By Dr Leila R. Benali.
The momentum to tackle climate change has never been stronger, but the pathways to achieving "net-zero" carbon emissions for the energy industry are still hobbled by the fact that policy uncertainty outlives investment timelines. Energy stakeholders are trying to make sense of taxonomies, roadmaps and reporting requirements.
The implications are huge, with 120 countries having announced net-zero targets by mid-century. More than half a trillion dollars of oil and gas companies' asset value is today under a net-zero carbon emissions regime. Portfolio investors have poured more than $2.5 trillion into sustainable equity assets, even when there are still questions over the consistency of the "environmental, social and governance" (ESG) label amid a proliferation of standards.
If we needed a price signal, carbon futures in the EU's emissions trading system have soared by more than 80 percent since the beginning of the year, breaking a record on May 12 at €55 per ton of carbon-dioxide equivalent.
At the same time, estimates of how much the transition will cost range anywhere from $7 trillion to $130 trillion over 30 years – an unacceptably wide gap.
Companies governed by these fast-evolving standards must nevertheless continuously invest in new supply, extend access to energy, future-proof existing infrastructure, enhance efficiency and support innovation. For example, major international oil companies have committed to increase annual low-carbon investments from $6 billion last year to $15 billion in 2025. But the whole industry is urgently in need of clarity around three key topics related to sustainability.
First, humanity will need to manage enormous trade-offs required from local communities, citizens and therefore from governments over the coming decade. Back casting analyses in 30-year net-zero roadmaps are one way to enhance awareness, but these can only discount the massive efforts required shorter-term.
The key problem with scenario planning is that the interface of scenarios and decision-makers run the risk of being muted. In the case of intergenerational and global climate-related scenarios, this interface is largely ignored. Radical consumer behavior change, bankruptcies, energy affordability, unemployment are a few examples of the implicit assumptions on which public support -and therefore government support - is not guaranteed.
In several countries considering phasing out coal, social implications are not trivial. For example, in Lausitz, Germany, more than 8,700 workers are employed in either coal mining or power. Moreover, in few instances ambitious renewables targets are met with strong local resistance to planning approvals or high electricity prices. In Chile, known for its ambitious green hydrogen strategy, violent nationwide protests resulted in the reversal of a 9 percent increase in electricity prices late 2019.
The IEF will work on enhancing the understanding of people's expectations regarding their consumption and energy policy choices, as well as the political and social implications of net-zero commitments.
Second, capital allocation and expenditure plans will naturally focus on the low-hanging fruits, in a pragmatic manner: methane reduction, low-carbon hydrogen, scaling up Carbon Capture Utilization and Storage (CCUS) and Direct Air Capture (DAC).
Since it took most of the 20th century to build today's energy infrastructure, decarbonizing transportation and hard-to abate industries will require blending existing fuels with low carbon alternatives. Italian grid operator Snam recently tested a blend of natural gas with 30 percent hydrogen at a steel plant.
With 80 times more warming power than CO2 over the first 20 years after it reaches the atmosphere, methane is probably the most overlooked greenhouse gas in the net-zero debate. Canada, Norway, Qatar, Saudi Arabia, and the United States, representing 40 percent of global oil and gas production, formed a cooperative forum to develop pragmatic net-zero emission strategies, including methane abatement, and other measures in line with each country's national circumstances.
The IEF is forming a partnership with a global asset observation platform to propose methodologies for measuring methane emissions, as countries update their Nationally Determined Contributions for COP26.
Finally, robust standards are critical to ensure the scientific integrity of carbon credit systems and alignment with competitive practices. The truth is that we cannot manage, or even tax, what we cannot measure.
China launched the world's largest emissions trading scheme in February this year, covering more than 2,000 coal and gas-fired power plants. With China, nearly 23 percent of global greenhouse gas emissions are covered by carbon pricing initiatives, trading schemes or tax. These domestic schemes have been increasingly coupled with sectorial crediting mechanisms and voluntary markets.
Since the first formal mention of a Cross-Border Adjustment Mechanism in the European Green Deal in December 2019, different proposals and concepts have been offered. The aim is to drive decarbonization beyond Europe's borders while protecting industrial competitiveness. For many industries, energy costs are a critical component of competitiveness. After the first carbon-neutral LNG cargos were sold, emissions certifications standards for oil and gas streams might become an integral part of energy trade, marketing, and costs.
Dr Leila R. Benali is Chief Economist at the International Energy Forum.