McKinsey Explainers

What is decarbonization?
Decarbonization is the reduction and removal of carbon dioxide and
other greenhouse gases from the atmosphere.

October 2024
Decarbonization is a critical response to climate What are carbon credits?
change. It comprises two elements: first, reducing Carbon credits are certificates affirming that certain
the amount of CO2 and other greenhouse gases that amounts of greenhouse gas emissions have been
are released into the atmosphere, and second, removed from the atmosphere. Companies can
actively removing CO2 from the atmosphere, purchase these credits either to meet short-term
whether at the point of emissions (point source emissions reduction targets or to fully eliminate
capture) or from the air (direct air capture, or DAC). emissions to achieve net-zero targets. In either case,
the price of carbon credits ranges from about $10 to
But how does decarbonization work more broadly, $1,000 per ton1 of CO2. Nature-based solutions,
and what can companies do to contribute including reforestation, fall toward the lower end of
meaningfully to carbon reduction and removal? In this spectrum, at about $10 to $25 per ton of CO2.
this Explainer, we’ll delve into the financial and Tech-based removal—including techniques such as
technical approaches used to limit and remove the DAC and bioenergy with carbon capture and
carbon in our atmosphere. storage—costs more, about $100 to $1,000 per ton
of CO2.

What are carbon markets? Learn more about McKinsey’s Sustainability

A carbon market is a funding mechanism to support Practice.
decarbonization, whereby organizations trade
emissions allowances to achieve their reduction
targets. The vast majority of funding provided by What are the types of carbon markets?
carbon markets is allocated to processes that There are two main types of carbon markets:
remove carbon from the atmosphere through either
natural climate solutions (NCS) or technical means, — Compliance carbon markets are financial
such as DAC. markets where mandatory national, regional, or
international entities trade and regulate carbon
Carbon markets are one of the most important tools allowances, or the amount of carbon that a
for tackling climate change. By offsetting their company or entity is allowed to emit. These
emissions via carbon markets, companies can play a markets play an increasingly visible role in the
key role in removing carbon from the atmosphere world’s efforts to reduce emissions. As of 2021,
and achieving the global goal of net-zero emissions compliance markets had a value of more than
set out in the 2015 Paris Agreement on climate $100 billion and an annual trading turnover of
change. more than $250 billion.

A growing number of companies with long-term — Voluntary carbon markets are markets through
carbon reduction strategies are turning to carbon which carbon credits are bought, sold, and
markets to hold themselves accountable for their traded to compensate for greenhouse gas
more immediate carbon footprints. As a result, the emissions. When a company makes a net-zero
demand for carbon credits is expected to increase commitment, it frequently purchases carbon
15 times by 2030—and 100 times by 2050, credits to offset its greenhouse gas emissions.
according to the Taskforce on Scaling Voluntary According to McKinsey senior partner Badrinath
Carbon Markets, a private-sector-led initiative Ramanathan, voluntary carbon markets are “still
informed by McKinsey knowledge and advisory nascent,” with a total value of about $300
support. Within the next decade, the overall market million as of 2022. Voluntary carbon markets
for carbon credits is estimated to be more than need to be significantly scaled to contribute
$50 billion. meaningfully to climate action.

1
Metric tons: 1 metric ton = 2,205 pounds.

What is decarbonization? 2
The largest carbon market is in the European Union, 5. Create regulatory clarity. Overcoming political
and it has evolved significantly since it was created barriers requires stakeholder collaboration,
more than 20 years ago. Ramanathan says there international consensus building, and coherent
are other sizable carbon markets in the United policy frameworks that are in line with
States (one in California and another on the East international climate goals.
Coast), as well as a few in New Zealand and a
relatively new one in China. 6. Build trust. A coalition of high-level champions
could amplify best practices, highlight advances
in measurement and verification to increase the
How can stakeholders unlock the full credibility of carbon markets, and endorse
potential of carbon markets? scientific advances toward net-zero certification.
We’ve seen that carbon markets, and the NCS they
fund, have significant potential to address climate
change and nature loss. But buyers, suppliers, What is CCUS?
investors, and regulators still have some doubts CCUS stands for carbon capture, utilization, and
about the efficacy of carbon markets. “We need storage. This suite of technologies addresses CO2
people to come together and recognize the emissions at point source industrial and power
importance of getting this right, and soon,” says facilities by capturing, concentrating, and purifying
McKinsey senior partner Joshua Katz, “so capital the CO2. The CO2 is then compressed for transport
can flow to NCS.” to the location where it will be stored or used,
typically via pipeline networks but sometimes by
Here are six ways that organizations can overcome ship, truck, or rail. Captured CO2 can be
these challenges and create more certainty in this permanently stored underground in saline aquifers
space: or oil and gas reservoirs. It can also be used as a
feedstock for manufacturing processes, in which
1. Define net-zero and corporate claims. NCS can CO2 can displace another form of carbon as an input.
help organizations in various sectors transition
toward a net-zero pathway, and ultimately CCUS technologies offer solutions for many hard-
achieve net zero—but organizations should start to-abate sectors that rely on energy from fossil
by clarifying exactly the role NCS can play for fuels, such as electric power, cement, and hydrogen
them in this journey. production. CCUS can also help with activities that
are vital to our daily lives and economic growth, says
2. Highlight good practices for supply. McKinsey senior partner Mark Patel: “Things like
Organizations that have had success with NCS heating and lighting and the materials we use.”
should highlight their success stories so that
others are inspired to follow the same course. Once carbon is captured, it can be permanently
stored (CCS) or utilized by converting it into
3. Send a demand signal. High-emitting products (CCU). “The concept of CO2 removal is, if
companies should come together to prioritize we can’t entirely cut out the activities that are
NCS credits with high cobenefits. causing emissions, then let’s instead find other
mechanisms in which we can remove carbon
4. Improve market architecture. Improvements dioxide, or gases that are equivalent to carbon
could include creating carbon reference dioxide … and capture it, contain it, store it, or
contracts, which would define the cobenefits permanently remove it,” Patel says.
of NCS.

