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October 28, 2022

COP prep: 5 charts on stranded assets, clean energy investment and the ’emissions gap’

UN, IEA and other research published ahead of COP27 highlights clear consequences if pledges made at COP26 are not fulfilled, and the move to renewables is not quicker.

For anyone following climate policies and the energy transition, last week may have felt rather overwhelming, with various UN bodies and the International Energy Agency publishing a plethora of reports before COP27 opens in Egypt on November 6.

The UN reports, in particular, make for a sobering read. The world is not on track to meet emissions reductions targets, they conclude, and climate chaos – with its massive implications for society and the economy globally – beckons if fossil fuels are not taken off line faster or left in the ground. 

Under the 2015 Paris Agreement, signatories aimed to stop global warming surging more than 1.5C above pre-industrial levels. At COP26 last year, COP president Alok Sharma insisted this goal was “kept alive”, but nonetheless described its pulse as “weak”. The ‘Emissions Gap’ report published on Thursday by the UN Environment Programme warns, however, that this pulse is now barely beating. Despite the promises of politicians and business leaders, the world still does not have a credible pathway in place to keep warming below 1.5C. Indeed, it’s likely current policies would allow heating to rocket to 2.8C by 2100. Even if current pledges are enacted, temperatures would still rise by between 2.4C and 2.6C.

If implemented, the pledges (the so-called nationally determined contributions that set out how countries plan to reduce emissions) would reduce global emissions by 2030 by as much as 10 per cent compared with today’s policies. Yet to get on a ‘least-cost’ pathway (the least expensive combination of mitigation options) to limit global warming to 2C or 1.5C, emissions must fall by 30 per cent and 45 per cent respectively, says the UNEP report. Achieving such targets would mean speeding up the energy transition; avoiding investment in new fossil fuel-intensive infrastructure; the transformation of food systems and better protecting nature, it adds.

Since 1990, energy supply, industry and transport are the sectors that have seen the biggest increases in emissions globally, according to UNEP data – with heat and electricity production, road transport and the metals industry being particularly emissions intensive. The report highlights eight major emitters – China, the US, the EU, India, Indonesia, Brazil, Russia and international transport – as contributing more than 55 per cent of total global GHG emissions in 2020, while the G20 as a whole contributed 75 per cent of total emissions.

The UN’s World Meteorological Organization also flagged up the world’s continuing failure to engage wholesale with the energy transition, in a report published on Wednesday warning that atmospheric levels of the three main greenhouse gases – CO₂, methane and nitrous oxide – all reached new record highs in 2021. The biggest year-on-year jump in methane concentrations was recorded since systematic measurements began nearly 40 years ago.

Finance is crucial

For the necessary shift to happen, the financial system must become a “critical enabler”, says UNEP, which estimates that the shift to a low-carbon economy globally will require investment of at least $4-6tn a year, equivalent to only 1.5-2 per cent of total financial assets managed but representing a more significant 20–28 per cent of additional annual resources that would need to be allocated.

UNEP recommends six ways in which the financial sector can help meet these challenges, and acknowledges some of the existing efforts to improve clarity and transparency (through taxonomies and voluntary and mandatory disclosure proposals) and to influence investment decisions through carbon pricing mechanisms. Broader policymakers and regulatory intervention is also mentioned, emphasising tax and subsidy incentives in favour of green investments and against fossil fuels.

The IEA’s World Energy Outlook 2022, also launched on Thursday, held a glimmer of hope that the necessary change could happen. Following its invasion of Ukraine, Russia’s decision to squeeze pipeline gas supplies to the EU and the subsequent impacts on the energy market are “causing profound and long-lasting changes that have the potential to hasten the transition to a more sustainable and secure energy system”, the IEA concludes, in a tone of cautious optimism.

It suggests that if the latest climate policies agreed worldwide are implemented, global emissions will peak in 2025 and all fossil fuels, including gas, will have peaked by 2050. However, it highlights that an emissions peak by 2025 would still be too little, too late and lead to a rise of around 2.5C in global average temperatures by 2100.

To replace Russian gas, the IEA suggests the best stopgaps are “projects with short lead times that bring oil and gas to market quickly”, as well as capturing some of the 260bn cubic metres of gas wasted through flaring and methane leaks. Lasting solutions, however, lie in reducing fossil fuel demand. “Many financial institutions have set goals and plans to scale down investment in fossil fuels,” the IEA says. “Much more emphasis is needed on goals and plans for scaling up investment in clean energy transitions.”

Windfall taxes and new oil

There are also growing calls for governments to levy windfall taxes on the fossil fuel multinationals as a way to scale up investment in the transition. Last week, UK-headquartered Shell and TotalEnergies of France announced they had doubled their quarterly profits to about $10bn each. BP, also based in the UK, said it expected to pay $2.5bn in UK taxes in 2022 and flagged $800mn of these under the “energy profits levy” introduced by the government earlier this year.

Additionally, research from May by non governmental organisation Oil Change International suggests eight of the world’s largest energy companies, including Shell, TotalEnergies and BP, are involved in over 200 new fossil fuel projects that could be approved for development from 2022 to 2025. If permitted, these projects could cause an additional 8.6 gigatonnes of carbon pollution – equivalent to more than a quarter of the world’s total energy sector emissions in 2020, and equivalent to the lifetime emissions of 77 new coal power plants, Oil Change International says.

Investment in such projects may be bad news not only for the planet, but also for profits as fossil-fuel infrastructure is increasingly likely to become a stranded asset as governments regulate to reduce emissions. More than $1tn of oil and gas assets – of which some $600bn are held by listed companies – risk becoming stranded, according to a June report by the UK non-profit Carbon Tracker.

According to the report, the majority of embedded emissions relates to assets listed on the stock exchanges of China, the US, India, Russia and Saudi Arabia and that, with the exception of the US, emissions are dominated by the partial listings of state-owned companies.

Excluding companies that are state-owned or have a restricted ownership structure, Carbon Tracker has found that New York, Moscow, Toronto and London are the financial centres with the highest embedded emissions from upstream oil and gas companies over which private-sector investors have influence.

A service from the Financial Times