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Lindsey Hall: Hi. I'm Lindsey Hall, head of thought leadership at S&P Global Sustainable1.

Esther Whieldon: And I'm Esther Whieldon, a senior writer on the Sustainable1 thought leadership team.

Lindsey Hall: Welcome to ESG Insider, a podcast hosted by S&P Global where we explore environmental, social and governance issues that are shaping investor activity and company strategy.

Esther Whieldon: So Lindsey, we're airing today's episode on Earth Day. And we'll be talking with one of the experts behind the latest report published by the UN's Intergovernmental Panel on Climate Change or IPCC. The report focused on mitigation or ways to reduce Scope 1, 2 and 3 emissions globally.

Lindsey Hall: So Esther, I'm glad you bring up the emission scopes because, as you know well, I talk about sustainability and climate all the time for my job, but this week, I've also had the chance to talk about it more at home as well.

Esther Whieldon: How did that come up?

Lindsey Hall: My 9-year old actually listened to our latest episode of this podcast, where we talked with Bank of America about the challenge of measuring and managing Scope 3 emissions. And naturally he asked me to explain what are Scope 3 emissions, which I kind of say it was quite a challenge to explain to a kid.

Esther Whieldon: Yes. I can imagine. So what did you tell him?

Lindsey Hall: Okay, so here's my best effort: a pet cow.

Esther Whieldon: Okay.

Lindsey Hall: Right? If you have a pet cow, Scope 1 emissions are the emissions from when the cow releases gas. Or for elementary school audience, that's when the cow farts or burps. Scope 2 emissions are from the electricity you purchase to store the milk at home, so emissions from lighting, air conditioning, heat. And Scope 3 emissions have to do with emissions for producing the feed for the cow, the packaging for the milk, refrigerating the milk at the grocery store.

Now joking aside, it's important to get people of all ages talking about emissions reductions because, as we'll hear in today's episode, the latest IPCC report on climate change provides some stark warnings.

Esther Whieldon: The IPCC report sounds the alarm on climate change. It says that, unless the world moves faster to make sweeping emissions reductions, we'll be locked into a global warming trajectory. In other words, it will be very difficult to get off the path we're traveling. And prior IPCC reports have noted that every degree of higher warming leads to exponentially greater levels of losses and damages. That's for businesses, nature and society. And this is the third in a series of IPCC reports. The first report looked at the scientific basis for climate change. Second focused on adaptation to climate change, and you can find the link to our prior two podcast episodes on these reports in our show notes. This third and latest report is also referred to as the Working Group III report. And some models the IPCC used here found that we need to take swift action and reach peak emissions by 2025.

Currently the world is on a path to global warming of about 3.2 degrees Celsius this century, and that's relative to pre-industrial temperatures. As we've talked about before, even 3 degrees of warming would have catastrophic implications compared to 1.5 degrees. Here's a few quick examples: At 1.5 degrees, about 14% of species on land-based or terrestrial systems would be at high risk of extinction. That number will climb to 29% at risk of extinction at 3 degrees warming. Damage from floods would be up to 3.9x higher at 3 degrees as under a 1.5-degree scenario. And human lives would also be at higher risk. In Europe, for example, the number of deaths and people at risk of heat stress will increase two- to threefold at 3 degrees warming compared to 1.5 degrees.

Lindsey Hall: So how do we move the needle on emissions fast enough to avoid the worst of these impacts? Well, the latest IPCC report includes several chapters that focus on specific sectors, including what a net zero world would look like for each sector. If you recall, Esther, the IPCC in 2018 found that limiting global warming to 1.5 degrees Celsius would require us to achieve net zero emissions around the year 2050. And many companies are setting net zero targets to align with this finding. The report also found that the world could have up to $4 trillion worth of stranded fuels and infrastructure assets by 2050 under a 2-degree scenario.

As we've talked about on this podcast, the potential for companies to be stuck with stranded assets in a low-carbon scenario is a key concern for investors. And in this context, the term stranded assets refers to when assets are no longer able to generate an economic return because of regulatory and market changes associated with decarbonizing the economy. In this episode of podcast, we're going to explore what the latest IPCC report says about decarbonizing energy systems, which is basically any system that relies on electricity or fossil fuels to operate. The report found that transforming energy systems will be critical to helping other sectors achieve net zero emissions.