What is decarbonization? 3
For countries to achieve their current net-zero — Willingness to pay for lower-carbon-intensity
commitments, CCUS uptake needs to expand by products. Businesses and consumers will likely
120 times its current levels by 2050. This will take a have to pay premium prices for green products,
great deal of effort and investment to deploy at especially zero- or near-zero-carbon products.
scale, which we are starting to see in some new
industries and contexts. While this may mean that — Valuation of CO2 as a feedstock. The sale of CO2
CCUS is less attractive to some investors, it also as a product offers a revenue source that could
means there is a lot of room for growth. McKinsey offset the cost of capture. CO2 is already used in
estimates that annual investment in CCUS could industrial processes, including oil recovery and
reach $175 billion by 2035. food processing. But there remain further
opportunities to monetize captured CO2.

What’s the state of the CCUS industry? — Voluntary carbon markets. Some CCUS can
CCUS has emerged as an economically viable generate negative emissions, which can be
decarbonization lever across Europe and the United monetized in voluntary carbon markets through
States. In 2023 alone, the capacity of all CCUS negative-emissions credits.
facilities under development has grown to over 420
million tons of CO2 per annum, an increase of more Learn more about McKinsey’s Sustainability and Oil
than 40 percent since 2022. & Gas Practices.

Project pipelines are ambitious: over the next six

years, CCUS capacity is expected to expand about What are some nature-based carbon
60 times in Europe and nine times in the United removal solutions?
States, but only a small number of projects are fully NCS are nature-based actions that either reduce or
funded to date. About 15 percent of the announced sequester greenhouse gas emissions. Here are four
projects are in conventional segments, such as gas such methods for capturing and storing CO2:
processing; the rest are in newer segments,
including cement and hydrogen. — Wetland and peatland restoration. The potential
benefits include increased biodiversity, better
Here are five factors that will be critical to CCUS water quality, reduced flood risk, and
development moving forward: opportunities for ecotourism. The potential
challenges include greenhouse gas emissions
— Subsidies and regulatory interventions. In that could be released during the restoration
Europe and North America, tax credits, direct process, as well as the complexity of long-term
subsidies, and price support mechanisms are monitoring and management.
beginning to stimulate the industry. Product
standards that mandate certain volumes of — Cropland, grassland, and agroforestry. Cropland
green commodities are equally important. and grassland management could enhance CO2
uptake from soils, while agroforestry could help
— Coordination among industry players. remove CO2 from the atmosphere. The benefits
Cooperation is important when undertaking the could include increased biodiversity, better soil
time- and capital-intensive tasks of building fertility, and improved agricultural productivity.
large new pipeline and storage networks for CO2. The challenges could include quantifying and
The lessons learned from existing industry monitoring carbon sequestration.
clusters will need to be quickly imparted to the
next generation of projects so they can get
going faster.

