The impact of global warming is becoming apparent across the globe, and the conflict in Ukraine has added a new layer to this emergency – global energy security. Despite this urgency, humankind''s ability to reduce greenhouse gas (GHG) emissions remains largely unproven.
To limit global warming by 2050 to about 1.5°C (McKinsey estimates the best feasible result is a 1.7°C increase), humanity needs to scale a major global effort to transition the global economy to sustainable energy and materials, and complement this activity with carbon capture, use and storage (CCUS) at scale.
This effort now has nations that account for over 95% of the global GDP committed to achieving net-zero emissions, and almost 3,000 organizations have signed on to the Science Based Target Initiative (SBTi), founded in 2015 to help companies set their emission reduction targets in compliance with climate science. McKinsey estimates this will require USD 3-5 trillion in investments per year until 2030 – the largest capital relocation in human history – and different parts of the world will play different roles.
Brazil can play a much larger role in this transition, given its natural resources and capabilities. McKinsey has mapped three avenues associated with the green economy in which Brazil can take a leading global role: renewable power, biobased energy and materials, and carbon markets. Together, these avenues represent a market of over USD 125 billion (Exhibit 1). They can also deliver numerous other direct and indirect benefits, such as socioeconomic development, improved water security and biodiversity protection.
Therefore, beyond being an agricultural powerhouse, with 27% of the country''s GDP in 2021 in this sector and a prominent role in feeding the global population, Brazil has a unique opportunity to accelerate sustainable inclusive growth while taking a leadership role in the decarbonization of the global economy.
Biomass use is another major opportunity and has three main applications. First, to expand the use of biofuels for aviation or as a replacement for diesel. Second, to develop the biomethane industry, and third, to use biomass for steel production and other high-temperature processes.
Brazil is well-positioned to become the world's largest sustainable fuel producer. Elements of this transformation include the use of "residues," such as sugarcane vinasse, as well as the use of soybean oil, and specialized crops, such as macaúba (which can grow on degraded pastureland). By 2040, Brazil could capture a market of up to USD 40 billion without putting its agricultural production at risk.
Brazil's biomethane market value could reach USD 15 billion by 2040, taking advantage of waste and by-products from five main industries: sugarcane, cattle ranching, dairy farming, pork raising, as well as urban waste and sewage. Biomethane is produced via anaerobic digestion and can be used in four main applications: heating or electricity for self-consumption, electricity for sale to the grid, renewable natural gas for sale, and renewable natural gas for transportation. The key factors for deciding which application makes the most sense are location and production volumes.
Brazil''s potential for commercial forestry is widely known and exploited by the pulp and paper industry. But the use of biomass as a substitute for coal has great potential in steel-making and other processes that require high-temperature heat, such as pelletizing and clinker production for the cement industry. In the steel value chain alone, the biomass market could reach its full potential of USD 3-4 billion as soon as 2030, staying at this level until 2040. The main restrictions are the growth cycle of the eucalyptus plant and the installation of the continuous carbonization furnaces needed for quality biomass.
Finally, besides extensive forests, Brazil has about 15% of the potential to abate or sequester carbon from the atmosphere using natural climate solutions. In fact, the country has the greatest potential worldwide. These solutions, for example, involve the preservation and restoration of biomes and the improved capture of carbon in the soil by agriculture; initiatives that can be structured via voluntary carbon credits. In addition to bringing important benefits like increased biodiversity and greater water security, this market could reach USD 15 billion in 2030 and USD 35 billion in 2040.
The green economy has the potential to attract significant investments to the country, fostering sustainable inclusive growth. At the same time, it will allow Brazil to collaborate significantly with the process of decarbonizing the global economy. It is probably the opportunity of the age.
The share of solar and wind in the installed power generation capacity of Brazil will likely grow to 47%, surpassing hydro, fossil, and biomass sources. This has a potential market of up to USD 11 billion in 2040. Three main factors will drive this growth. The first is economic attractiveness as the costs for energy generation and required capital continue to decrease as productivity, scale and technological development evolve. Our projections show that by 2040 there will be an up to 46% reduction in the levelized cost of energy (LCOE) for solar generation and a 27% reduction for wind generation (Exhibit 2).
The second factor involves the abundance of locations with high wind and solar capacity factors in the country, which are among the highest in the world. Brazil''s solar energy potential is close to that of desert countries, and it is one of the best places in the world for wind (Exhibit 3). Additionally, the complementarity of sources would allow the development of hybrid solar and wind farms in the same location.
Finally, decarbonization commitments have accelerated. Several global and Brazilian companies are setting their emissions commitments, and renewable energy is an easy and cost-effective lever to pull. Players are already locking in renewable energy positions for the next 15-25 years.
Solar energy growth has been exponential – in 2021 Brazil had 13 gigawatts (GW) of solar installed capacity that will see estimated fourfold growth, at 15% a year. Distributed generation should reach 37 GW and centralized generation another 30-40 GW, growing five- to sixfold
Wind energy is concentrated in the Northeast and South of Brazil. The first auction in 2009 effectively kick-started the sector''s growth in the country. Unrestricted onshore wind potential in Brazil is about 440 GW3
As a fuel and an industrial feedstock, green hydrogen will contribute to decarbonizing the world''s energy matrix, acting as a carrier for renewable energy and creating a USD 200 billion investment opportunity in Brazil over the next 20 years.
So far, hydrogen use remains limited to specific applications, such as oil refining or ammonia production, but this will change. Growing investments in renewable energy sources like wind and solar, where costs are decreasing, and the technological and industrial evolution of electrolyzers, will drive a major drop in the cost of green hydrogen production.
Furthermore, meeting the goals set by the Paris Agreement will require a reduction in CO2 emissions of 60% by 2050 – only green hydrogen will enable the decarbonization of hard-to-abate industries such as steel and fertilizers.
