The pledges made at COP26 to cut carbon dioxide emissions substantially are a distant memory. The realities of a gas shortage, sky-high energy bills in many countries and days when the wind did not blow enough is forcing governments to swerve on the road to net zero to keep the lights on.
2030 is likely to see the world using as much oil and gas as today, with limited cuts to overall carbon emissions. China had to abandon emission targets with government instructing the domestic coal industry to deliver more. US President Joe Biden returned home keen to avoid the European gas shortage and went ahead with issuing more permits to drill for US gas and oil to raise supply and keep the prices down. He even promised to sell some oil from the national stockpile to try to make it cheaper.
The European Union (EU) is facing a perfect storm with German nuclear closures, French nuclear outages and some windless days decided to redesignate gas as a green fuel for transition, capable of morphing into hydrogen created by using renewable electricity in due course.
Chart 1: Current net zero commitments and carbon emissions scenarios
The big emitters
When it comes to curbing greenhouse gases China, the US and Europe are the big three. They account for 56% of the world total of carbon dioxide output. Add in Russia and India and you reach 68%, more than two thirds. It will be impossible to reach “net zero” in good time, unless the conduct of these main players changes.
Even under most optimistic assumptions, still leave a significant “ambition gap” between Paris targets and emission forecasts.
China alone accounts for 31% of the total and is currently on course to expand its use of coal and other fossil fuels for the rest of this decade. This places more strain on the others if they are to get closer to their goal. This is without taking into account the fact that currently stated net zero pledges and targets, even under most optimistic assumptions, still leave a significant “ambition gap” between Paris targets and emission forecasts.
Chart 2: World emissions of CO2 by region
If we look at the large oil and gas companies, they offer us a range of scenarios, which have contrasted achieving net zero with other futures where governments and economies fail to make the changes in time that net zero requires. Understandably, they do not offer scenarios where net zero is reached earlier than 2050.
BP offers us a business-as-usual case to remind us of little progress so far to cut emissions globally. In this, CO2 output declines a little by 2050, but remains well above target. It offers us a rapid-change scenario, which still falls short of getting to net zero by 2050. Royal Dutch Shell embeds net zero in 2050 in its “Sky 1.5 scenario”. Its “Waves” scenario gets off to a slow start, forecasting peak oil and coal in 2030 and net zero by 2100. Its “Islands” scenario sees an outbreak of economic nationalism and the pursuit of energy self-sufficiency, with net zero not achieved by 2100 and a longer dependence on fossil fuels. Most scenarios see fossil fuel use expanding this decade before peaking.
Chart 3: Demand for oil, gas, and coal in 2030 and 2050 by scenario
The knock-on effect on trade
All of this is complicating trade relations. It is becoming part of the larger diplomatic plays between the great powers. Countries are contemplating placing carbon taxes on imports from countries that make use of fossil fuels to produce good value products, as well as introducing domestic carbon taxes and renewable and new technology subsidies. These need to be absorbed and approved by the World Trade Organisation to make sure they are fair and not unduly restricting trade.
More interventions also increase the risks of markets malfunctioning, requiring urgent further interventions.
The larger the range of subsidies, taxes and other interventions the greater the danger of trade disputes and challenges, as these same interventions can look like or could become protectionism of a traditional kind. There is growing resentment in the west of China generally. If China exploits its freedom to use more cheap coal to make good-value products it could become another bone of contention with the west. More interventions also increase the risks of markets malfunctioning, requiring urgent further interventions to avoid shortages or high prices.
Chart 4: Developing Asia’s dependency on imports for oil and gas in 2030 and 2050 by scenario with implied share of OPEC and Russia in oil and gas production
Nature has provided Russia and Saudi Arabia with strong positions with oil and gas reserves, alongside Qatar’s huge gas reservoirs. Russia is keen to exploit its gas strength to earn substantial foreign exchange from sales. President Vladimir Putin also wishes to exercise leverage diplomatically by offering piped supplies to neighbouring countries, to the EU and to China. As he seeks to increase Russian influence over the countries of the former USSR, he is willing to adjust flows and change sales arrangements as leverage.
Ukraine in particular now suffers from the diversion of gas in transit from a pipeline across its territory, as Mr Putin steps up economic pressure on that country. The crucial decisions to be made are over how much gas in future he wants to sell to China where a new pipeline is in discussion and how much he will be able to sell to the EU. Russia and the EU are currently arguing over the terms for bringing NordStream 2 into use, the new pipeline from Russia direct to Germany. Meanwhile, Mr Putin has signed a new gas supply agreement with Hungary that will route the gas via Turkey to avoid the Ukraine pipe used for the previous contract. An aim is to put more pressure on Ukraine, reducing its pipeline revenues.
Map: Ukraine – Ethnic composition and major gas pipelines
The US has some purchase over Saudi Arabia as its main ally and defence supplier. The US often seeks Saudi help to smooth the oil price as the main swing producer as the US, with a free enterprise system, likes to keep its oil taps fully open. The US has tried to stop the EU from becoming ever-more dependent on Russian gas, seeing the dangers of an ally having to be careful in its response to Russia. It seems likely that, in due course, Germany and the EU will agree a deal with Russia over more pipeline gas, as the EU remains very short of energy. The recent policy change to be more favourably disposed to gas as a transition fuel implies preparation for the reality that gas will be an important fuel at least for this decade.
The cost of change
The central paradox of the journey to net zero is that it needs high prices for fossil-fuel energy to induce change. Given the dominant role of fossil fuels in the current world mix, allowing or forcing these fuel stocks to be too expensive too soon plunges governments into unpopularity – and forces them to turn back to fossil fuels to avoid disruptions to markets and to politics.
Our base case assumes continued heavy reliance on fossil fuels for the next few years, with emerging economies supporting growing with rising fossil-fuel use. Meanwhile, there will continue to be market enthusiasm for renewables as governments chase the investments in green technologies and try to buy faster progress to more renewable power.
COP26 may have represented a temporary peak in enthusiasm for the green alternatives, as governments wrestle with a northern winter and with growing resistance to the extra costs of energy. The carbon taxes and the renewable incentive charges build up on domestic and industrial energy bills which is forcing governments to look for ways to abate the impact on consumer incomes.
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