IEA Net Zero Report: the Elephant in the Room

Most of the headlines for the IEA Net Zero report last week focussed on the ‘no new oil or gas’ recommendation. It was described as ‘bombshell’, ‘watershed’ and ‘truly a knife into the fossil fuel industry’.

And I agree. Having worked in the oil and gas industry for 30+ years, and on climate change issues for 20+ years, this felt like a very significant change. Why? Not because of the content of the report. It really is just another net zero scenario of which there are many by now. And if you aim for 1.5 degC and not too much ‘carbon removal’ then you end up with pretty drastic measures. No surprises there. The surprising element was that for the first time there was explicit attention for so-called ‘supply-side’ decisions: decisions on the production of oil, gas and coal. As many people have pointed out before, this has long been the ‘elephant in the room’. The Paris agreement is famously lacking in any statements on the production of fossil carbon; the assumption being that if you manage your emissions well then you do not have to say anything about production. The IEA finally acknowledged the elephant in the room, and they deserve full credits for that!

This report ended the silence on the need for supply-side measures. I’m not surprised this has happened under the leadership of Fatih Birol. He has long expressed his unease with the disconnect between energy decision making and climate policies and actions; this quote is from 2019: “the biggest challenge I see today is the disconnect between what is happening in the energy market and the targets and trajectories set by governments and other groups.”

So the challenge now is to connect these two: energy decision making and emission reduction targets.

Did the IEA manage to do that in their report? That’s what I will be discussing in this article. I will address the following topics:

1.      What does the IEA say about fossil energy production?

2.      How likely is it that the world can reduce demand for fossil energy quickly enough so that no new developments are needed?

3.      Can the world decide to not approve any new fossil energy projects tomorrow?

4.      The Carbon Takeback Obligation: An alternative policy option to connect energy decisions with emission reductions targets

5.      Summary and Conclusions

As some of you know by now, the length of my articles is a direct reflection of the weather. This means that this article is very long (bad weather last week). I was going to edit it down to less pages this weekend, but since the weather will be great I am going to be lazy and publish the long version. For those of you with less time, I recommend scrolling straight to the summary and conclusions.

1.      What does the IEA say about fossil energy production?

Although many people interpreted the IEA report as a call to ban all new production that was actually not in the report in those words. The phrasing most commonly used is (see eg pg 2): “The rapid drop in oil and natural gas demand in the NZE means that no fossil fuel exploration is required and no new oil and natural gas fields are required beyond those that have already been approved for development. No new coal mines or mine extensions are required either.”

This is an important distinction. The IEA is saying that IF we do all the other recommended actions (growing renewables, green hydrogen, EV’s, etc) THEN demand will drop and there is no need for new fossil energy projects. A decline in demand for fossil energy is the logical result of the world using less (7% in 2030!) and different kinds of energy. Hence their assumption that prices for oil and gas will also fall. This follows what CEO’s like Ben van Beurden have been stressing, namely that the only way to reduce production is to reduce demand.

A mail sent out by IEA on 24 May seems to confirm that interpretation: “Many news reports focused on the finding that “there is no need for investment in new fossil fuel supply" in the pathway to net zero mapped out by the report. However, considerably less coverage has so far been devoted to the massive policy-driven surge in clean energy investment and energy efficiency improvements that would be required to reach that point.”

Nevertheless, many people interpreted the report as saying that bans on new production, as shown on the timeline of the roadmap, should be implemented today.

This is a rather fundamental question that deserves to be analysed and discussed more explicitly by the IEA and governments: should the recommended supply- (production restrictions) and demand-side policies be implemented at the same time? How confident do we need to be about future demand reduction before we can confidently approve bans on new oil and gas production without risking energy shortages? Could a portfolio of policies that ‘cut with both arms of the scissors’ (supply and demand) be more effective for rapid emission reductions (as this paper argues[1] )? And on a more practical level: will this create problems in the kind of models that are typically used for these scenario’s and in which supply (and price finding) follows from demand predictions? Is it possible to adjust the model to include both demand and supply-side policies and restrictions? 

The IEA could have been more explicit and transparent about this. The way it has been communicated now leaves room for different interpretations. Hopefully, the World Energy Outlook report later this year will address this issue in more detail.

For the purpose of this article I will discuss each approach separately:

Demand-side forcing: can the world reduce demand for fossil energy so quickly (as described in the IEA NZ scenario) that, as a result, no new investments in fossil energy are needed? 

Supply-side forcing: can the world agree on policies that will prohibit new fossil energy project to be approved, starting ‘tomorrow’, thereby effectively forcing the world to scale up renewables and efficiency far more quickly in order not to be short of energy?