Esther Whieldon: To learn more, I talked with a contributing author to the report, John Bistline. John is program manager in the Energy Systems and Climate Analysis group at the Electric Power Research Institute or EPRI. I asked John to give us a sense of the top takeaways from the report, for starters. Here he is.

John Bistline: I would say at a high level the report and especially the energy systems chapter really underscore the idea that our climate future is up to us to decide. And the falling costs of clean energy, combined with policy commitments, really put us in a better place today than we were a decade ago when the last report was released, but there's a lot of work to be done.

I think that the global landscape has changed quite a bit since the IPCC special report on 1.5 degrees that came out in 2018 but especially since the last assessment report that came out in 2014. I think that the Paris Agreement shifted the focus to limiting warming to well below 2 degrees, so the 1.5 degrees. That means an accelerated response to mitigation; it also created, I think, a focus on non-state actors like cities, businesses, public and private entities mitigating climate change.

I will say the other big change over the last few years was the following costs of a range of low-emitting technologies but especially electric vehicles, wind and solar and battery storage. And thanks to those reductions, I think that the next steps are clearer and more affordable than they were before, especially when we're thinking about having emissions over the next decade or so. I think that's one key message from the report is that deploying clean technologies that previous decades have made cheap and then simultaneously laying the groundwork for reaching net zero emissions toward mid-century, again, is sort of more doable than ever before. I think there are some novel aspects to the assessments as well.

So there are special chapters looking at demand and social aspects of mitigation as well as things like innovation and technology development, which of course are really key to reaching those net zero goals. There are also sections thinking about the institutional and legal dimensions of mitigation as well as those policies and incentives from subnational entities as well. Those were areas that maybe were mentioned in previous assessment reports but really got their own focus with this assessment report.

Esther Whieldon: And to be clear, I think, for those who are listening and just to make sure I'm getting it right also. When you mentioned demand, they're talking about what the average person can do, right, whereas past reports have focused a lot on corporations and government and all that stuff, but this one includes like the human factor component, human action.

John Bistline: That's exactly right. So actions that individuals can take to lower their own carbon footprint and also a focus on one of the behavioral drivers for those sort of energy system changes that are really important for reaching not just the sort of near-term goals but the longer-term ones as we're trying to understand challenges and barriers for deployment of electric vehicles and of heat pumps.

Esther Whieldon: And as I understand it, energy systems also underpin many of the other sectors outside of energy that also need to transition, like industrial that use fossil fuels for making metal, and things like that.

John Bistline: That's absolutely right; and even agriculture, methane. There's a lot of methane that comes from agriculture. And that's a potent greenhouse gas, but of course, agriculture equipment also uses fossil fuels, so obviously you can do things like electrifying some of that equipment, but you may need a sort of portfolio of other approaches, especially for tackling those hardest-to-abate emissions like non-CO2 gases from agriculture.

Esther Whieldon: So as you mentioned, the cost of renewables and some other technologies as well has gone down. So the report mentioned this, but it also noted that deployment of these technologies has not been even globally. Why might that be the case? Why isn't everybody sort of having the same level of deployment?

John Bistline: I think there are several factors at play when you think about how much wind and solar and batteries are deployed. I think a big one is policy support. So countries and sub-national entities have a portfolio of approaches that they've used to either incentivize more wind and solar or, in some cases, to sort of penalize the emissions for other technologies. So things like renewable portfolio standards are pretty common, tax credits, but there's also the sort of dimension that the resource quality for wind and solar varies depending on where you are in the world. Some places are really sunny are really well positioned to install solar right away. Others are windier. That dimension also plays a pretty critical role, but the final one, which also has its own section of the report, is financing.

So when it comes to those technologies that I just mentioned, renewables and storage, those are fairly capital intensive, so financing assumptions matter a lot, at least more so than fuel-intensive technologies of the past. So those are sort of the big three: policy, resource quality and financing.

Esther Whieldon: Can you explain to me a little more about what you mean by financing assumptions?

John Bistline: So with financing, depending on where you are in the world, there are elements to, for instance, project risk. In some parts of the world, the projects are riskier either because policy support that maybe was behind the deployment of a particular technology is variable. And I think there's a lot of countries that sort of illustrate that waxing and waning of policy support. And in other cases, it's just, yes, a matter of sort of riskier lending, but again that sort of varies a lot depending on whether you're in a developed country context or an emerging economies context.

