Transitioning to a Low Carbon Economy

The COVID-19 pandemic is one of the most severe economic and energy shocks in modern history. On top of the massive disruptions to business, mobility, and everyday life, there clearly will be longer-lasting implications for the energy transition away from fossil fuels. While the shocks from the pandemic are leading to reductions in fossil fuel consumption and emissions, they will not be enough to put the world on a path to meet 2 degree global warming target, nor bring forward peak oil demand, nor drive coal consumption to near zero.

Roundtable Discussion Participants:

—Susan Gray, Global Head of Sustainable Finance, Business, and Innovation, S&P Global Ratings

—Manjit Jus, Managing Director, Global Head of ESG Research & Data, S&P Global

—Roman Kramarchuk, Head Energy Scenarios, Policy & Technology Analytics, S&P Global Platts

—Lauren Smart, Managing Director, Global Head of ESG Commercial at S&P Global Market Intelligence

—Reid Steadman, Managing Director and Global Head of ESG at S&P Dow Jones Indices

—Evan Greenfield, Senior Managing Director, Global Head of ESG at S&P Global (moderator)

S&P Global is proud to support Climate Week NYC 2020 to accelerate progress on climate risk, and provide the essential intelligence to achieve sustainability at scale.

Crude and condensate output is forecast to fall 7% year on year, dipping below 80 million b/d, and oil prices in late August remained around $20/b below 2019 average levels.

In almost any other year, these cuts to capital spending and output could be attributed to supply-demand cycles and price responsiveness.

After 2022, growth in CO2 emissions essentially flattens to 0.2% a year before peaking in 2032. By 2040 emissions remain around 3 Gt above 2020 levels, as abatement efforts are offset by the continued use of coal for power generation in Asia's growth economies.

Since the 2015 Paris Agreement, 180+ countries[2] have committed to accelerate the transition to a low-carbon economy by enacting a variety of policies. This includes the introduction or increase of a carbon tax. Major central banks and financial regulators across the world are planning to test the financial markets’ preparedness for associated physical and transition risks by introducing ad-hoc scenarios to financial institutions’ annual stress-testing exercises.

While scenario analysis is routinely performed by risk managers at financial institutions and non-financial corporations, energy transition risks pose new challenges. This includes the longer time horizons needed for the analysis, the scarcity of quality company emission data, and the lack of an established quantitative approach linking energy transition risks and opportunities to credit risk.

To date, climate-conscious investors have largely focused on reducing relative portfolio carbon exposure, but divergent methodologies have made fertile ground for so-called “greenwashing.” While point-in-time analyses do not necessarily inform alignment with our needed transition to a low-carbon economy. However, a combination of groundbreaking new datasets and index innovation is emerging. Investors now have the choice to align with a scenario that may mitigate the most catastrophic impacts. The European Union (EU) is in the process of finalizing standards for defining a ClimateTransition Benchmark (CTB) and a Paris-aligned Benchmark (PAB), both of which use absolute measures to align with a 1.5°C trajectory rather than simply a relative carbon reduction.

That would be the largest drop since 1.4% in 2008 during the global financial crisis, according to the Global Carbon Project. That's significant but would still fall short of the 7.6% each year in reductions that the UN Environment Program says the planet needs to keep global warming below 1.5 degrees Celsius under the Paris Agreement.

Furthermore, climate watchers expect a rebound in emissions growth once economies restart and try to make up for lost time. This means companies and countries will still need to reduce their emissions further. To be sure, many are committing to becoming "net zero" by 2050, which is in line with the agreement, but is it achievable? Can they really reduce as many emissions as they produce? Here, in this article, we assess the ability of the world's forests and soils to capture carbon and offset emissions.

The commitments of governments, regions, and cities across the globe to reduce carbon emissions are creating transformative times for many industries. Few are facing more change than the global power sector, which is responsible for approximately one-quarter of global greenhouse gas (GHG) emissions. It is expected that renewable electricity will need to increase to 70-85% of supplies by 2050 in order to limit climate change to less than 1.5°C of warming to avoid its worst impacts, with coal-fired power being almost completely eliminated.

A Need for Leadership

Given its size and effect, it is important that the global power sector play a key role in the world’s decarbonization efforts. To recognize progress made on this front, Trucost developed a methodology to identify power companies at the forefront of the energy transition for the S&P Global Platts3 Global Energy Awards; The Energy Transition Award.