2.      How likely is it that the world can reduce demand for fossil energy quickly enough so that no new developments are needed?

As the IEA pointed out in their mail, their NZ roadmap requires “a massive policy-driven surge in clean energy investment and energy efficiency improvements”. They claim the pathway they sketched is narrow, but just about do-able. I have some doubt about that. These are some of the reasons why:

> Energy efficiency is required to improve by 4% every year (much more than historical rates of less than 2%), leading to 7% less energy use in 2030. At the same time we need to produce and install an unprecedented amount of renewable energy, grid upgrades, etc, etc. Considering that all the energy investments for solar and wind are upfront (and for a large part produced in China with energy from cheap coal) estimates are that this could increase emissions by 10 to 20% in 2030[2]. Obviously, this is a temporary hit that we will have to absorb, but assuming that the world will be using 7% less energy in 2030 (while also providing energy access for all worldwide) seems unrealistic. 

> Green hydrogen is expected to scale up by a factor 3000 by 2030. This was explained in the webcast by saying that around 110 GW of projects have already been announced, so 850 GW may be possible. This is around 20 times more than IEA’s previous estimate of green hydrogen production in 2030 (see Sustainable Development scenario 2020). Many of the announced projects are nowhere close to a final investment decision, and there seem to be many more projects announced than can reasonably fit in: there is not enough funding for all, and more importantly, not enough clean electricity for all. As long as the grids are not low-carbon yet, green hydrogen does not lead to emission reductions; for Europe this has been worked out in more detail by Bellona recently.[3]

> In general, the IEA would benefit from involving more engineers and project managers to help make realistic assumptions on how quickly certain projects can be executed. From a project management perspective (for large infra projects) 2030 is not that far away. What are the assumptions on how fast new mines can be opened, how fast additional production capacity can be built, how fast grids can be upgraded, permits be obtained, etc.? Taking all that into account, what would be the more realistic targets for 2030? In NL we just started looking in more detail at realistic bar charts for critical transition projects; for many, the conclusion is that project approval is needed within 1 or 2 years to have a chance of being implemented before 2030 (and that assumes that sufficient people, equipment and materials will be available).  

> IEA’s roadmap milestones are a mix of policy recommendations and results that need to be realized by a certain date. On the technology side IEA has done a lot of work to assess ‘technological readiness’ of different technologies, and that is taken into account in the assumed speed (and start) of scaling up the implementation of technologies. For the suggested policies this is not the case. ‘No new fossil energy projects approved’ as of now is not at a ‘policy readiness level’ that the world can implement it this year. Even the ‘no new sale of fossil fuel boilers’ in 2025 will need a lot of work to be feasible world-wide in 2025. It would be useful to develop a ‘policy readiness level’ methodology with which various policies can be assessed to get a realistic sense of how quickly they can be implemented. 

> Considering the above, I was surprised to see (pg 83) that the IEA only saw major uncertainties for their NZ roadmap around behavioural change, bio-energy and fossil CCUS. I would have liked to have also seen sensitivities done on efficiency improvements (eg 2% per year improvement instead of 4%) and less green hydrogen realized in 2030 (eg half of the 850 GW assumed now). From the sensitivity analysis they performed it is clear that without CCUS the total bill would increase by up to 20%. Conversely, this also means that using more CCS could lower the total cost (but they did not do that sensitivity).  

In conclusion therefore, it does seem like the IEA stretched to the maximum what can be done to reduce energy and fossil energy demand, and some would argue to beyond what is possible. Is this a problem? Yes and no. Of course, this is an improvement from the ‘gradual change’ scenario’s they have tended to produce in the past. And policy makers need to be made aware of the incredible challenging task ahead. This report does so. On the other hand, presenting only one scenario and calling it a Roadmap creates the risk that countries will underinvest in less popular options like nuclear, bio-energy, carbon removal and CCS. I would have liked to have seen a longer chapter on ‘sensitivities’ and alternative NZ scenario’s/roadmaps with the pro’s and con’s of these alternatives. Also, overly optimistic assumptions (like eg on energy efficiency improvements) will understandably make governments hesitant to implement the complimentary supply-side policies to reduce or stop new fossil energy developments.

