites while distributing more power for vehicle charging, heating and other applications means increasing the scope and capacity of power grids. Both generation and infrastructure projects can have significant impacts on local wildlife, biodiversity and communities, leading to opposition and in some cases work being blocked. National environmental rules can cause similar clashes, with nitrogen emission permits required in the Netherlands hindering the construction of green hydrogen and biofuel plants in Rotterdam. However, several countries are devoting considerable effort to reforming systems to address these concerns proactively, including through better site planning, community consultation and benefit sharing.
Nuclear power, which while not a renewable energy source produces low carbon electricity reliably, remains politically unacceptable in several countries. Some have reconsidered this and are planning new capacity, given the way in which nuclear power contributes towards decarbonization in countries such as France.
6. Net zero backlashes occur when people fear costs and bans rather than new opportunities.
While many people support work towards net zero in principle, they may oppose measures that cost a lot of money or stop them doing something, particularly if it involves their livelihoods. The UK is struggling to move some of Europe’s least efficient homes from natural gas heating to low carbon alternatives, with few homeowners choosing to install heat pumps given the costs and difficulties involved, and its government recently delayed its planned date to end sales of new gas boilers. An attempt by the German government to ban replacement natural gas boilers was significantly modified after it ran into opposition. Switzerland is providing significant financial support to help owners replace fossil fuel heating in buildings, which are already of relatively high quality by international standards.
Agriculture is experiencing acute conflicts over how to reduce emissions, with some countries flagging the need for livestock farming to share in decarbonization efforts. Attempts in New Zealand to agree a way to manage and reduce on-farm emissions between government and representatives of farmers and growers, which would be a powerful way to incentivize innovation, are yet to succeed. There are ways in which agriculture can reduce emissions, such as supplementing livestock diets to reduce methane, turning effluent into biofuels and sequestering carbon. The last also represents a ‘blue economy’ opportunity for coastal areas including small island economies that are particularly threatened by climate change, through expanding areas of mangroves and other carbon-rich ecosystems.