What is decarbonization? 4
— Reforestation and afforestation. The potential enable them to store carbon from the
benefits of planting trees in deforested or never- atmosphere. Improved agricultural productivity
forested land include increased biodiversity and may be a benefit; the challenges could include a
ecosystem resilience, while the potential potential increase of trace metals that enter
challenges could be increased demand for local ecosystems.
nonforested land and the release of
sequestered CO2. — Bioenergy with CCS is a process whereby
sustainably sourced biomass produces biofuels,
— Blue-carbon management. The benefits of electricity, heat, and pulp. The CO2 emitted
enhancing CO2 uptake and storage in ocean and during these processes is captured and stored.
coastal ecosystems, such as mangrove forests The benefits could include new revenue streams
and seagrass meadows, could include improved from generating coproducts, while the
marine ecosystems and coastal resilience. The challenges might include increased demand for
challenges could include regulatory uncertainty biomass feedstock and land.
in international waters, as well as monitoring,
reporting, and verification issues. — Direct ocean capture is where the acid derived
from ocean electrodialysis is used to chemically
extract CO2 from surface water. The extracted
What are some technology-based CO2 is then placed in long-term storage, a
carbon removal solutions? technology that could counter ocean
acidification but could also require a lot of
Here are six promising technology-based removal
energy to use.
methods for capturing and storing CO2:

— DAC and storage involves air passing through a

— Biochar and bio-oil are produced from biomass,
solid or liquid chemical filter that binds to CO2,
a general term for organic matter used as fuel.
removing it from the air. Concentrated CO2 is
Biochar is spread to improve soil quality, and
stored in underground geological formations.
bio-oil is injected underground. The benefits
This solution could be deployed across a diverse
could include more fertile soil; the challenges
range of geographies but would require high
could include increased demand for biomass
energy and water usage.
feedstock and land.

A carbon removal industry capable of deploying

— Ocean alkalinity enhancement is when alkaline
both nature- and technology-based removal
substances are added to the ocean to enhance
solutions could be worth up to $1.2 trillion by 2050.
its natural propensity to absorb CO2. Related
But timely action will be required to achieve this
challenges may include unintended impacts on
potential value.
marine ecosystems, due to increased alkalinity,
as well as regulatory uncertainty in international
Learn more about McKinsey’s Sustainability
waters.
Practice, and check out sustainability-related job
opportunities if you’re interested in working with
— Enhanced weathering occurs when rocks and
McKinsey.
minerals are broken down to increase surface
area, speeding up the natural processes that

What is decarbonization? 5
 Articles referenced: — “Accelerating the transition to net zero in life
Find more content like this on the
sciences,” August 11, 2023, Maria Fernandez
McKinsey Insights App
— “What building owners need to know about and Lucy Pérez
decarbonizing operations,” September 25, 2024,
Brodie Boland — “The world needs to capture, use, and store
gigatons of CO2: Where and how?,” April 5, 2023,
— “Global Energy Perspective 2024,” September 17, Phil De Luna, Luciano Di Fiori, Yinsheng Li,
2024 Alastair Nojek, and Brandon Stackhouse

— “How Ventas used machine learning and AI to — “Blue carbon: The potential of coastal and
Scan • Download • Personalize
create a net-zero plan,” September 12, 2024, oceanic climate action,” May 13, 2022, Julien
Brodie Boland Claes, Duko Hopman, Gualtiero Jaeger, Matt
Rogers
— “The energy transition: Where are we, really?,”
August 27, 2024, Diego Hernandez Diaz, — “The path to net zero: Investing in carbon
Humayun Tai, and Thomas Hundertmark, with markets,” January 26, 2022, Oliver Tonby and
Michiel Nivard and Nicola Zanardi Badrinath Ramanathan

— “Building a next-generation carbon platform to — “Putting carbon markets to work on the path to
accelerate the path to net zero,” May 13, 2024, net zero,” October 28, 2021, Asilah Azil, Vincent
Sean Kane and Charles Riesenberg Barnard, Christopher Blaufelder, Cindy Levy,
Thomas Nielsen, and Badrinath Ramanathan
— “Everything you wanted to know about carbon
removals but were afraid to ask,” April 18, 2024, — “How negative emissions can help organizations
Mark Patel meet their climate goals,” June 30, 2021, Peter
Cooper, Emma Gibbs, Peter Mannion, Dickon
— “Global Energy Perspective 2023: CCUS Pinner, and Gregory Santoni
outlook,” January 24, 2024, Krysta Biniek,
Luciano Di Fiori, Rosie Liffey, Neil Segel, and — “A blueprint for scaling voluntary carbon markets
Brandon Stackhouse to meet the climate challenge,” January 29,
2021, Christopher Blaufelder, Cindy Levy, Peter
— “Carbon removals: How to scale a new gigaton Mannion, and Dickon Pinner
industry,” December 4, 2023, Peter Mannion,
Emma Parry, Mark Patel, Erik Ringvold, and
Jonathan Scott

Get to know and directly engage with senior McKinsey experts on CCUS
Badrinath Ramanathan is a senior partner and managing partner of McKinsey’s Singapore office,
where Oliver Tonby is a senior partner; Cindy Levy is a senior partner in the London office; Clint Wood
and Luciano Di Fiori are partners in the Houston office, where Brandon Stackhouse is a senior asset
leader; Mark Patel is a senior partner in the Bay Area office; and Peter Mannion is a partner in the
Dublin office.

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What is decarbonization? 6