3.      Can the world decide to not approve any new fossil energy projects tomorrow?

Theoretically, there would be no need for active intervention as the reduced demand and lower prices would cause new projects to be shelved (just like what happened in the IEA model). However, this is what the world has tried for the last few decades, and without a lot of success. Despite the incredible success of renewables, so far the energy transition has been more of an energy addition. Fossil energy use and emissions are still increasing. So it makes sense to ask if it is time to start putting restrictions on the production of fossil energy. This is what in scientific literature is referred to as ‘supply-side’ policies. Until recently this was a ‘fringe’ topic debated mainly in scientific papers, and by actions groups (‘keep it in the ground’, non-proliferation treaty, etc). A few countries have committed to stop or never start fossil energy production (most of them have very limited fossil resources). Most of the discussion is around how to decide in a fair way who can still produce how much (and the possible need for compensation), and how to enforce ‘caps’ after they have been agreed. The only attempted deal to pay a country to not develop oil reserves has failed. [4]

That’s why the IEA recommendation came as quite shock. Suddenly there now is a recommendation from a main stream, authoritative organisation to not approve any more new fossil energy projects. Starting in 2021.

Below is a sample of all the arguments (more and less valid ones) you will hear the coming months on why this is not possible and/or sensible.

> The world has not been able to agree on sufficient emission reductions; agreement on who can still produce how much fossil energy will be far more difficult. Without some agreement in place most countries will not unilaterally reduce production or stop exploration.

> Energy security is very important for most countries; as long as there is domestic demand for fossil energy countries will prefer to produce and use their own resources.

> Using locally produced oil or gas often reduces the overall carbon footprint compared to importing from countries far away and/or with lower environmental standards.

> Local employment in fossil energy production and value chains is something governments will try to protect, as long as there is domestic demand for the products.

> Fossil energy production and use still generates a lot of easy income for governments in producing nations. This is not easily replaced or compensated for by financing of renewable energy. [5]

> There are many new producing countries in sub-Sahara Africa and South America (Suriname, Mozambique, Ghana) that would consider it extremely unfair that they would not be allowed to profit from their resources the way the wealthier countries have done in the past.

> There is a risk that decisions to stop international financing for fossil energy developments will be made before decisions are made to increase investments in renewable energy sources. Without worldwide agreements, this can lead to countries like China and Russia stepping in to invest in these projects. Or it could delay energy access for many people.

> Reducing supply when demand reductions are still uncertain is risky as this could trigger energy shortages and huge price spikes. This in turn could lead to more production again.

> Increasing dependence on OPEC (as is predicted for the IEA NZ roadmap) is unlikely to be supported from a geopolitical perspective.

> Stopping LNG projects in the middle of construction (yes, these are also ‘not needed’ anymore according to IEA; see pg 101/102) will lead to contract cancellations and shortage of supplies. From a cost perspective (LNG is more expensive gas) the models are correct in predicting this will ‘not be needed’ when demand is reduced. However, that does not mean there will not be local shortages if projects under construction are cancelled now.

> There will (rightly or wrongly) be endless discussions and legal battles about definitions and about compensation:

• Definitions: what is an approved development plan? Does the IEA actually mean Final Investment Decision has been made? What scale are we looking at: wells, fields, basins, plays, regions? What about phased developments?
• Compensation: should anyone get compensated for leaving oil/gas in the ground? Similar to paying for reduced deforestation? Will people be willing to pay for this (ref failed attempt in Ecuador)? Countries with the largest stranded reserves? Countries that have not produced much yet? Companies that have already invested a lot (with permits and approvals) in exploration and other activities? LNG companies that have to stop construction and cancel contracts?

From the above, no doubt incomplete list, it is clear that we should not count on any early agreement on restrictions in fossil energy production. If it was a technology, the IEA would have regarded it as ‘early stage of development’ and ‘lots of work needed’ to be ready in 2030.

On the positive side, by naming the elephant in the room the IEA has made it clear that if the world would manage to get serious about the Paris commitments then new developments could become stranded assets. This should make companies and governments think twice before approving plans for new oil- or gas production (especially when it is high cost and/or with a high carbon footprint). That is a much-needed step in the right direction.

4.      The Carbon Takeback Obligation: An alternative policy option to connect energy decisions with emission reductions targets

A quick recap of the article so far. It is great that IEA is talking about the elephant in the room, ie the need to do something about unmitigated and unrestricted production of fossil energy. However, a blanket stop on approvals of all new projects is not a very realistic (short-term) option. That raises the question if there are other ways to ensure that our fossil energy production decisions take into account the very limited carbon budget that remains.

One option is of course court cases. More and more governments find themselves having to defend why they intend to issue permits for new coal/oil/gas production. Although this is important for setting precedents, it will take a lot of time before worldwide critical mass can be developed through court cases. But they can play a useful role in urging companies and governments to increase their ambitions. See text box example.

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Text Box Court Cases: Connecting fossil energy production decisions with carbon budget restrictions

In the absence of supply-side climate policies the battles over the emissions of new fossil energy production are more and more fought out in courts.

