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Emissions: Does COVID-19 Bend the Curve to 2 Degrees?

Dan Klein, Head of Scenario Planning at S&P Global Platts Analytics


Dan Klein is Head of Scenario Planning at S&P Global Platts Analytics, a division of S&P Global. The thoughts expressed in this market view are those of S&P Global Platts, which are subject to this citation policy.

COVID-19 has altered three fundamentals drivers of emissions: macroeconomics, behaviors, and policy, that combined will lower energy sector CO2 emissions by 27.5 gigatons over 2020-2050, as estimated by S&P Global Platts Analytics Future Energy Outlooks.

However, this is only a minor step in the direction needed to meet the 2 degree target, which would require more than 10 times that reduction over the period.

The emissions reduction achieved in 2020 nevertheless is equivalent to the decline required by 2027 in a 2 degree scenario, illustrating that sizable emissions reductions are possible.

The COVID-19 pandemic has not only altered energy supply, demand, and prices in the near term, but also to some extent their long-term trajectories. Looking just at demand, the repercussions from the pandemic have changed three primary drivers: macroeconomics, behaviors, and policy. As a result, S&P Global Platts Analytics has reduced the outlook for CO2 emissions by 27.5 gigatons (GT) over 2020-2050. However, this represents only a minor step in the direction needed to meet the 2 degree target under the Paris climate accord, which would require more than 10 times that reduction over the period. Nevertheless, the emissions reduction achieved in 2020 is equivalent to the decline required by 2027 in a 2 degree scenario, illustrating that sizable emissions reductions are possible.

Quantifying the impact of COVID-19 on energy demand and its associated emissions in both the short and long term requires a three-pronged approach, examining macroeconomics, behaviors, and policies individually and holistically.


The first prong is to quantify the economic impact of the virus on overall energy demand. The COVID-19 pandemic has certainly shocked global macroeconomic growth in 2020 and 2021, but there will likely be longer-lasting implications. Platts Analytics projects that even beyond the 2020-2021 macro shock, long-term global GDP has been lowered by approximately $5 trillion on a purchasing power parity basis. The relationship between global GDP and primary energy demand is directly correlated, although the elasticity of demand relative to GDP has weakened over the past decade due to efficiency gains and the shift in many economies to less energy-intensive industries. However, even with weaker demand elasticity, a $5 trillion loss to global GDP should equate to a loss of energy demand on the order of 7-9 million barrels of oil equivalent per day. If this amount of demand loss was completely made up of coal, it would represent 1.3-1.8 GT of CO2 emissions; for oil it would represent 0.8-1.1 GT of CO2 emissions, and for natural gas, it would represent 0.7-0.9 GT of CO2 emissions. This range represents roughly 2%-5% of total annual energy combustion emissions.


The second prong is to determine and quantify how COVID-19 could permanently modify behaviors. For the most part, such behaviors are centered on transportation. The lockdowns prompted some rethinking about the need and desire for travel by individuals and organizations. As long as there are fears of coronavirus transmission, there will be reductions in demand for air travel for business and pleasure, and many business will either mandate or allow working from home to continue. However, even if or when these fears subside, demand for travel will not return to its previous state. For air travel, businesses are have been forced to curb travel, opting for online meetings, conferences, and other virtual engagements, with many already signaling that these changes will continue after the pandemic to some degree. The reduction in business travel has yielded considerable costs savings, and some businesses will permanently reduce travel for employees. According to a recent survey conducted by 451 Research, the emerging technology research unit of S&P Global Market Intelligence, 23% of enterprises surveyed indicated they expected travel restrictions to remain in place over the long term or permanently. This would have large knock-on effects on demand for road and air transportation fuels. We project that even a modest reduction in demand for air travel could result in 1.0-1.5 million barrels per day of lower oil demand over the long term, equivalent to 14%-21% of aviation sector oil demand in 2019 (see the Platts Analytics report,"Quantifying Risk: How Much COVID-19 Could Change Consumer Behaviors And Impact Long-Term Oil Demand.")

Many companies have also identified potentially long-lasting cost savings of allowing employees to work from home, particularly if business activities were largely able to continue during lockdown conditions with the aid of telecommunications tools. The 451 Research survey showed that two-thirds of surveyed organizations expect some level of expanded working from home policies to remain in place over the long term. However, separate surveys show that less than 20% of office workers want fully remote working arrangements, while nearly three-quarters of office employees do not want to go back to the office five days a week. This suggests a desire for arrangements that allow part-time working from home. Platts Analytics projects that the equivalent of 5% of the OECD's workforce could manage to work from home permanently with a moderate change in behavior, which would reduce demand for petroleum-based road transportation fuels by an additional 1.0 million-1.5 million barrels per day over the long term, equivalent to 2%-3% of petroleum-based road fuel demand in 2019.

Not all changes to behavior will be negative for demand. Aversion to public transportation in favor of private transportation could increase demand for gasoline and diesel. A slowdown in electric vehicle (EV) penetration because of low oil prices or reduced household purchasing power could similarly increase oil demand, offsetting some of the negative demand dynamics of COVID-19. However, the adoption of EVs is influenced by a number of factors ranging from fuel prices to governmental subsidies and resale value.

While changes in travel behavior typically do not meaningfully affect natural gas or coal demand because those fuels are not commonly used in the transportation sector, there will likely be second-order effects. For example, if there is less travel in general, the hospitality sector would shrink, reducing the need to heat/cool, power, and fuel hotels and restaurants. On the flip side, a greater prevalence of working from home would shift heating demand from the generally more efficient commercial sector to the generally less efficient residential sector, likely resulting in a net increase in demand for heating fuels like natural gas and oil.


The third prong is to determine and quantify how COVID-19 could alter policies that affect energy demand. Predicting policy changes is notoriously difficult to do with any degree of accuracy, and there is a wide range of potential outcomes depending on the severity of policy effectiveness. However, there have already been signs of how some countries may react to COVID-19. European policymakers have signaled their intent to skew stimulus packages toward green initiatives, such as a greater push for electric vehicles, renewables, and hydrogen. These policies are also seen as an additional impetus for Europe's wider ambition to achieve net zero carbon emissions by 2050, an aggressive goal given Europe emitted about 3.8 GT of CO2 in 2019 (gross basis) according to a Platts Analytics analysis.

On the other side of the Atlantic, the U.S. has not provided any support for green initiatives in stimulus measures to date. The U.S. presidential and congressional elections in 2020 offer a stark dichotomy of how COVID-19 policies could evolve. President Donald Trump's stance on environmental policies over his administration to date signal that he would not support green initiatives in general and as part of stimulus packages in particular. However, the Democratic Party nominee for president, former Vice President Joe Biden, has released a series of plans, called "Build Back Better," which includes an aggressive goal of carbon-free power generation by 2035. By comparison, the U.S. power sector emitted 1.6 GT of CO2 in 2019, and Platts Analytics projects 2035 emissions in the sector will be 0.9 GT.

In Asia, policy announcements in reaction to COVID-19 have been mixed. South Korea announced a draft plan, dubbed "South Korea's Green New Deal," designed to stimulate its economy and drive emissions to net zero by 2050. It should be noted that this plan is not currently enshrined into law, and environmentalists claim the deal is neither specific nor aggressive enough in the short term to move toward net zero. While China announced energy efficiency goals as part of a stimulus package, it also rolled back regulations on coal plants. Other countries in Asia, ranging from Japan to Malaysia and Myanmar, have announced new renewable projects nominally in response to COVID-19, although it is possible these projects would have proceeded in absence of the pandemic.

Adding up the three net zero policy targets that have risen in prominence in the wake of COVID-19--from the EU, South Korea, and from Mr. Biden--yields approximately 6 GT of gross CO2 emissions in 2019, or 17% of total energy combustion emissions. While policy targets, particularly ambitious ones such as net zero, do not often come to complete fruition, implementation of strong policies in these countries could curtail emissions by several GT, according to the projections in our outlook. Currently, Platts Analytics' World Energy Demand model projects gross emissions from these areas and sectors will decline to under 4 GT by 2050 in its Most Likely Case outlook.

The prices and assumptions that S&P Global Ratings uses, for the purposes of its ratings analysis, may differ from those that S&P Global Platts reports. Data that S&P Global Platts uses includes independent and verifiable data collected from actual market participants. Any user of the data should not rely on any information and/or assessment therein in making any investment, trading, risk management, or other decision.