Brazil ranks seventh on the global list of energy generators, with a current installed capacity of 175 GW in 2021, out of which 85% of its energy comes from renewables – a key requirement for green hydrogen production. When it comes to renewable energy, Brazil is behind only the US and China.
Brazil is one of the most competitive places in the world to produce green hydrogen (Exhibit 4). This study shows that the levelized cost of green hydrogen (LCOH) produced in Brazil would be under USD 1.50 per kilogram of H2 in 2030. This is in line with the LCOH of the best locations in the US, Australia, Spain, and Saudi Arabia. By 2040, this cost could drop to approximately USD 1.25/kg.
The total opportunity for Brazilian green hydrogen at USD 15-20 billion. The domestic market has the largest potential, possibly generating revenue of USD 10-12 billion by 2040, primarily driven by trucking and steel along with other industrial heat energy uses. Exports to the US and Europe could add another USD 4 to 6 billion as the landed cost of Brazilian green hydrogen in these regions should be competitive vis-à-vis the main potential competitors (Exhibit 5).
In a fast-paced scenario, green hydrogen will require USD 200 billion in investments, including 180 GW in additional power capacity from renewable sources. Additionally, there are several other factors to consider.
Regulation. Questions arise as to which regulatory functions will fall under what government agencies, as well as regulations governing the use of hydrogen. Regulators must also develop technical standards for hydrogen facilities and transportation, including issues such as blending hydrogen to natural gas flowing in pipelines.
The end-use of green hydrogen and its derivatives. The main challenges involve certification trends. In international markets, requirements may stipulate the use of only wind and solar energy, which may limit the utilization of the clean, integrated grid that exists in Brazil and is a significant competitive advantage. Internally, regulations to support other sources of energy and the non-existence of carbon pricing make traditional solutions more competitive in the short term, delaying the domestic adoption of hydrogen.
Brazil is a leader in the use of biomass for energy, especially in the generation of electricity, process heat and biocoal for steel. The country has a unique capacity and competitiveness for producing biomass, with shorter growth cycles and proximity between the planted areas and the industries that use it. Companies can be segmented into two groups: those that produce biomass as a by-product of their industrial processes (e.g., sugarcane, palm oil, pulp and paper), and those that need a dedicated planting for consumption (e.g., chemicals and petrochemicals, mining companies, consumer goods, steel companies). Looking ahead, with the development and scale-up of new technologies, biomass could be used as a feedstock for advanced fuels and chemicals or plastics.
Technology could enable the use of biomass as a feedstock for advanced fuels, chemicals, and plastics. Brazil''s great feedstock potential position it as a potential world leader in sustainable aviation fuel production. The total opportunity could amount to up to 40 billion by 2040 with a focus on the export market.
Aviation is one of the hard-to-abate sectors and accounts for 2 to 3% of global emissions. Although several technologies are under development such as hydrogen, batteries, and fuel cells, they will have limited impact on most of the emissions generated by the industry until well after 2050. However, sustainable aviation fuels represent the only technically viable option to decarbonize over 70% of the industry''s emissions.
Sustainable aviation fuels (SAF) are "drop-in" fuels that can directly replace jet fuel with GHG emissions reductions of 70% to 100%. The reduction potential depends primarily on the type of feedstock used. SAF has been in commercial use since 2011. Consequently, many expect global demand for SAF to increase rapidly, driven mostly by regulation and corporate commitments. SAF should meet almost 40% of the total aviation energy demand by 2050 (Exhibit 6).
Within SAF, there are multiple technologies with different degrees of maturity and decarbonization potential. Of the four that receive the most focus, hydroprocessed esters and fatty acids (HEFA) is currently the only mature technology in commercial production. As the other technologies develop, we expect HEFA to remain the cheapest alternative until the late 2030s or early 2040s when Power to Liquid (PtL) will likely reach price parity in the most favorable regions. Brazil is well positioned to supply the world with HEFA given its high feedstock potential.
Access to foreign markets will be defined by future regulation, which will determine the acceptability of feedstocks and production processes. SAF regulation is characterized by two key elements: feedstock type and GHG emissions. The EU is focusing on both feedstock types and emissions, and the rest of the market, including the US, is focusing mainly on GHG emissions. Purpose-grown oil trees on degraded pastureland seem to fulfill both requirements and the resulting fuel is likely to be marketable in all markets. Soybean oil SAF fulfills the emission requirements in the US and other regions but does not fulfill feedstock requirements in the EU.
Cooperation along the value chain has helped the SAF industry take off in the EU and the US, especially when there was little regulatory certainty regarding demand volumes. While regulation currently provides more certainty, offtake agreements with customers (e.g., airlines) remain beneficial (e.g., for improving project "finance-ability"), especially when they represent new pathways (e.g., the production of macaúba on a commercial scale).
Finally, the government could choose to provide support to incentivize and de-risk investments in this space, similar to what was done with ethanol. This support could take multiple forms. For example, establishing blend mandates would accelerate development by guaranteeing local demand, direct financial support, and/or the facilitation of access to external markets (via trade treaty agreements and interventions).
Brazil can build a strong biomethane industry worth more than USD 15 billion in total market value by 2040 based on waste and byproducts from five industries (sugarcane, beef, dairy, pork, and urban waste and sewage).
Biomethane is produced through the anaerobic digestion of biomass with proven commercial application for different feedstocks. Biomethane can be used to generate heat or electricity for self-consumption and/or sale (via power purchase agreements or PPAs) and sold as renewable natural gas (RNG) replacing natural gas in industrial applications and transportation markets.
Currently, we estimate that the viable feedstock in Brazil could supply approximately 50% of the total Brazilian demand for natural gas (Exhibit 7).
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