IPCC REPORTS SETS OUT HARD CLIMATE CHOICES
Ronan Kavanagh, London; Philippe Roos, Strasbourg; Alex Martinos, London - Apr 8, 2022
The latest report from the Intergovernmental Panel on Climate Change (IPCC) makes for stark reading. It warns that the world will likely overshoot the goal of limiting global warming to less than 1.5°C, and that keeping even 2°C warming in sight will require a major strengthening of policies. But even if the 1.5°C goal is now slipping out of reach, it remains, more than ever, what the world should aim for. That's bad news for the oil and gas industry, as it implies cutting oil and gas use by more than half over 2019-50. It also serves as a timely reminder of the underlying climate challenge facing the industry, as it grapples with the shorter-term supply issues — underscoring the challenges of reconciling seemingly irreconcilable demand requirements with urgent decarbonization imperatives.
The report released this week focuses on climate change mitigation, and is the last of three working group contributions to the IPCC's sixth assessment report. These do not paint a “pretty picture,” notes Inger Andersen, executive director of the UN Environment Program. “The first two IPCC reports told us that climate change is here and now and causing huge disruptions in the natural world and to human wellbeing. This report tells us that we're still not doing enough to cut greenhouse gas emissions,” she said at its launch.
Unlike the International Energy Agency's net-zero report last year, the IPCC report does not directly call for a freeze on investment in incremental fossil fuel projects. But its message is arguably worse for the industry, as it shows that in 1.5°C pathways with no or limited overshoot, just a net 510 billion tons of carbon dioxide can still be emitted before midcentury. Yet, future emissions from existing and planned fossil fuel infrastructure alone could reach 850 billion tons, or 340 billion tons above that limit.
Carbon capture and storage (CCS) retrofits can help to address this issue, but early retirement of existing fossil fuel infrastructure and cancellation of new projects seems unavoidable. This will certainly increase lenders’ and investors’ pressure on fossil fuel value chains — from exploration-production to final use — to limit and possibly halt any new investment while redirecting funds toward “green” assets, including CCS and other carbon dioxide removal (CDR) technologies.
Carbon Removal Limits
CCS and CDR shouldn’t, however, be taken as a lifelines for the industry. The impact of CCS in moderating the cuts needed in oil demand would be negligible, the IPCC found, given that oil is mostly used in transport applications where CCS does not fit. Gas is a slightly different story because CCS can be deployed in power generation and industry, and demand reduction would vary between 45%-70%, depending on how much CCS is implemented.
CCS also still faces “technological, economic, institutional, ecological-environmental and sociocultural barriers,” the IPCC says. CDR technologies, which mostly include forestry projects, bioenergy with CCS, and direct air capture with CCS, face even higher barriers but are “unavoidable” if the net-zero target is to be achieved, according to the IPCC. But it also stresses that CDR cannot be used to compensate for delayed action in other sectors.
In addition, the oil and gas industry should expect to be pushed for faster reductions in absolute emissions — including Scope 3 (end-use) — by the end of the 2020s, even if that seems impossible to reconcile with wider demand trends. Action on methane and other operational emissions is likely to be a minimum requirement, too — which the industry is already targeting, including through groups such as the Oil and Gas Climate Initiative.
Deep reductions in methane emissions by 2030 and 2040 could lower peak warming, reduce the likelihood of overshooting warming limits and cut back reliance on CDR to reverse warming later in the century, the IPCC notes. About 50%–80% of methane emissions from fossil fuels could be avoided with currently available technologies at a cost of less than $50 per ton of carbon dioxide equivalent, it says.
Stranded Assets Risk
The IPCC warns that continued investment in unabated high-emissions infrastructure could result in losses on "stranded assets." These could amount to $1 trillion–$4 trillion from 2015-50 to limit global warming to approximately 2°C, and even more if global warming is limited to approximately 1.5°C. Coal assets are the most vulnerable over the coming decade, but oil and gas assets become more exposed toward midcentury.
The report acknowledges that many countries, businesses and individuals stand to lose wealth from stranded assets and may therefore want to keep assets in operation. This could create political and economic risks, and prompt asset owners to hinder climate policy reform. The IPCC says that it will be easier to retire assets if the risks are communicated, sustainability reporting is mandated and enforced, and corporations are protected with arrangements that shield them from "short-term shareholder value maximization." It also suggests that compensation could be paid for devalued assets.
Prepared by 278 authors who reviewed more than 18,000 scientific papers and approved by the 195 member governments, the IPCC reports are the world's most authoritative assessment of the science of climate change, and form the backbone of climate decision-making and action on a global, regional and national level. They are also used as a reference framework by energy and insurance firms, investors seeking climate-friendly portfolios, policymakers, and judges in climate litigation cases.
Strong Renewables Potential
As well as sounding a stark warning, the IPCC holds out some hope that the climate problem can still be addressed — with the average annual rate of growth in global emissions having slowed in the last decade. “This decline in growth is particularly noticeable in the energy and industry sectors, where the rate of growth has more than halved,” said Jim Skea, co-chair of Working Group 3, which prepared the report. Since 2010, there have been sustained decreases in unit costs, with reductions of 85% for solar energy, 55% for wind power and 85% for batteries. In some cases, costs have fallen below those of fossil fuels and “at the same time we've seen big increases in installed capacity,” Skea said.
Electric vehicles powered by low-emissions electricity offer strong decarbonization potential for ground transport, on a life-cycle basis. Sustainable biofuels, too, can offer benefits in land-based transport in the short and medium term. Sustainable biofuels, clean hydrogen, and derivatives (including synthetic fuels) can help cut carbon dioxide emissions from shipping, aviation and heavy-duty land transport as well, but require production process improvements and cost reductions, the report says.
Immediate Action Needed
There is no time to lose however, with the IPCC insisting that more urgent action is needed now, not after 2030, when it would be less effective. It warns that overshooting the 1.5°C target implies greater social and environmental risks, compared with pathways that limit warming to 1.5°C with no or limited overshoot. To achieve this, emissions would need to peak by 2025 and halve by 2030, using mature technologies, like wind, solar, electric vehicles and energy efficiency, to cut fossil fuel use as fast as possible. Technologies that are less mature, such as CCS and hydrogen, would only play a role later, after 2030, when fossil fuel demand is already down substantially. Nature-based solutions such as tree planting will also be important, but as a vital addition to rather than a substitute for reductions elsewhere, the IPCC argues.
Ronan Kavanagh is an editor of World Energy Opinion, Philippe Roos is a senior reporter, and Alex Martinos is Director, Energy Transition Research at Energy Intelligence. Versions of this article originally ran in Petroleum Intelligence Weekly and EI New Energy.