A few years ago a judge in Australia refused a permit for a new coal mine basically pointing out the disconnect between the planned activity and the stated support for emission reductions:

“There is no evidence before the court of any specific and certain action to ‘net out’ the GHG emissions of the project. A consent authority cannot rationally approve a development that is likely to have some identified environmental impact on the theoretical possibility that the environmental impact will be mitigated or offset by some unspecified and uncertain action at some unspecified and uncertain time in the future.”

This week a court in the Netherlands stated:

“The responsibility of RDS (Royal Dutch Shell) also includes the CO2 -emissions of the end-users (scope 3).” 

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Another option is a worldwide fossil fuel non-proliferation treaty [6]. This is an initiative that is basically already working on gaining support for what the IEA is now saying is needed, namely ending new production. As explained above, this can help with awareness creation, but unless the majority of the large producers and users get on board it is unlikely to have a significant impact on emissions any time soon.

As it happens, there is another option: a Carbon Takeback Obligation (CTBO). For the last couple of years we have been investigating this in the Netherlands, and prof Myles Allen et al have been working on this for much longer already in the UK. Pre-Paris, neither governments nor companies were willing to discuss supply-side policies, but that is slowly changing as the enormous challenge of Net Zero is starting to sink in and reports like IEA NZ and court cases are no longer ignoring the elephant in the room. Considering a multitude of criteria (political, economic, energy security, polluter pays, climate, social justice, do-ability) the Carbon Takeback Obligation is by far the most promising supply-side policy that society can implement. 

The CTBO places an obligation on the producer of fossil energy to collect and store an increasing percentage of the carbon produced. In the target NZ-year this percentage is 100%. For every ton of CO2 stored a Carbon Storage Unit (CSU) is awarded. These become valuable, as they are needed to be allowed to produce hydrocarbons (just like emission allowances are needed to be allowed to emit CO2). They can be traded with others that also have implemented a CTBO. This will require companies and governments to think twice before awarding new licenses as they will have to make sure there will be enough CO2 that can be captured and stored. It will probably lead to some companies converting natural gas into hydrogen or electricity (and storing the CO2) in order to generate CSUs themselves. It will stimulate discussions and cooperation in the value chain. Customers that capture and return the CO2 may get a discount on the gas price. Customers that cannot switch to other forms of energy may have to pay extra for carbon removal services (eg Direct Air Capture and storage).

More info on CTBO:

Website: https://carbontakeback.org/

Short audio intro: https://www.bbc.co.uk/programmes/m000v8wm

Report NL CTBO study: https://uploads-ssl.webflow.com/5f3afd763fbfb08ae798fbd7/6012eccf84bfa326b5ee01ce_CTBO_Final_Report_Jan_2021.pdf

Some other advantages of a CTBO are:

> It provides a safety net in case all the extremely ambitious targets that are needed to make demand for energy go down by 7% in 2030 cannot be met. This is not unlikely, so we should prepare for this. If we do not prepare then we accept that unmitigated fossil energy will fill the gap. A CTBO would ensure energy security while restricting unmitigated fossil energy use.

> It is easier to implement than a ban on new fossil energy production. There are no easy options, but this could be implemented relatively easy by a group of leading countries (eg North Sea countries) and then scaled up by restricting import and export of fossil energy to countries with a CTBO. Ideally, the recently formed Net Zero Producers Forum would support and introduce a CTBO.

> A CTBO internalises the cost of CCS in the fossil energy price, and will therefore slowly but inevitably raise the cost of fossil energy. In the IEA NZ roadmap the price of oil and gas will actually drop, presenting a risk to the progress of renewables and efficiency measures. This is an important issue: lower oil and gas prices are not good for the energy transition. A CTBO will make sure that does not happen.

> A CTBO is a mechanism to make fossil energy producers (and users) develop and pay for permanent carbon removal services. When the takeback percentages become higher and all the larger point sources are captured and stored then CSUs can only come from carbon removal (from the atmosphere) technologies that result in permanent (thousands of years) carbon storage.

> By increasing the takeback percentage above 100% fossil energy producers and users can be made responsible for cleaning up historic emissions, and fossil energy use can be phased out more quickly.  

> With a CTBO the polluters (all stakeholders in the fossil energy value chain) are paying to clean-up; external costs are internalised. With an upstream carbon tax (an alternative that is often suggested) the polluter is paying to pollute; governments become further entangled in carbon revenues; and there is no certainty that net zero will be reached on time.

> A CTBO is consistent with producer responsibility principles that are implemented for many other products in order to encourage more circular design, recycling and waste disposal. The same principles can be applied for fossil carbon: if you want to sell it then you become (co-) responsible for waste collection and disposal.

