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COP26: Climate talks face fossil fuels dilemma as supply crunch weighs


Major uncertainly hangs over pace of oil demand decline

Tensions rise as calls for fossil energy bans gain traction

Technology 'leaps' needed more than ever to hit key goals

  • Author
  • Robert Perkins
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  • Andy Critchlow
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  • COP26

As world leaders meet in Glasgow, Scotland, for the closely-watched UN Climate Change Conference of the Parties, policymakers face squaring a big circle over pledges to relegate fossil fuels to history and the global need for reliable, low-cost energy supplies.

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Global oil demand alone would need to collapse by 75% over the next three decades in order to put the world on a pathway to net-zero emissions by 2050, according to the International Energy Agency. At the same time, solar, wind and other renewable energy sources would need to surge more than five-fold and nuclear power double to shrink fossil fuels' share of the global energy mix from 80% to 20% by 2050.

By its own admission, the IEA sees the window of opportunity to hit this pathway is narrowing fast as global demand for oil and gas rebounds from the nadir of the 2020 pandemic lockdowns.

In March, the IEA said it expects global liquids demand, including biofuels, will recover to reach 103.2 million b/d in 2025, up from 91 million b/d in 2020 and almost 100 million b/d in 2019. A month later, the IEA warned rebounding coal use would outstrip renewables growth by 60% this year.

The furor over record gas prices in Europe in October has only fueled the debate over whether the pace of energy transition is already crippling vital energy security, setting the world up for damaging price volatility in the years to come. Despite calls for the need to double down on booming renewables spending to avoid a supply crunch such as that seen in gas markets, major challenges to back-stopping intermittent renewables with baseload power capacity remain.

But the IEA has been careful to leave the door open on the achievability of its pathway, eager to push policymakers into faster, more radical action to cut ties to fossil fuels while boosting spending on cleaner alternatives.

In its recent new long-term energy outlook aimed at informing the COP26 talks, the IEA concluded that climate pledges to date would result in only a fifth of the emissions reduction by 2030 necessary to put the world on a path towards net-zero by 2050. Breaking out a new "Announced Pledges" scenario, the IEA said the world's existing net-zero targets would see fossil fuels peak by 2025 but only if the pledges are fully met.

The new forecast, which sits between its base-case 'Stated Policies' scenario and its net-zero pathway, would still see global oil demand remaining at three-quarters of current levels by 2050 or some 75 million b/d.

Policy tensions

Part of the concern over national net-zero targets is their lack of granularity on precise policy levers and a line of sight to the costs of hitting the targets. When provided, the policy goals often seem optimistic.

In nine years, 60% of global car sales would need to be electric, under the IEA's net-zero pathway, up from just 7% in H1 2021. The IEA's roadmap also requires conventional cars be banned globally from 2035. A decade later, 85% of heavy-duty trucks would need to be EVs or fuel cell vehicles.

More pressingly, the world should have already shelved all new oil and gas developments when the report was published in May, an aspiration that drifts further into the distance each day as new projects come onstream.

The call has riled many developing countries who feel side-lining fossil fuels has dashed hopes of alleviating structural energy poverty. The African Energy Chamber has called for regional governments to boycott any international companies shunning the continent's fossil fuels sector as part of net-zero ambitions, claiming "Western elites" are "disrupting African progress."

"We're hearing a crescendo of voices calling for action on the climate, the phase-out of fossil fuel, and other sustainability goals," S&P Global Platts Analytics' head of energy scenarios, policy and technology Roman Kramarchuk said. "At the same time, we are also hearing a lot about near-term pressures needed to keep the lights on and the economy growing and this is where the role of fossil fuels hasn't been very obvious."

Demand deltas

With so many unknowns over the fiscal backdrop, political will, and public appetite to pay for cleaner energy, the divergence between the demand outlooks for fossil fuels appear bewildering.

Global oil liquids consumption, including biofuels, would return to pre-pandemic levels in 2023 and continue to rise, peaking at 115.4 million b/d in 2038, under the Platts Analytics reference case scenario which would see global warming approach 3 degrees. But that's already well above the 93.4 million b/d of liquids the world would be pumping in 2038 if current net-zero pledges are met, according to the IEA.

The demand delta for oil in pathways needed to hit Paris climate targets, however, is far bigger. Platts Analytics sees liquids demand close to 70 million b/d in 2050 under a 2 degrees warming scenario, more than 40 million b/d below the reference case. Under the IEA's net-zero pathway, the role for the world's top energy source would shrink to just 25 million b/d by then. Underlying assumptions over the pace of fossil alternatives make a big impact across competing scenarios. Under the IEA's pathway, modern biomass such as forestry residues need to become the world's third-biggest single source of energy by 2050 behind solar and wind.

"There will clearly be tensions about how we get there (the Paris Climate goals), particularly if there are perceptions that addressing long-term policy goals will complicate and make the here-and-now more expensive," Kramarchuk said. "The key questions are around the pace of change, new investments, the stranding of assets, around how quickly fossil fuels may be phased out and what roles they can continue to play under different outlooks."

Tech promise

By a few measures, the world is already well behind on the Paris Agreement goals and the race to halt global warming. Under countries' current pledges, global emissions would be 16% higher in 2030 than they were in 2010, according to the UN. That's well off the 45% reduction by 2030 that scientists say is needed to cap warming at 1.5 degrees. But financing --a key talking point in Glasgow -- is also lagging well behind previous goals.

The world's richest countries have already broken a promise to deliver $100 billion/year to developing nations to help tackle climate change. By the IEA's own measure, annual clean energy investment worldwide will need to more than triple by 2030 to around $4 trillion to hit net zero emissions.

Some remain upbeat that innovation and technology leaps allowing cheaper clean hydrogen and EVs are being undervalued and can turn the tide on emission faster than a tougher policy push.

In addition to massive levels of green spending and "unwavering" policy focus on climate change, the IEA admits that achieving its net-zero scenario does require "huge leaps" in clean energy innovation. Cheaper batteries and more commercial-scale carbon capture projects, for example, could boom thanks to breakthroughs in chemistry and CO2 transportation. Nature-based carbon sinks, or offsets, can also play a much bigger role.

While the pace of fossil phase-out remains unclear, the fossil fuel industry itself is being transformed by the changes. Even in a world where oil, coal and gas hold footholds in the energy mix in the foreseeable future, the most efficient, low-carbon fuels like natural gas are needed to underpin energy security. As the dirtiest, carbon-intensive crudes and coal are squeezed out of the picture, politicians will be hoping reliable, affordable alternatives can fill the gap.