The CO2 Abatement Curve and business response

1. The CO2 Abatement Curve and business response Copenhagen, November 24, 2009

2. Today’s topics • Quick introduction to McKinsey’s CO2 abatement curve and findings from the recent v2.0 release • Business’ response to climate change • Implications for business schools

3. Peak at 550 ppm, 3.0°C • Peak at 510 ppm, 2.0°C • Peak at 480 ppm, 1.8°C 70 • Business-as-usual • Technical measures < €60 per tCO2e • Focus of the study -38 32 • Additional measures Behavioural changes & expensive measures -9 23 Possible to contain global warming below 2°C • Global GHG emissions • GtCO2e per year 70 60 50 40 30 20 10 0 • 2005 • 2010 • 2015 • 2020 • 2025 • 2030

4. Global GHG abatement cost curve beyond business-as-usual – 2030 • Gas plant CCS retrofit • Abatement cost • € per tCO2e • Coal CCS retrofit • Iron and steel CCS new build • 60 • Low penetration wind • Coal CCS new build • Cars plug-in hybrid • Power plant biomass co-firing • 50 • Residential electronics • Degraded forest reforestation • Reduced intensive agriculture conversion • Residential appliances • Nuclear • 40 • Retrofit residential HVAC • Pastureland afforestation • High penetration wind • 30 • Degraded land restoration • Tillage and residue mgmt • Solar PV • 2nd generation biofuels • Solar CSP • Insulation retrofit (residential) • 20 • Building efficiency new build • Cars full hybrid • 10 • Waste recycling • 0 • 5 • 10 • 15 • 20 • 25 • 30 • 35 • 38 • Organic soil restoration • -10 • Abatement potentialGtCO2e per year • Geothermal • -20 • Grassland management • Reduced pastureland conversion • -30 • Reduced slash and burn agriculture conversion • -40 • Small hydro • 1st generation biofuels • -50 • Rice management • Efficiency improvements other industry • -60 • Electricity from landfill gas • -70 • Clinker substitution by fly ash • Cropland nutrient management • -80 • Motor systems efficiency • -90 • Insulation retrofit (commercial) • Lighting – switch incandescent to LED (residential) • -100 Note: The curve presents an estimate of the maximum potential of all technical GHG abatement measures below €60/tCO2e if each lever was pursued aggressively. It is not a forecast of what role different abatement measures and technologies will play.

5. Operational efficiency – key areas of regulation required • Abatement cost€ per tCO2e • 60 • 30 • 0 • 0 • 20 • 40 • -30 • Abatement potentialGtCO2e per year • -60 • -90 • -120 • -150 1 2 3 • Energy efficiency regulation • Long-term stable international system for power and industry • Mechanisms to drive selected key technologies down the learning curve 4 • Targeted systems for agriculture and forestry

6. Key findings global GHG abatement cost curve v2.0 • There is sufficient abatement potential to contain global warming below 2°C with high probability (480 ppm peak, 400 ppm stabilization) • Three major technical GHG abatement opportunity areas to address - Energy efficiency, Low-carbon energy supply, Terrestrial Carbon (Forestry & Agriculture). Behavioral change could provide a fourth source of abatement • Scale of change is immense – In 2030, as examples, 40% of new cars would be hybrids, 70% of electricity would be generated from low-carbon sources, and until 2030 deforestation of an area of twice the size of Venezuela would be avoided • Global and cross-sector action is essential to capture the opportunity – leaving out major sectors or regions makes it very challenging to stay below 2°C • Effective policies on national, regional and global level are required • Costs and financing look manageable, but challenging in some sectors and regions – Costs likely less than 1% of global GDP (€200-350 billion/year by 2030). Investments ~5% of BAU investments in fixed assets (€810 billion/year in 2030). 60% of investment in consumer sectors, 60% in developing world • Time is of the essence, and the value of early investment is high – delaying action by 10 years would get the atmosphere towards 3°C or more, rather than towards 2°C and abatement costs would increase

7. 4 5 • Energy efficiency (buildings, industry transportation • 300-500 BEUR “extra” market by 2030 • Water • EUR 500 billion market with 4–5% growth 1 3 • Carbon markets • Carbon marketscould reach size of oil industry by 2030(USD 1 – 1.6 trillion) • Land, biomass and biofuels • 100 - 300 million hectares needed for biofuel & bio-energy Moving towards a low-carbon economy will fundamentally shake up a broad list of industries 2 • Renewables and new Power technologies • EUR 400 billion market by 2020 • Threat and opportunity for various industries!