Esther Whieldon: So it could even boil down to like the credit rating or something like that of a government or area.

John Bistline: That's right, yes.

Esther Whieldon: So what does the report tell us about the need to wean off of or move away from fossil fuel related emissions. Does it say anything about having to get to like absolute zero emissions from fossil fuels?

John Bistline: Yes. So taking a step back: The Paris Agreement goal of keeping warming well below 2 degrees Centigrade or 3.6 degrees Fahrenheit generally means reducing global greenhouse gas emissions by roughly half in the next decade or so on the way toward net zero CO2 by mid-century. And reaching that, there's a couple of nice figures in the report that illustrates how, if you're thinking about net zero emissions for all greenhouse gases, including methane and other higher global warming potential gases, it typically takes a decade or two longer than net zero CO2, especially given how some of those emission sources are relatively challenging to abate like the methane from agriculture I mentioned before, but I will say that the scenarios that are in the report isn't a one-size-fits-all approach to decarbonization. There's a lot of different technologies and pathways to reach those emissions reduction targets. And specific approaches depend a lot on regional circumstances and in the way that mitigation intersects with other societal objectives.

And so the scenarios in the IPCC report, they indicate a few things. One is that the electric sector has a pretty key role in climate change mitigation both through direct emissions reductions; and also through electrification, which is using that low-emitting electricity to then reduce fossil fuel use in sectors like transport, in buildings and industry. And electrification is a central pillar of emissions reductions alongside things like greater efficiency; the use of carbon removal; the deployment of alternative energy carriers -- things like hydrogen, bioenergy, ammonia. But I will say that, generally in the scenarios in the report that limit warming to 1.5 degrees, coal consumption in particular, without carbon capture and storage, drops by something like 60% to 90% by 2030. Oil and gas consumption fall more slowly, but again there's a lot of variation depending on which region you're in, in the world and a lot of variation across scenarios.

So there are a wide range of modeling groups that submitted global scenarios, national scenarios to this assessment report. And one really cool thing is that, the IIASA (International Institute for Applied Systems Analysis) database that sort of hosts the IPCC database, you can go there and check out the variation across models across different dimensions that you care about, including things like how does fossil fuel consumption change over time in these different scenarios.

And so what you're assuming about things like carbon capture and storage definitely change the trajectory of just how quickly the fossil fuel consumption changes, but that depends a lot on what you're assuming about technological costs and public acceptance, how those unfold over time as well as how policy is designed. So for instance, in countries like the United States, there's tax credit-led approaches to climate policy that have provided support for technologies. That's pretty different from, say, a carbon price that is used by many of the integrated assessment models that are reflected in the database which, the aim there for carbon price might be to make dirtier fuels more expensive rather than explicitly subsidizing to make clean energy technologies cheap.

Esther Whieldon: One thing I found striking of many, many things in the report was the urgency of the time line for action. In the 2018 interim report, they talked about we need to see serious action by 2030, right; reach, I think it was, around 43% or 45%, which they're still saying now, but what I'm seeing in this report is that they're saying -- and I think in the 2018 report they said reach peak emissions before 2030. But what they said in this latest report is we need to reach peak emissions globally before 2025, which to me -- I mean that's, what, 2 years away, right, 2 to 3 years away, so that to me just seems like a very fast time line for us to act on. Where does the energy sector and utilities stand in being able to reach peak emissions by that time?

John Bistline: Yes. I can't remember what the exact language was in the summary for policymakers, but a lot of the stories I see in the coverage of the report generally are interpreting that to mean that peak emissions have to happen before 2025. And while I think that's true, many of the scenarios indicate that the peak happens before that, but the broader point is just that delay can be costly when you're thinking about mitigation, so if we were waiting to peak, then emissions cuts might have to be steeper later on. Or you might need additional carbon removal.

And so I guess this question you mention about feasibility is a really good one too. When you think about the historical emissions, they decreased globally in 2020 due to measures from the pandemic, but then they rebounded again in 2021. And I think they were pretty close to their 2019 values. And some countries, I think, are better positioned than others to sort of peak and decline or potentially having peaked already. But I think that a lot of people have questions about how near-term drivers of oil and gas price spikes globally, how those could impact longer-run emissions. And I think an unfortunate sort of near-term effect is that you have seen these emissions that bounce back from things like coal consumption increasing at the same time. But I think, when we're considering the next decade or more as you're trying to reach these targets, you really need all of the tools both in the policy toolbox and the technological toolbox to help to make those sorts of reductions feasible.

Esther Whieldon: So you talked earlier about how policy drivers have been helping with slowing down the rate of emissions, but I also saw in the report that there is still a risk of stranded assets. Can you talk about sort of how those two things fit together? Because obviously carbon pricing is going to play a role in sort of how fast certain sectors have to decarbonize before they have some stranded assets, as well as other policy drivers.

John Bistline: Yeah, and I guess, at high level, stranding assets or asset impairments broadly, where the value of the asset may decline even when it's not necessarily retired. That does depend a lot on policies and policy design. So their timing, their stringency, things like that. And the IPCC report describes how limiting warming to 1.5 or 2 degrees can lower the economic value of certain types of fossil infrastructure and lower the value of unburned fossil fuel resources. And I think some of the headline numbers that I've seen people quote are that the economic impacts could be in the trillions of dollars globally.

I think that what the scenarios suggest is that the impacts for specific countries, on specific fuels, can vary quite a bit. Oil and gas assets are pretty different from coal assets in terms of their trajectories for how they decline in these scenarios. And ultimately what you're assuming about the availability, the costs of carbon capture and storage can also matter a lot to especially when you're thinking about gas rates of change, how quickly gas use might decline or not. There are some scenarios that have fairly flat gas consumption, natural gas consumption, globally. Part, that's from CCS. And part, that's from the fact that it's not as carbon intensive, say, as other fuels, but yes.

I think that one important thing to remember about scenario ensembles like the one used to inform the IPCC report is, even though you have scenarios from a range of different organizations that reflect different input assumptions about how technology costs might evolve, how policy might evolve. At the end of the day, it's kind of a convenient sample, right; that a lot of these teams sort of submitted their scenarios that maybe didn't look at all of the possible ways that the future might unfold. And I think that's a really valuable part of the IPCC report in sort of bringing together those differences in world views and sort of synthesizing the science over the last decade. There have been a lot of really great papers, a lot of great analyses during that time that will provide a more complete picture of these sort of rates of change, including the rates of sort of fossil fuel consumption, production changes and consequently the risk of stranded assets.

Esther Whieldon: But are there some technologies that you think need more attention potentially in the report or in general, really need to get more looked at or more thought about or more work done on?

John Bistline: Yes. As you described, there are a range of supply options available to reduce emissions over the next decade and beyond. And in particular, I think that the focus on electricity systems, higher shares of renewables have been a focus of this report and others because of their sort of extensive cost declines; and the sort of large role that solar PV, wind, et cetera are expected to play in these scenarios moving forward, but reaching net zero emissions requires really using all of the tools at our disposal. And part of that is thinking about the research, development and deployment needs that are really foundational for ensuring that, that range of technologies not just on the supply side but on the end-use side are available and affordable when they're needed.

And I think one interesting part about the energy systems chapter is that it tried to summarize what net zero energy systems might look like. And even though, again, there's not a one-size-fits-all approach to decarbonization — there are regional circumstances that may sort of affect the balance of which strategies we use — net zero energy systems do share a number of common characteristics: electricity systems that either produce no net CO2 emissions or actually remove emissions from the atmosphere. There's widespread electrification of end uses; much lower fossil fuels used than today; use of those alternative energy carriers like hydrogen, bioenergy, et cetera; also a lot of sort of integration across regions, across components of the energy system; and also the use of CO2 removal as well to offset any residual emissions.

And so I think they're sort of talking about that taxonomy of net zero systems. There are some technologies that are less far along on their deployment than others. And so that innovation systems chapter, in particular, was trying to unpack how did -- the successful experiences of solar PV. What does that suggest about how we make other technologies cheap? And part of that is finding niche markets for technologies, and some of it is providing government guarantees for early deployments of technologies. And so yes, really thinking about the innovation system not just nationally but more importantly thinking about it globally, right? These global challenges really do require global solutions. And so thinking about how like carbon removal and electrolytic hydrogen and technologies like that, how we move those down the learning curve so that they're there when we need them.

