Managing Director & Partner
The challenge is enormous. To keep global warming to less than 2°C—a critical limit for avoiding the most catastrophic consequences of climate change—accomplishing two goals is a must: reducing greenhouse gas emissions to 45% below 2010 levels by 2030 and reaching net-zero emissions by 2050. To achieve these goals will require a fundamental reinvention of the world’s energy and industrial systems in virtually every major industry.
The task at hand will fall in large part to the world’s machinery makers—the companies that provide the equipment, components, and industrial automation systems to industries across the globe. Our earlier analysis of the economic opportunity available to machinery makers uncovered a meaningful prize of $12 trillion. However, considering the full range of technologies required and the growing implementation gap, our recent analysis estimates the opportunity will be $27 trillion from 2020 through 2040.
Companies looking to capture their share of the opportunity must act boldly, committing to a thorough yet expeditious reexamination of their businesses and swiftly bringing the next generation of green technologies to market.
Early movers have historically reaped real economic and strategic advantages during periods of rapid technological change, suggesting just how critical it is for machinery makers to begin now to prepare their businesses for the climate transition. In what follows, we examine the role that key technologies will play in helping industries meet their abatement goals, the opportunity for machinery makers, and how they can take action to capture it.
Global emissions are just under 60 gigatons of CO2e each year and largely generated by five broad sectors: power generation, industrial processes, agriculture, transportation, and buildings. (See Exhibit 1.) Effectively zeroing out the emissions from these sectors will require companies to fundamentally rethink—at a far faster pace than any previous energy transition has required—how they source and use energy. To meet the challenges, companies in these sectors will look to machinery makers as they seek ways to reinvent their operations.
Power Generation. This industry is key to the fight against global warming, given that it emits 34% of total emissions. Decarbonizing power generation will require outsized investments in renewables not only to replace existing fossil fuel-based power generation but also to meet increased power demand due to higher rates of home, auto, and industrial electrification. Meanwhile, major investments in the grid will be needed to connect new renewable resources, manage distributed and intermittent generation, and harden transmission and distribution networks against more extreme weather. These investments will drive the bulk of the value opportunity for machinery makers.
Industrial Processes. This sector includes mining; the production of chemicals, metals, and cement; and the downstream manufacturing of a wide variety of machinery and end products. Here, the need to decarbonize both production processes and supply chains will require advancing a wide variety of new technologies, some of them still in their infancy. Switching to sustainable fuels or high-load electrification will be needed for processes with high heat requirements, and technologies for optimizing heat and power will be needed to manage costs and emissions. Still, the release of some emissions will be unavoidable, likely requiring carbon capture, utilization, and storage technologies.
Agriculture. Agriculture and related changes in land use account for more than 20% of global GHG emissions. These potent emissions are driven by methane and nitrous oxide in addition to CO2. Methane emissions come primarily from livestock, while the application of fertilizer produces nitrous oxide. Conventional farming practices, such as tilling and overgrazing, have resulted in the loss of up to a quarter of the original carbon stock in the world’s soil. Changes in land use is another significant contributor, as growing demand for agricultural output continues to fuel deforestation and the loss of biodiversity, resulting in the further destruction of natural carbon stores.
Transportation. The automotive industry is currently undergoing a fundamental change, as vehicles shift from using the internal combustion engine to using battery electric powertrains. Navigating this change will require massive investments not only in machinery to manufacture electric vehicles but also in the charging infrastructure required to support them. Over the long term, heavy-duty trucks may shift to hydrogen as a fuel source for hauling freight over longer distances.
Decarbonizing the aviation and maritime industries presents a unique set of challenges given that batteries lack the power density required for long-distance travel. Instead, these industries will turn to sustainable biofuels or synthetic power-to-X fuels that can replace existing fossil fuels with a fraction of the emissions. Biofuels will lead to new supply chains and production facilities that use specialized membranes and compressors. Power-to-X fuels will rely heavily on green hydrogen that is produced using electrolyzers and sustainably sourced CO2.