> CTBO regulations and commitments can help demonstrate ‘Paris-compliance’ and therefore could be part of an effective defense strategy in court cases.

Summarizing: a CTBO is a smart, progressive, supply-side policy that will ultimately result in a ban on unmitigated use of fossil energy. We need to reduce our fossil energy emissions much more quickly than that we can reduce our fossil energy consumption. That will only happen if we put policies in place to make it happen. The Carbon Takeback Obligation should be considered a prime candidate for such a policy.

5.      Summary and Conclusions

In summary:

·      The IEA has produced a highly ambitious NZ Roadmap that will result in a reduction of demand for fossil energy. Only if or after the recommended massive policy-driven surge in clean energy investment and energy efficiency improvements are implemented would that would the point be reached that no more new fossil energy developments would be required.

·      The IEA has tried to keep the use of bio-energy, nuclear, CCS and CDR to a minimum (compared to eg IPCC 1.5 scenarios). This has made it necessary to really push other levers (renewable scale up, efficiency, green hydrogen) to fairly extreme levels. The path has indeed become very narrow as a result. It also means that the probability of not achieving the stated goals are fairly high, and therefore countries will be very reluctant to implement the corresponding supply-side stops on new fossil energy developments.

·       The IEA has suggested 2021 as implementation date for ‘no new fossil energy projects’. The world is unlikely to agree on such a policy anytime soon, mainly for reasons of energy security and geopolitics.

·      Nevertheless, the last 20 years have shown that supply-side policies will be needed in addition to the many demand-side policies already in place and being scaled up. An increasing number of court cases and investors are no longer accepting that more fossil production is added without having a plan for what to do with the emissions. It is clearly time for more (formal) producer responsibility.

·      The Carbon Takeback Obligation is a smart, progressive supply-side policy that should be considered as alternative to the rather blunt proposal by IEA to stop all new projects this year. Considering a multitude of criteria (political, economic, energy security, polluter pays, climate, social justice, do-ability) the Carbon Takeback Obligation is by far the most promising supply-side policy that society can implement. 

Concluding:

The IEA has finally addressed the elephant in the room: we need supply-side policies. Energy production decisions can no longer be disconnected from emission reduction targets.

How this can best be done requires more thinking however.

The discourse on supply-side policies has to move from fringe to mainstream, involve many more stakeholders, and move beyond discussions on how to implement complete bans. Carbon Takeback policies should be on the table in these discussions.

I want to close of with some thoughts on the do-ability of this all.

There comes a point when we have to face up to the fact that certain scenarios are just not possible anymore. As David Wallace-Wells asked last week in his reflections reflections on the do-ability of 1.5 degrees scenarios: “But how real was it? How much was a mirage conjured by desperate hope?”

As 2030 is less than 9 years away, our emissions are still rising, and in the year of COP-26 our targets become more and more ambitious, I do wonder who will be brave enough to burst the bubble. I am for ambitious targets and a ‘can-do’ mentality, but I am also a firm believer in the "The Stockdale Paradox" which says that “you must maintain unwavering faith that you can and will prevail in the end, regardless of the difficulties, and at the same time, have the discipline to confront the most brutal facts of your current reality, whatever they might be.”

Most people prefer the ‘unwavering faith’ part to the ‘confronting brutal facts’ bit.

I think IEA has done a great job trying to do both: yes, we can still do it, but the path is getting extremely narrow, and it will require some rather drastic actions. I think the report will mainly be remembered however for talking for the first time about the elephant that has been in the room for a long time: the need for supply-side interventions. We should all support that. It has strengthened my resolve to work hard on getting a Carbon Takeback Obligation implemented for natural gas; if we could all join forces on that, that would be a game-changer for the climate.

[1] Green, Fergus and Denniss, Richard (2018) Cutting with both arms of the scissors: the economic and political case for restrictive supply-side climate policies

https://eprints.lse.ac.uk/87734/1/Green_Cutting%20with%20both%20arms_2018.pdf

[2] https://www.researchgate.net/publication/335609618_Dynamic_Energy_Return_on_Energy_Investment_EROI_and_material_requirements_in_scenarios_of_global_transition_to_renewable_energies

https://osf.io/5wf64/download

[3] https://bellona.org/publication/electrolysis-hydrogen-production-in-europe

[4] https://www.euractiv.com/section/sustainable-dev/news/europe-admired-ecuador-s-oil-drilling-ban-but-didn-t-want-to-pay/

[5] https://www.energyforgrowth.org/memo/harnessing-mozambiques-gas-wealth-to-address-energy-poverty/

[6] https://fossilfueltreaty.org/open-letter