There is an unusual number of interesting topics in today's report, versus the normal mix of small pet projects or broad and unsubstantiated announcements. The EU 2030 targets are worth highlighting and they are in part connected to the central theme of the ESG and climate report that we will publish tomorrow. The European targets are not coordinated with what is happening in the rest of the World and while we admire the ambition, we suspect that the goal is not achievable, simply because the challenges of replacing the power and fossil fuel associated with the emissions to be avoided are too great, given the timeline. The level of additional renewable power generation, EV adoption, and hydrogen production needed to offset so much CO2 are extremely high, and it will be hard to get substantially more CCS offset than already announced because of land rights issues in Europe and logistics. To get the power, EV, and hydrogen, the EU will be competing with other regions that have their own targets and we see scare resources bidding up the price of power, impacting all of the elements, power itself, the cost of running EVs (see the chart below – the EV story does not work of you are using coal as a marginal source of power), and the cost of hydrogen.
Source: Argonne National Laboratory GREET Model, Reuters, June 2021
The bp chart below is also interesting as it shows not only how much hydrogen is needed to get to net-zero, but how much of it needs to be blue hydrogen and therefore use natural gas and CCS. It is impossible (in our view) to chart an economic path to net-zero without growth in natural gas consumption at least for the next 20 years and the governments and other regulators around the world must recognize this and support the investments needed for CCS. The recently announced bill in the US Congress to raise the 45Q credit would be a good move, but as with many of the initiatives in Europe, the cost falls on the government (lower tax revenues in the US and higher subsidies in Europe) and will ultimately lead to higher taxes – finding bipartisan and equitable ways to pay for this will likely be easier in Europe than in the US.
Sources: Natural Gas Intelligence, BP, June 2021