8. Climate response by business: Key success factors for winning in the low carbon economy • …internal CO2-efficiency • …new business, innovation, and growth opportunities • Think … • …policy influencing

9. 1. Think CO2-efficiency – reduce carbon footprint across the business system • Investing into fuel efficiency and reducing emissions of the 787 Dreamliner expecting a 20 percent improvement • Efforts are focused on the following areas: New engines, increased use of light weight composite materials, more-efficient systems applications and modern aerodynamics • Fuel efficiency • All airplanes—including the 787—may benefit from the potential of using alternative fuels that can reduce carbon dioxide emissions over their life-cycles • Company has developed and tested a diverse set of sustainable, plant-based fuels – initial results have been positive • Reducing dioxide emissions • Boeing participates in developing a number of new methods (with airports, air-traffic management systems and airline operational changes) that deliver real and substantial emissions savings over the past year • Air traffic system efficiency • Beyond the Aerospace & Defense field: Working with the wholly-owned Spectrolab subsidiary to produce some of the world's most efficient solar cells for Earth- and space-based uses • Solar SOURCE: Boeing environment report 2009

10. 2. Think growth – leveraging green to increase sales • Tesco developing carbon footprint labels for all of its 70,000 products • Labels measure the carbon emissions from • Manufacture • Transportation • Packaging • Similar label for nutrition resulted in • 30% decrease in sales for redlighted products • 85% increase for greenlighted products Source: Tesco, Guardian; McKinsey analysis

11. 2. Think growth: European Chemicals major identified over 30 business opportunities through focused growth scan • Low methane feed • Enzymes in pulping • Slow release fertilizer • Industrial feedstock substitution • CCS; coal retrofit • Waste • Livestock/soils • 40 • Soil • CCS EOR;new coal • Wind;low pen. • Solar • 30 • 20 • Industrial non-CO2 • Nuclear • 10 • 0 • -10 • 0 • 1 • 2 • 3 • 4 • 5 • 6 • 7 • 8 • 9 • 10 • 11 • 12 • 13 • 14 • 15 • 16 • 17 • 18 • 19 • 20 • 21 • 22 • 23 • 24 • 25 • 26 • 27 • -20 • Industrial CCS • Sugarcanebiofuel • Celluloseethanol • Industrialnon-CO2 • CCS;new coal • -30 • -40 • Enzymes andorganisms • Wind blade composites • Non-reflective • coating • CCS • membranes • AbatementGt CO2e/year • -50 • Fuel-efficient vehicles • -60 • -70 • Innovative coolant • -80 • Air-conditioning • Lighting systems • -90 • Metal replacement • -100 • Fuel-efficient commercial vehicles • Enabling by the chemical industry • -110 • -120 • Insulation material • Substantial • -130 • Partial • -140 • Insulation improvements • Little/none • -150 • -160

12. Applied research • Regulation and time dynamics • Cross functional focus Implications for business schools • Climate change is a playground for applied economics – application focused research must be rewarded • Apply economics to real challenges and practical actions, as e.g. in the carbon cost curve • For business / strategy research, climate change is an opportunity to revisit strategy and look at e.g. regulation as an important performance driver • True long term dynamics and risk must be understood, e.g. cost of energy and CO2 emissions in companies' production cost setup really matter over time • Cross functional collaboration important : to understand long term environmental changes, social sciences must be comfortable with understanding basic scientific debates, e.g. technology learning rates