Pragmatic approach will help oil producers to assess IEA road map to lower emissions
Reports by agencies and consultants have power when they can bring about change. There are many ways to reach a goal and scenarios should not be mistaken for reality. These maxims should be kept in mind as we evaluate the International Energy Agency’s pathway to reaching net-zero carbon dioxide emissions by 2050.
Firstly, we should note the report’s significance and applaud the IEA’s diligence in preparing it. The world’s top energy agency, set up to represent the interests of the industrialised countries after the 1973 oil crisis, has often been portrayed by critics as a mouthpiece for fossil fuel interests.
Although it is guilty of errors such as heavily underestimating the adoption of solar power, such a characterisation is unfair. It has long broadened its scope to cover energy security in general, with a growing focus on climate. According to executive director
Fatih Birol, this report is the culmination of at least a decade’s work and more will follow to help the agency’s members and associates in choosing their own paths.
The agency’s climate-related work has been caught between two forms of projections: what will happen, given certain conditions, and what should happen to realise a particular goal. This report, aimed at achieving the Paris Agreement’s goal of limiting global warming to no more than 1.5°C above pre-industrial levels by the end of the century, is of the second kind.
The report will be influential since it could change the behaviours of governments and investors. The agency is following, not leading, the more ambitious initiatives of environmentalists, green political parties and low-carbon entrepreneurs. If we include the US under the Biden administration, 70 per cent of the world economy is already covered by net-zero targets between 2050 and 2060.
However, the milestones to 2030 – those that current governments can influence – will be the best guide to whether we are anywhere near the right path. Dorel Iosif, chief executive of consultancy Lavaux, said that “we see growing global political consensus for net zero but policies need to be translated into action and, most importantly, in a manner in which developing countries receive the right amount of investment so that they are not left behind”.
The scale of what the agency finds as necessary to attain net-zero emissions has been widely reported but remains breathtaking.
It includes a commitment to not approve new coal-fired stations without carbon-capture systems from this year, measures to ensure 60 per cent of all car sales are electric by 2030 and the outlawing of new petrol or diesel car sales globally by 2035. It also includes policies to guarantee that all power generation worldwide is zero-carbon by 2040, with 70 per cent generated from solar and wind by 2050.
These milestones rely on technology that exists today, developed with sweat and massive investment over the past half-century. The road map contains others such as low-emission aircraft and industrial processes that, at best, are at the development stage.
This is not the only way to meet climate goals. The Intergovernmental Panel on Climate Change, a UN body, laid out four representative scenarios in 2018, covering a wide range of philosophies. There is relatively little reliance by the IEA on negative emissions – the direct removal of carbon dioxide from the atmosphere, which some of the IPCC projects use heavily.
Environmentalists and headline writers hailed the agency’s findings, which showed that no investment in new oil and gas fields was required. However, this is reading the report backwards. The demand side will lead, not supply.
Oil companies and resource-rich countries must plan for the world as it is, not as it should be. They need to judge how likely the agency’s proposed rapid shift to renewables and electric vehicles is.
China, an associate of the agency, approved new coalfired projects that can generate 46 gigawatts of electricity last year, which despite the report’s admonitions, will not drop to zero this year. Exploration and development of new fields can still be preferable if existing resources are expensive to produce or carbon intensive.
Furthermore, the agency’s traditional advocacy of a diverse and competitive energy market sits oddly with a projected concentration of future oil output in Opec and Russia.
At stake is not only lost profit for oil companies that might commit prematurely to becoming renewable energy majors. An artificial constraint on fossil fuel production will mean sharp price increases and volatility, a failure to meet the agency’s goal of universal energy access by 2030 and a political setback for the whole green agenda.
Individual companies might decide to leave the oil business and some countries might ban further exploration, as Denmark has already done.
That is a plausible path for the EU, which is investing heavily in low-carbon energy systems for consumers and does not include Norway and the UK, the two biggest European producers.
However, there is no international body to enforce the rapid decline in oil and gas production the agency’s scenario envisages. Opec comes closest but it has no powers of enforcement and wants its members to make the most of their oil resources.
It would help to co-ordinate the transition of economies as oil output and prices fall. More controversial would be if the oil exporters’ organisation produces its own view on how far continued petroleum consumption is compatible with the Paris goals they have all signed up to and what skills and assets are transferable to low-carbon activities.
Investors, lenders, multinational businesses and intergovernmental organisations will probably ask fossil fuel producing states that very question.
Oil companies and countries that are rich in resources have to plan for the world as it is, not as it should be