Buildings. The most significant source of direct emissions from buildings is heating and cooling systems. Converting legacy heating, ventilation, and air conditioning (HVAC) equipment to heat pumps can dramatically reduce fossil fuel use and the resulting emissions. While this switch will increase the use of electricity, more-efficient HVAC units and heat pumps can help reduce the incremental power needed from utilities. New digital technologies that manage power consumption, directing it to only where it is truly needed, will also play a key role.
To construct net-zero buildings, improved insulation and decarbonized materials will be needed. Machinery makers will likely find opportunities to help industrial materials makers reduce emissions during the manufacturing process.
As demand for new machinery, equipment, and automation systems ramps up, machinery makers will need to juggle three challenges simultaneously. They must decide which new product and technology areas to compete in, balancing their existing competencies with the needs of their customers. They must continue making their legacy offerings more efficient to remain competitive throughout the transition. And they must develop new data and analytics tools that can help support their customers’ efforts to decarbonize.
Meeting these challenges will be no easy task. And predictions consistently underestimate the speed at which the transition to new technologies and systems take place. (See “Rising Expectations.”) As the pressure on industries to decarbonize increases, and as governments take a more active role in the transition, the demand for new products will likely accelerate, reach an inflection point sooner than expected, and become an avalanche. There are early signs that the US Inflation Reduction Act, for example, may be triggering a sudden increase in demand.
As substantial as the challenges may seem, the green tech opportunity for machinery makers is equally vast—about $27 trillion through 2040 across six critical technology categories. (See Exhibit 2.) And while the opportunity is significant in each category, it is important to note that the growth trajectories for each type of technology will vary considerably given their current maturity and future innovations.
A wide variety of technologies—those already available at scale and those that have not yet been brought to market—will be needed to meet global decarbonization goals. (See Exhibit 3.) The variety highlights the sheer complexity of the strategic challenge for machinery makers: many of the technologies that customers will invest in will differ significantly across industries.
In choosing where to play, machinery makers must consider two factors: where their current core competencies lie and where their end customers are most likely to have needs—including customers of ancillary and aftermarket services. (See “The Aftermarket.”) These considerations will help machinery makers decide where to focus as they evolve their businesses.
The vast majority of the estimated $27 trillion in green tech investments will come from the private sector as it seeks to decarbonize operations and supply chains with high emissions. But early and sustained support from governments around the world will also be essential to support research into new technologies, stimulate demand for green tech, and create the regulatory frameworks required to promote change.
In the US alone, for example, the Infrastructure Investment and Jobs Act, enacted in 2021, and the Inflation Reduction Act of 2022 will provide close to $500 billion in direct funding and tax credits for renewable and nuclear energy, battery electric vehicles and charging infrastructure, green buildings, hydrogen production, carbon removal, and low-carbon manufacturing. That funding is to be matched by an estimated $600 billion in private investment. We are beginning to see evidence that similar efforts around the world, such as the European Union’s Green Deal Industrial Plan, may lead to competition among countries to catalyze their own green-tech economies. This, in turn, will help drive the rapid transformation of legacy industries and offer enormous prizes to machinery makers bold enough to enter green tech markets quickly.
Regulators can also play a significant role by directly affecting the adoption of certain technologies and products. For example, to increase the public’s adoption of energy-efficient light-emitting diode, or LED, light bulbs, the US enacted rules to phase out and then ban incandescent light bulbs. Similarly, the European Union’s regulations are accelerating a shift away from gas boilers to heat pumps for home heating. Heat pump installations are expected to reach 40 million by 2030, reducing the total number of gas boilers in use today by a third.
Green tech markets are already starting to pick up steam, making it critical for machinery makers to develop the right strategies to enter them now. This effort will require gaining an understanding of the business models, technologies, and projected demand across each industrial sector under consideration, as the following companies have done.
These examples suggest that companies are already beginning to incorporate green tech into their business. Those looking to do the same must ask themselves five key questions: