FACTBOX: COP28's fossil fuel call focuses on power; carbon talks draw blank

The UN Climate Change Conference in Dubai concluded Dec. 13 with a call on all countries to move away from using fossil fuels, accelerate the phasedown of unabated coal power and triple renewables. Here, S&P Global Commodity Insights reporters add market context to the first global stocktake deal.

Infrastructure

The agreement recognizes the need to transition away from fossil fuels in energy systems, with "energy systems" being interpreted by some countries as meaning power generation.

• Oil-fired power generation is a relatively minor contributor to the global mix, with S&P Global data showing output from the source of 551 TWh in 2022, or 2% of the total.
• Saudi Arabia, however, is almost entirely reliant on gas and oil for its power generation, making the stocktake commitment a genuine challenge.
• Accelerating away from gas and coal in generation is a bigger issue globally. Together, the two sources are forecast to account for 44% of the global power mix in 2030, according to S&P Global forecasts.
• Analysts at S&P Global estimate that global oil demand -- including biofuels -- will remain at around 31% of the global energy mix through 2030, while renewable energy sources will grow 6%-8%/year to make up 13% of total energy demand at the end of the decade, up from 8% in 2022.
• Global oil and biofuel demand will peak at around 110 million b/d in 2031, according to S&P Global's reference case scenario.

Multi-nation commitments at COP28 to triple renewable energy capacity and double the average annual rate of energy efficiency improvements by 2030 were restated in the final stocktake text.

• The renewables target equates to 11 TW installed by 2030, requiring an unprecedented acceleration in deployment from today's 2.3 TW total installed capacity for wind and solar.
• According to analysis by S&P Global, some 4.6 TW of solar and wind capacity are forecast to be added globally between now and 2030, at a cost of $4.7 trillion.
• While energy efficiency improvement rates are expected to rise in all S&P Global scenarios by 2030, expecting a doubling to 4%/year is seen as beyond realistic. In a base case Inflections scenario, energy intensity improvement rates increase by 28% from 2022 levels by 2030.

The stocktake acknowledges the need to accelerate efforts towards the phase-down of unabated coal power, first expressed at COP26 in Glasgow two years ago.

• India's public sector power companies are currently building 27 GW of thermal generation capacity, almost all coal, and still failing to keep up with annual power demand exceeding 9% this year.
• S&P Global forecasts China's massive coal fleet to generate 5,171 TWh this year before peaking at 5,185 TWh next year. Forecast greenhouses gas emissions from China's power sector alone, at 4.33 billion mtCO2e this year, would represent 12% of global emissions from energy.

Prices

COP28's failure to adopt key texts laid out under Article 6.2 and Article 6.4 of the Paris Agreement represents a setback for project developers seeking the greater certainty and integrity afforded by international agreements.

• Platts Nature-Based Avoidance price, which reflects the most competitive internationally fungible carbon credits issued by nature-based projects, is currently languishing at a record low. The credits were assessed at $3.90/mtCO2e Dec. 12, having been at $11.60/mtCO2e in January.
• Compliance markets have shown more resilience. S&P Global analysts expect the average EU carbon allowance price to rise from Eur81.50/mtCO2e in 2022 to Eur86.10/mtCO2e in 2023, Eur93.50/mtCO2e in 2024, and Eur101.20/mtCO2e in 2025.

Avoidance of phaseout language for fossil fuels reflected the refusal of OPEC member states to accept the singling out of upstream oil production.

• OPEC remains bullish on 2024 oil market fundamentals despite global economic uncertainty, supply growth from outside the group and a recent fall in oil prices.
• Platts, part of S&P Global, assessed Dated Brent at $73.56/b on Dec. 12, the lowest level since June 29.
• Non-OPEC supply growth is seen at 1.8 mil b/d in 2023, and 1.4 mil b/d in 2024, with the US accounting for around 70% of this expansion in 2023. Liquids production is expected to increase by 1.3 million b/d year on year.

Trade flows

The global stocktake refers to "the urgent need for accelerated implementation" of voluntary cooperation under Article 6.

• The Japanese government had signed bilateral agreements with 28 countries to collaborate under Article 6.2, but a lack of a strong domestic market giving a clear price signal has resulted in sluggish demand for credits.
• Singapore has signed over a dozen Article 6.2 agreements with different countries, supported by a long-term carbon tax policy allowing companies to use Article 6.2 credits to offset up to 5% of their tax-liable emissions.

The agreement notes that unilateral measures taken to combat climate change "should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade."

• Speaking during COP28, Chinese environment ministry official Sun Zhen told the European Commission's director general for Climate Action: "If you want to lead the world, you should stop your CBAM, that's the simple message" -- referring to the EU's targeting of imports of emissions-intensive commodities including iron and steel, aluminum, fertilizer and cement.
• Countries exposed to the tax, notably China, India, Brazil and South Africa, have raised strong concerns, accusing the EU of insufficient communication, violation of World Trade Organization principles, and a lack of a clarity on how CBAM proceeds are to be spent.
• Reshoring clean tech manufacturing policies in the US (the Inflation Reduction Act) and the EU (the Green Deal Industrial Plan) have prompted China to develop alternative markets and to relocate factories closer to clients.
• China has a 70% share of the global markets in solar PV modules and wind turbines, as well as a dominant position in the supply of batteries, fuel cell stacks and electrolyzers.