The Financial Times opinion piece linked in the bullet below and from which the chart is taken has used the IEA data that we have featured in recent work. The piece comprehensively walks through how the world is likely to come up short, and while it gives the measures that are needed and the money that likely needs to be spent, it is not an optimistic review of what will most likely occur. We remain firmly of the belief that much more progress could be made if there was a global agreement to make carbon very expensive – accompanied by an agreement on how to share the spoils of that expensive carbon such that the inflationary pressures are offset where they are most needed and that environmental injustices are minimized – this is idealistic are we recognize that.
The IEA chart in the exhibit below is another stark reminder of how far away stated policies for clean energy are from what will be needed, and the 2030 gap is the most significant in our view as there is little time to correct it. The IEA has presented several studies over the last year that presents a series of “straw men” examples around how the World and, most recently China, might meet their respective net-zero targets, and the chart below is intended to show how far adrift we are, comparing what is needed to what has been stated. As we have mentioned a couple of times, it would be unusual for companies and countries to have firm plans for 2050 that sum to what the IEA is looking for as there are new technologies under development and the incentive/penalty landscape is still uncoordinated and very unclear. The latter is also a problem looking forward to 2030, but closing the gap between the STEPs scenario and the NZE scenario by 2030 looks almost insurmountable today, without a much tougher and more globally coordinated regulatory landscape, which looks unlikely given some of the low expectations for COP26 specifically. Note that how under the Net-Zero scenario discussed by the IEA, fossil fuel would peak by 2025 and compare this with the EIA analysis that we discuss in today's daily report – there is a huge disconnect.
In today's ESG and Climate report we discuss the issues facing the oil industry and present several possible scenarios focused around activist behavior and government behavior – none of the outcomes are pretty and the most likely one is quite concerning. The activists seem to be laser-focused on reducing the production of fossil fuel, but they are arguing for a timeline that is impractical and very inflationary – right now they are winning and they are changing the hearts and minds of investors, both public and in some cases private, but perhaps more important, they are influencing insurers. The fossil fuel industry needs to clean up its act, no doubt, and based on the chart below it is trying harder, but a transition period is necessary to prevent hyper-inflation not just in fossil fuel prices but also in renewables, as they would not be able to keep up with an aggressive cut back in fossil fuel production today – which is what activists are pushing for.
There is a broad technology theme to the articles that we have chosen today, which is in keeping with one of the core conclusions of the IEA report earlier this week. The IEA is estimating that roughly half of the path to net-zero will require technologies still in the test phase, or in some cases still conceptual. The Dow headline around ethane dehydrogenation and electric furnaces is a good example. Both technologies could lower the carbon footprint of making ethylene, but the dehydrogenation route will require some catalyst or other breakthrough as current propane dehydrogenation technologies require a lot of heat. The electric furnace idea is complex and would require extremely high levels of power, all of which would have to be renewable for the carbon footprint to fall – this type of technology is likely implied in the BASF announcement today. The IEA talked about some of the transition moves required to allow the technology advances time to become either commercial or cost effective, or both. Carbon capture features meaningfully in the IEA plans, but the study has carbon capture volume rising through 2050, which we find odd. The idea of carbon capture is to act as a bridge between where we are today and where we could be once new technology is developed – therefore, while companies like Dow should be aiming for technologies that lower the carbon production of its processes, carbon capture should be an almost immediate bridge to lower emissions while both the technology is developed, and its costs are reduced. Carbon capture needs should then decline. View today's Daily Report for more.
We discussed the IEA report yesterday at some length, but in such a comprehensive report we missed a couple of things that are probably worth noting today. See more in our ESG Report today.