A sobering reality check for the energy sector after COP21

Everyone is still trying to determine what the impact of the recent global climate change agreement means in reality, now that the fine words are over. Nick Butler provides a good blog in the Financial Times about the impact on the energy sector.

 

Beyond Paris – the long-term energy outlook

Two papers published in the last few weeks provide a sobering reality check after the rhetorical success of the Paris climate change conference in December. Getting any agreement was a diplomatic triumph but producing real change on the scale necessary will be much more difficult. The two documents are very different but both excellent pieces of work. Their calculations and assumptions are detailed, transparent and, most important of all, evidence based. Both, however, reflect a degree of unjustified optimism. The first is ExxonMobil’s long-term energy outlook to 2040. The second is the Grantham Institute’s assessment of the credibility of the pledges made in Paris by the G20 nations, which account for the bulk of global economic activity and the overwhelming majority of current and future greenhouse gas emissions. Both are freely available and worth reading by anyone interested in the energy industry or the debate on climate change. The Grantham paper dissects the credibility of the pledges made against a set of criteria. It says to be judged credible countries should have in place:

  • Rules and procedures such as a coherent legislative process and transparent decision making.
  • Players and organisations – public and private – capable of delivering.
  • A history of active international engagement on environmental issues plus climate-aware public opinion.
  • A track record of past performance on climate commitments and no history of policies being reversed or abolished.

Each of these elements is then disaggregated to build up a picture of credibility in each country and across the G20 as a whole. The conclusions are mixed. Ninety per cent of the pledged emission reductions are backed by at least moderately supportive public opinion but only 15 per cent have the backing of rules and procedures that are largely or fully supportive.

The EU member states and South Korea score well, but the list of countries with significant weaknesses on at least one of the measures is long and includes the US, Russia and Brazil. More seriously, there are six G20 countries that in the slightly coy phrase used in the paper “have scope to significantly increase their credibility across most determinants”.

A sharper way of putting this would be to say that the majority of emissions reductions promised are due to come from countries which have not yet proved in any way that they are ready to fulfil the commitments. There remain major question marks over both the US (where a significant division of views is still evident at the political level) and China, which has made progress but may not be able to alter its energy economy rapidly enough.

The paper does not include any assessment of the knock-on effects of the failure of one or more of the major countries to keep its promises. Its main weakness is that it leaves economics out of the calculation, and there is no assessment of the inevitable short-term costs of making the transition to a low carbon economy. That is already hitting the commitments made by Brazil and any economic downturn – in individual countries, or more generally – would undoubtedly have a negative impact on the climate commitments that have been made.

After reading the Grantham Institute paper it is fascinating to turn to the Exxon outlook, which gives a detailed view of the energy market to 2040. There is much rich detail but two headlines stand out. Energy demand in total is projected to rise by 25 per cent to 2040 – with most of the increase coming in the non-Organisation for Economic Co-operation and Development world. By 2040, it says, significantly more renewables and nuclear power will be in use but hydrocarbons – oil, coal and natural gas – will still provide 80 per cent of total supply. Oil will remain the leading fuel, not least because Exxon is sceptical about electric vehicles.

The most notable aspects of Exxon’s paper lies in two key assumptions. First, that there will be a continuing and cumulative gain in energy efficiency – with energy per unit of economic output down 40 per cent by 2040 – and, second, that despite the continued reliance on hydrocarbons there will be a marked decarbonisation of the global economy. The expectation is that the CO2 intensity of global economic activity will be cut in half and that emissions will peak about 2030.

The efficiency gain seems like a big stretch. There has been a significant gain in efficiency since 2000 but that was achieved when energy prices were high and rising. Now we are in an era of low prices, the incentive for consumers to save is much more limited. The assumptions supporting the projection of decarbonisation seem even less credible. It is that OECD governments will impose a cost on carbon rising to $ 80 a tonne by 2040 (I assume this is in current dollar terms – but the paper is not quite clear).

Really? To achieve the progress on decarbonisation that Exxon is suggesting by 2040 would require a carbon price set at a level which changed behaviour from now on. I don’t see any of the candidates in the US election advocating such a charge and politics have prevented even the most climate-change conscious European countries taking a lead. The carbon price would, of course, come on top of any other price increases – a point not discussed. Exxon should tell us how it thinks this very radical political shift is going to be made.

The conclusion from the two papers is that it takes heroic assumptions to get to numbers necessary on the UN’s Intergovernmental Panel on Climate Change calculations to keep global warming to 2 degrees centigrade, let alone anything less. Optimism is a fine thing but the danger after the “success” of Paris is that it creates a mood of complacency. Public opinion, which may not understand all the details, could easily be led to believe that the problem has been solved. That view is wrong and the risks are all too obvious.

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