How US States Can Advance a Successful Clean-Energy Transition
As the United States moves toward decarbonization, states and their leaders will help determine whether net zero is achieved—and whether the energy transition elevates communities to deliver a more prosperous future for all. Last year, we outlined six critical action areas that could enable a more orderly transition, from designing a capital-efficient and affordable energy system to accelerating technological innovation to ensure timely deployment of new clean technologies. Across these areas, states have an opportunity to advance the transition, improve energy affordability, and support inclusive economic growth. Traditionally, states have influenced the creation of new sources of energy through formal policies, regulatory constructs, and planning and permitting authorities. But the national energy landscape is undergoing tectonic shifts.
McKinsey estimates that it will take more than $27 trillion of capital spending through 2050 ($900 billion per year on average) to deploy US climate solutions at scale. Several pieces of recent legislation include significant investments to make progress toward these aims. The Inflation Reduction Act (IRA) directs nearly $400 billion in federal funding to clean energy (see sidebar “How the Inflation Reduction Act could unlock new net-zero opportunities for state agencies”). And IRA funding promises to amplify the approximately $70 billion in clean-energy technology and demonstration projects funded under the Bipartisan Infrastructure Law (BIL). Now is the time for states to consider how to access and use this financial support to achieve net-zero targets and advance an orderly energy transition—all while facilitating economic development (transitioning workforces, for example) and environmental equity (such as clean-energy benefits for disadvantaged communities). At the same time, while public funding can cover part of the transition, states may need to explore new financing mechanisms, as well as investments from public and private capital, to close investment gaps.
This article explores tactical steps state leaders can take—and four essential roles they can play—to ensure their states meet net-zero goals efficiently and equitably while unlocking additional value. These actions could also help guide state, provincial, and other subnational leaders globally to ensure their net-zero transitions deliver for all.
Three ways state leaders can jump-start the decarbonization journey
Some states may already be off and running with their decarbonization plans. Others may be looking for a place to start. Based on our experience, we have identified three “no regrets” action areas that can help leaders initiate or accelerate their states’ plans.
Understand the state’s current role in the energy transition
In states that are in the early stages of decarbonization, leaders can consider several moves to gain a baseline understanding of the state’s current role in the energy transition—assessing both its carbon footprint and the potential for progress. States that are further along on their decarbonization journeys could still benefit from these actions, as ongoing factors (rapidly changing cost trajectories of emerging technologies, for example) may affect previous assessments.
- Create a comprehensive, quantified baseline of in-state emissions. This assessment could include point-source and sector-specific emissions.
- Set detailed transition targets and related policies. States can build on any previously announced state-level emissions reduction targets and commitment timelines, as well as existing clean-energy plans and road maps to achieve targets, clean-energy incentive programs, public–private convening mechanisms, and company commitments. States can lead the way by setting targets to decarbonize state-owned assets such as buildings and vehicle fleets.
- Assess the resources that can help the state achieve net-zero goals. These resources could include natural resources, physical infrastructure (such as existing electric power grid infrastructure that has supportive permitting to enable renewable integration), financial resources, skilled workers, and public support. In the process, leaders can also identify the potential resource gaps.
- Set metrics to monitor progress—and get ahead of roadblocks. Key metrics might include state-level emissions intensity, investment gaps, the percentage of clean-energy production, and impacts on high-risk communities. Leaders can also ask, “What might impede progress?” Roadblocks could include scarce private capital in the clean-energy sector, lack of cost-effective solutions and investments, permitting, supply chain risks, and lack of coordinated effort among stakeholders.
Develop or update decarbonization pathways around different scenarios
Achieving net-zero goals in an orderly fashion could prove challenging and unpredictable, given ever-changing market conditions, shifts in energy costs (including potential “shocks”), emerging technologies, supply chain development, workforce availability, and shifting policies. To get ahead of the uncertainty, leaders can develop decarbonization pathways based on different scenarios with the following moves:
- Factor reliability, resiliency, and affordability into any potential changes to the power system, from generation to the distribution grid. As a starting point, leaders could use hourly supply-and-demand matching models to understand the state’s current energy system requirements. From there, they could analyze cleantech costs (with views on the optimal role of emerging technologies such as hydrogen and carbon capture, utilization, and storage) under various policy and economic scenarios. It’s also important to anticipate market shifts. What could be the effects, for example, of a rapid acceleration of transportation and heating electrification? Or a decline in natural gas demand?
- Understand the different trajectories and pathways for climate technologies. By 2050, about 90 percent of total global emissions can be reduced with existing climate technologies; however, many of these technologies are not currently cost competitive, and only 10 percent are considered commercially mature. Leaders can account for available and emerging technologies and the potential for scaling technologies in decarbonization scenarios, and they can factor in state-specific considerations such as existing power infrastructure and natural resources.
- Anticipate the potential effects—intended or not—of implementing a decarbonization pathway. Considerations could include cross-sector interactions, implementation costs, socioeconomic effects (environmental-justice concerns or workforce requirements, for example), and infrastructure requirements for key technologies, such as the degree to which a grid needs to be built out to support renewables and electrification.
- Create an action plan. Once scenarios are identified, leaders will likely need to prioritize actions based on cost, feasibility, and abatement potential. A marginal abatement cost curve, which compares emissions reduction potential and costs for a set of decarbonization solutions, is one tool that states can use to assess a set of possible carbon abatement actions. This approach can help inform investment and policy decisions and identify the role private capital can play. A marginal abatement cost curve illustrating how the United States can stay on track to meet net-zero targets, for example, shows that investment in passenger electric vehicles (EVs) has relatively low-cost, high-carbon-abatement potential compared with investment in shipping and aviation decarbonization (Exhibit 1). At the state level, factors such as local industry, infrastructure, and energy mix could affect the potential value of abatement activities. (Later in the article, we’ll explore how states can effectively create an integrated plan.)