Is the energy sector copping out of COP26?

By Prajeev Rasiah, DNV

A pivotal moment for planet: A 1.5° C future is still possible, but it requires a sea change of progressive and urgent action (illustration: Shutterstock/petrmalinak)
A pivotal moment for planet: A 1.5° C future is still possible, but it requires a sea change of progressive and urgent action (illustration: Shutterstock/petrmalinak)

Six months on since the ink dried on the Glasgow Climate Pact and world leaders agreed on the Paris Rulebook, the outcomes and promises of COP26 have understandably slipped down the news agenda as the world turns its attention to the ongoing war in Ukraine. Though climate change may not be currently making the same headline news, the optimism and drive to achieve an energy transition that limits global warming to 1.5° C continues with gusto.

The energy transition is accelerating faster than ever
The energy transition is accelerating faster than ever (illustration: DNV)

DNV’s latest global report, which analyses the views of more than 1,000 senior energy professionals, maintains that the energy transition is accelerating faster than ever. The findings are documented in The Power of Optimism: Managing scale and complexity as the energy transition accelerates. The research accentuates opinion that huge commercial opportunities presented by the transition outweigh the business risks to the power, renewables, and oil and gas sectors, despite obvious challenges.

But what do these sectors, many of which are undergoing a radical transformation towards decarbonisation, truly make of COP26 and how are its pledges being applied?

Galvanising COP26
After tense and painstaking negotiations, the Glasgow Climate Pact was eventually signed in November 2021 with mixed reactions from observers.

Many in the industry – nearly two thirds (61%) – believe COP26 did not achieve enough. Around three quarters (74%) stated that policy failures are holding back greater action on climate change.

Yet some believe the conference achieved positive results. Espen Barth Eide, Norway’s Minister of Climate and Environment, who was interviewed as part of the DNV study, said: “I actually think COP26 went quite well, by the standards of previous climate conferences. I believe we need to do more and do it faster, but there were some strong outcomes.”

A tentatively encouraging sentiment is that nearly half of those questioned (43%) said that COP26 will lead to significant emissions reductions from their part of the energy industry.

However, while much of the industry is increasing investment in decarbonisation, it is telling that only 42% are optimistic about their company reaching its targets to decarbonise, and 28% are outright pessimistic. While these numbers sound negative, the summit was progressive, and we should not forget that what is being prescribed by the IPCC is extremely difficult.

The global climate gathering came at a pivotal moment for planet. A 1.5° C future is still possible, but it requires a sea change of progressive and urgent action, as set out in DNV’s Pathway to Net Zero Emissions report.

Carbon pricing conundrum
Senior energy professionals believe that COP26 pledges to phase down the use of coal, as well as those to end deforestation, will have the most positive impact for the global fight against climate change. Most notably, more than a fifth (21%) of those questioned stated that agreement over rules for a new global carbon market is one of the most welcome or encouraging results of discussions back in November as shown below.

Agreement over rules for a new global carbon market most encouraging COP26 outcome (illustration: DNV)
Agreement over rules for a new global carbon market most encouraging COP26 outcome (illustration: DNV)

It follows several years of inconclusive negotiations over Article 6 of the Paris Agreement, where countries agreed on a package of rules to govern and implement international carbon market mechanisms under the United Nations Framework Convention on Climate Change (UNFCCC).[1] Nearly eight out of ten respondents (79%) to DNV’s survey said the world cannot reach the goals of the Paris Agreement without a globally regulated carbon price/market.

The progress of Article 6 could accelerate the trade of carbon credits and offsets and have a powerful impact on industries. “A strong international carbon trading market would be a game changer for Canadian LNG,” said Andrew Brown, Head of Engineering, at Woodfibre LNG, an LNG export facility on the west coast of Canada, who was also interviewed as part of the DNV report.

He wants to see more regulatory clarity to help this grow further. “Article 6 implementation could trigger this positive change, unleashing a lot of potential by helping clarify where activities in one country can support emissions reductions in another.”

