Wood Mackenzie’s annual Energy Transition Outlook, released today, says the world must combine coronavirus recovery efforts with massive investments in renewable energy and clean infrastructure if it is to limit global warming to 2 degrees or lower.
Prakash Sharma, Wood Mackenzie Head of Markets and Transitions for Asia Pacific, said: “The coronavirus pandemic has slowed climate change mitigation efforts this year. As the world begins to reconstruct its economy, all energy and natural resources sectors will face a survival of the fittest. We call it the ‘Darwinian Challenge’ because society and investors must evolve and adapt to the changes needed to overcome the twin crises and prepare for the future.
“Nearly US$20 trillion, or 25% of global GDP, is earmarked for spending over the next 12-18 months to deliver a coronavirus vaccine, tackle unemployment, rebuild public health systems and get economies back on track. This investment figure only has tiny proportions allocated to the promise of the Paris Agreement targets. Some jurisdictions, such as the EU, have doubled down on green goals, but it is currently up in the air in the US and China. While China recently set a goal of achieving carbon neutrality by 2060, this does not overwrite the country’s intent to greenlight thermal coal plant construction as part of its next five-year plan.
“Whether economic recovery targets will be achieved in time and on budget will have major implications for public and private sector finances, inflation and FX rates. Given this uncertainty, we have developed scenarios in our 2020 Energy Transition Outlook to quantify potential high and low cases for commodity markets out to 2030.”
According to Wood Mackenzie’s report, an obstacle blocking the path to a 2-degree world is the emissions-intensive capital stock already embedded in our energy systems. “More than half of the world’s energy and industrial capacity – power, cement, steel, refining, chemicals and vehicle fleet – is young and capable of lasting a few decades before technical obsolescence.
“While the world is adding renewable power generation capacity and manufacturing electric vehicles, it is still not enough. No efforts have been made to decarbonise the existing infrastructure. Emissions will continue increasing unless there is an incentive to rationalise the carbon-heavy assets or retrofit it with carbon capture storage (CCS) – a Herculean task without an appropriate tax on carbon,” added Sharma.
At the present rate of progress, Wood Mackenzie’s base case indicates the world is on a 2.8C-3C pathway – not 2C or lower – warming trajectory.
David Brown, Wood Mackenzie Head of Markets and Transitions for Americas, said: “The world’s transition to clean energy and net zero emissions is clearly tied to electrification. We see it progressing slowly in our base case and forecast electricity’s share in final energy consumption to reach 26% by 2040 from around 22% today.
“However, electrification and efficiency improvements slow emissions growth in our outlook. We see energy emissions peaking at 36.3 billion tonnes in 2030 and then falling approximately 4% by 2040, still about 2.6% higher than 2019 levels.
“We expect coal, gas and oil to still contribute around 80% of primary energy supply by 2040, which is a far cry from the 50% maximum needed for the world to reach net zero by 2050.
“Using our 2-degree pathway scenario, we estimate that Western Europe and the US can reach net zero emissions by 2050, while China and India will take longer to get there as both are on a different energy transition trajectory.”
But the Paris Agreement aims to keep a global temperature rise well below 2 degrees. So, what will it take to achieve this?
In Wood Mackenzie’s 2-degree scenario, the world is much more efficient, substantially more electrified and a circular economy is common practice. Peak energy arrives by 2023. Total primary energy use in 2040 is down approximately 25% compared to the base case, while electricity consumption is up by around 14%. This is partly due to the increased use of electric vehicles and the effort to electrify everything. More of that electricity comes from renewable sources, too: wind and solar account for 30% of 2040’s power generation in the base case, and 51% in the 2-degree scenario.
Two technologies that will be vital in the fight against climate change are carbon capture, use and storage (CCUS), and green hydrogen. Neither has yet been successfully deployed commercially at scale but both remain promising, especially the latter.
“Going beyond, to 2 degrees or lower, means utilising these technologies rapidly to build on the promise of cheaper renewables and decarbonise difficult-to-abate segments of the economy.
“The versatility of green hydrogen is remarkable, with three times the energy content compared to fossil fuels. The declining costs of solar and wind power make green hydrogen an attractive proposition. In some nations, green hydrogen production costs will become competitive with fossil fuel-based hydrogen by 2030.
“Most energy Majors and miners have started to ramp up diversification efforts. Internal carbon price assumptions have increased up to US$70/t or higher for new project FIDs. Capital has followed: not just to renewables, but green hydrogen, fuel cells and CCS/CCUS projects, energy storage and end-user consumer management,” said Sharma.
“While the challenges facing the commercial deployment of green hydrogen and CCUS are daunting, both must be part of the solution if the world is to achieve the Paris goal for global warming. To play that role, the technologies will require sustained policy support.
“If world leaders want to maintain any credibility in pledging commitment to the Paris goals, they will need to do more to show how they intend to achieve them. As things stand, we are not going to get there,” added Brown.