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WoodMac: Energy Sector Faces ‘Darwinian Challenge’ to Tame Climate Change

WoodMac: Energy Sector Faces ‘Darwinian Challenge’ to Tame Climate Change

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The world is on course for 2.8 to 3 degrees Celsius of warming as existing infrastructure weighs heavy and COVID-19 slows progress.

The world is on course to sail past the recognized “safe” level of 2 degrees Celsius of warming to as much as 3 degrees Celsius, according to the latest Wood Mackenzie Energy Transition Outlook.

The Paris Agreement aims to limit warming to “well below 2 degrees Celsius” and ideally to limit it 1.5 degrees. Yet just as efforts toward that goal are finally scaling up — via the EU’s amplified climate targets, China’s new carbon-neutral target for 2060, and other examples — the coronavirus pandemic has introduced a massive dose of uncertainty.

“As the world begins to reconstruct its economy, all energy and natural-resources sectors will face a survival of the fittest,” said Prakash Sharma, head of markets and transitions for Asia-Pacific at Wood Mackenzie. “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.”

“While the world is adding renewable power generation capacity and manufacturing electric vehicles, it is still not enough. No efforts have been made to decarbonize the existing infrastructure,” said Sharma, pointing out that huge swaths of existing steel, cement, refining and transportation infrastructure still have decades left in their life cycles.

“Emissions will continue increasing unless there is an incentive to rationalize the carbon-heavy assets or retrofit with carbon capture and storage — a herculean task without an appropriate tax on carbon,” Sharma added.

David Brown, head of markets and transitions for the Americas at Wood Mackenzie, said that the appropriate figure for the task is $100 per metric ton of carbon dioxide equivalent. An EU carbon credit in its Emissions Trading System is currently priced at just shy of €30 ($35).

“We need more policy support than is available today. The EU is the most favorable,” Brown said during a press conference to launch the report, adding that even that support limits access to carbon credits. “Governments need to actually sponsor these projects to get them off the ground.”

China takes a big step
The report plots out the steps required to stay within 2 degrees of warming, finding that Western Europe and the U.S. can get to net-zero emissions by 2050. But that pace of decarbonization does not look to be possible for China and India.

Just the same, Chinese President Xi Jinping on Tuesday revealed that the country would pursue carbon-neutral status by 2060 and aim to hit peak carbon in 2030.

Xi Jinpeng said the target would be included in China’s next Intended Nationally Determined Contribution, the official pledges countries submit to the U.N.’s climate change board. In its first INDC, submitted in 2016, China offered only a carbon-intensity limit for 2030.

“China’s upcoming 14th five-year plan has the potential to be the most important document in global energy market history,” said Gavin Thompson, Asia-Pacific vice chair at Wood Mackenzie. “Increased investment in wind, solar, electric vehicle and battery storage technology deployment will almost certainly feature, and we can expect support for, green hydrogen and [carbon capture and storage] technology. It won’t, of course, be the complete roadmap, and I expect clean coal will continue to receive strong support.”

“But if any country can achieve such ambitious goals, it will be China,” Thompson said. “Strong state support and coordination have proven extremely effective at reaching economic goals; if this is now directed toward climate change, then China is capable of transforming its carbon emissions trajectory over the coming four decades in exactly the same way it has transformed its economy over the past 40 years.”

What does a 2-degree-warmer world look like?
WoodMac’s report finds that peak energy demand will have to arrive in 2023. By 2040, total primary energy demand will be 25 percent lower compared to WoodMac’s base case. The accelerating pace of electrification efforts means that power consumption is on track to rise 14 percent by 2040, by which time more than half (51 percent) of the world’s electricity will come from renewables.

Given that the base case involves electric vehicle numbers increasing from 9 million today to 323 million by 2040, the scale of transformation required to remain below 2 degrees will be epic.

CCS and green hydrogen will both be “vital,” despite neither having yet been deployed commercially at scale. “Going to 2 degrees or lower, means utilizing these technologies rapidly to build on the promise of cheaper renewables and decarbonize difficult-to-abate segments of the economy,” said Sharma.

Meanwhile, “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,” he added.

Brown alluded to the need for a regulatory overhaul to make the 2-degree pathway a reality. WoodMac reports that the investment levels required, though not guaranteed, appear to be attainable. The technology necessary already exists, even where it has yet to be scaled. All eyes now return to politicians and regulators.

Source: greentechmedia
Anand Gupta Editor - EQ Int'l Media Network
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