The survey, which was carried out before the outset of the Russia-Ukraine crisis, found that more than three-quarters of senior energy professionals (77%) believed that carbon prices would rise sharply over the next 5 years. The carbon price is the EU’s flagship financial mechanism for curbing emissions, with companies, such as airlines, forced to buy the permits when they pollute.

The cost of carbon usually moves with energy prices, but it has “decoupled” because of the war in Ukraine.[2] Launched in 2005, permit prices – part of the EU’s emissions trading scheme – had reached a high of €97 (£80) in early February but slumped to below €60 (€58 on 7 March 2022) a month later. By mid-April, it had steadied to around €80.

Lord Adair Turner, Chair at the Energy Transitions Commission is quoted in the report as saying, he’s “not holding out for a global or universal carbon price any time soon”. He believes a sector-by-sector approach is more realistic and anticipates three main models emerging:

  • Local challenges – like residential heat, where it does not matter if countries take different approaches to decarbonisation. These choices are unlikely to impact one country’s competitiveness in a major global market.
  • One country approach – this will see markets exploit lower prices from countries that do not apply carbon prices on carbon-intensive products, such as cement and some electricity. This kind of tariff, the Carbon Border Adjustment Mechanism (CBAM), is set to be phased in by the EU from 2023 and is likely to take effect in 2026.
  • Shipping and aviation – which have a strong history of truly global, rule-making power and are already evolving to govern emissions.

There’s no doubt that geopolitical and economic turmoil as a result of the Russia-Ukraine conflict will put untold pressure and impetus on the 59 countries (responsible for about 55% of global greenhouse gas emissions) declaring net-zero ambitions. According to the International Energy Agency’s World Energy Outlook 2021, achieving these goals requires carbon pricing to be very high. Therefore, such practices, as well as tangible action for climate change, matters now more than ever before as the planet’s temperature hangs in the balance.

Stepping up commitments in a time of crisis
The need to transition faster and deeply decarbonise energy systems has turned on its head as Europe struggles to build energy security.

As explained in DNV’s new paper – The Ukraine War will not derail Europe’s energy transition, dynamic modelling run since the conflict began on 24th February 2022 predicts that there is likely to be a small acceleration in Europe’s energy transition with some pace made to decarbonise and reduce emissions by 2030 as the most likely energy outcome of the Ukraine war. The effect globally is minor. However, given the state of flux, DNV underline the uncertainty in the quantification.

The wider analysis is clear; however, the world is not on track to meet the targets of the Paris Agreement. In 2021, DNV modelling forecast a most likely future in which the world exhausts the carbon budget for the Paris Agreement’s 1.5° C limit on global warming by 2029, and the 2° C limit by 2053. Predictions point to warming of 2.3° C above pre-industrial levels by the end of the century.

Uncertainty and volatility will loom on many fronts for some time to come but we must remember that optimism is a much needed and powerful force. The power of optimism is behind most of humanity’s greatest accomplishments, from medicines to moon-landings, and achieving an energy transition that limits global warming to 1.5° C certainly fits into that category.

References

  1. https://carbonmarketwatch.org/2021/12/10/faq-deciphering-article-6-of-the-paris-agreement/
  2. https://www.theguardian.com/environment/2022/mar/02/eu-carbon-permit-prices-crash-after-russian-invasion-of-ukraine

Prajeev Rasiah is the Executive Vice President and Regional Director for DNV’s Energy Systems business in Northern EuropePrajeev Rasiah is the Executive Vice President and Regional Director for DNV’s Energy Systems business in Northern Europe. He leads a team of 1,100 energy experts that support our customers, across the energy value chain, to tackle their transition to decarbonised energy systems. He has 25 years of experience in the Energy industry across both the oil and gas as well as the power and renewables industries. In DNV, Rasiah has held various operational and management roles starting from Principal consultant through to Area Manager and EVP & Regional Director; and he has had experience and leadership roles in different geographies across the world.