Esther Whieldon: I asked John how the IPCC's findings compare to analysis undertaken by other groups such as the one released in 2021 on net zero pathways by the International Energy Agency. He noted that the IPCC report took many of those studies into account, including the one from IEA. He said that IPCC was able to provide a sort of ensemble bigger picture view of the potential net zero options.

John Bistline: That sort of larger ensemble provides more variation in world views; and also differences about, again, how technologies might evolve alongside markets, alongside human behavior. I guess I'm reminded of this Stendhal quote about how there are as many notions of beauty as there are visions of happiness. And for climate scenarios, I would say that there are as many notions of what net zero emissions might look like as there are visions about how the future could unfold. So I would say those are the biggest differences between the IEA and the IPCC report.

Esther Whieldon: It's a really great comparison. I like it because it's true. And I think that's one of the challenges with net zero is that investors find it hard to trust that companies can achieve what they've pledged, right? And they want to see the exact plans these companies have when they set net zero targets, but the reality is, once you get out past a certain date, there are so many variables that could change, right?

John Bistline: That's exactly right. And ultimately, we don't know exactly what a net zero emissions system will look like. We know what it could look like. And I think we do know quite a bit more about what the next decade can look like. A lot of these scenarios indicate that you're going to be deploying a lot of these mature technologies like renewables, electric vehicles, heat pumps, but the sort of degree of deployment, the pace of deployment can vary a lot even in the next decade or more. And then as you're thinking about net zero toward mid-century, as you're approaching 80%, 90%, 100% emissions reductions, that's where these questions about potential technology wild cards and the social acceptability of different technologies and sort of policy design that gets you there, all of those things will pay a role in what the system will look like.

Esther Whieldon: So let's say I'm with the U.S. Business Roundtable or I'm a major asset manager. What advice -- if you got to sit down with their Boards or with the CEOs from those -- the biggest companies in the U.S., what would you tell them? What actionable things should they be taking from this report and specifically the energy systems chapter?

John Bistline: The next steps are thinking about these credible commitments to public policy, private investment, to innovation. And in the near term, that may mean doubling down on options that previous decades have helped to make cheap, so again electric vehicles, renewables, heat pumps, but at the same time, I think we're also going to see a lot of work trying to scale the technologies that are needed to reach net zero emissions across the economy. And I think, in order to do that, there's going to be a lot of interest, a lot of investment in these options that today are sort of more at a pilot scale. And the sort of magnitude of the opportunity for new investments, I think, is really striking.

So with the IPCC scenarios, they're suggesting that the sort of low-carbon transition would shift investment patterns across globally, obviously not just the U.S., from over $1 trillion per year right now to something like $2.2 trillion to $3.6 trillion per year by 2030. So doubling, tripling and then potentially more from there as you're going toward mid-century and reaching these net zero goals. So I think that that's a huge opportunity, but there's also a lot of challenges as well and a lot of regional variation too. And that means that you really have to be looking at sort of the full picture and the full context here. And I hope that -- one thing that a reader might take away from the summary for policymakers is that having an affordable, a reliable, a resilient, an equitable clean energy transition does require balancing a large variety of variables thinking about economic goals, environmental goals, social objectives. And that leads to a lot of complexity in terms of how things might roll out and in terms of which investments might make sense.

Esther Whieldon: As we heard John say, the world has a number of available options right now to speed up the low-carbon transition, including for energy systems, but the pace of that change will depend on many factors, including a rapid increase in financing for the transition and advancing technologies to lower their costs.

Lindsey Hall: Please stay tuned as we track how companies and investors tackle these major challenges and capture the opportunities associated with the low-carbon transition. Now these are topics we're going to be digging into in an upcoming series of events. We're taking the ESG Insider podcast on the road in May to bring you interviews and key highlights from the upcoming S&P Global Sustainable1 Summit. That summit will be held in Paris on May 10, in New York on May 17 and in Sydney on June 9. And we'll include a link in our show notes, in case you want to sign up to attend any of those events in person. We'll be digging into topics like net zero and nature positive, advancing social equity and measuring progress, so I hope to see you there.

Thanks so much for listening to this episode of ESG Insider. And a special thanks to our producer, Kyle Cangialosi. Please be sure to subscribe to our podcast and sign up for our weekly newsletter ESG Insider. See you next time.

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