Nov-2023

Scenario analysis for exploring pathways to decarbonisation (ERTC 2023)

In 2021, world leaders gathered for COP26 in Glasgow to reaffirm the global commitment to achieve the goals of the Paris Agreement and limit global warming to no more than 1.5°C above pre-industrial levels.

David Hone
On behalf of Shell Catalysts & Technologies

Article Summary

However, Russia’s invasion of Ukraine soon after upended the geopolitical landscape, quickly shifting focus from national climate policy to securing primary energy resources. With the world relying on fossil fuels for 80% of its primary energy,¹ this inevitably led to a scramble for oil, natural gas and coal.

With short-term energy security issues firmly back at the top of national agendas, where does this leave the global energy transition? Furthermore, how will countries balance the competing forces of securing enough affordable energy while trying to align emissions reductions with national targets under the Paris Agreement?

Driving change in a troubled world
The global energy system is going through the biggest upheaval since the 1970s when geopolitical tensions sent supply and price shockwaves around the world. Today, the reshaping of the energy system is the result of three key drivers.

First, with global energy demand continuing to rise, the world has entered a period of potentially extreme price volatility. Ongoing sanctions against Russian oil and gas – which account for over 10% and 17% of global production, respectively,^²,³ – have amplified supply-side pressure, sending many countries, including those across Europe, rushing to secure alternative primary energy sources. As a result, many countries are seeing a growth in resource nationalism as they adopt short-term, unilateral action to secure reliable and affordable sources of energy.

Second, the impacts of climate change are already being felt by many around the world. Energy consumption accounts for more than 85% of global carbon emissions;^⁴ therefore, to move the needle on global emissions and mitigate the worst impacts of climate change, the world needs co-ordinated, long-term global action that accelerates the development and deployment of lower- and zero-carbon sources of energy.

hird, the deployment of renewable energy technologies, such as wind, solar PV, and batteries, is gathering pace, with renewables expected to account for more than 90% of global electricity capacity expansion over the next five years, surpassing coal as the world’s largest source of electricity generation by 2025.⁵

Two competing dilemmas
Amid the evolving landscape of the global energy system and geopolitical priorities, two competing dilemmas are apparent.

First, least-developed nations around the world are striving for a better quality of life, and key to this is access to high-quality, affordable energy – as much as three times more energy per person than today. With the population of the least-developed nations expected to more than double by 2070 to more than four billion people, the demand for extra energy is set to soar.

Second, against the backdrop of increasing energy demand, the world is confronted with a quickly diminishing carbon budget, which means that to keep global warming to within 1.5°C, there is only a finite amount of carbon dioxide (CO₂) that can be released into the atmosphere – the world is on course to exhaust this budget in less than 10 years.

This leaves the world needing to find a way to decouple economic growth, better living standards, and rising demand for energy from increasing levels of carbon emissions.

How will nations respond?
The response of nations to the energy transition is unlikely to be uniform. Instead, countries will likely form like-minded blocs that follow different paths driven by economic, energy, and geopolitical needs. As a result, Shell envisages the emergence of four key national archetypes: Green Dream, Innovation Wins, Great Wall of Change, and Surfers (see Figure 1).

Green Dream
Green Dream describes countries, such as those in Europe, that are vulnerable to energy supply disruptions yet wealthy enough to cope with energy price shocks. These countries seek security by driving hard to reduce energy demand and shifting rapidly away from fossil fuels.

Innovation Wins
Innovation Wins represents major energy resource holders such as the US and the UAE. These countries do not fear a lack of energy supply; however, they are vulnerable to political tensions and voter dissatisfaction when energy prices, such as for gasoline, rise too high. In response, these countries would look to increase short-term oil and gas production while relying on low-carbon technologies in the long run.

Great Wall of Change
The Great Wall of Change generally describes China, a country resilient to supply disruptions and price shocks. It has a strong economy, ample domestic energy reserves, and invests heavily in energy supply systems. Additionally, China knows it must move away from fossil fuels, but will do so in a manner that does not risk its own national security.

Surfers
Surfers represent emerging economies, such as India (Emergent Surfers) and the world’s least-developed nations (Rising Surfers). They do not typically produce significant amounts of energy, which makes them vulnerable to both energy supply disruption and price swings.

However, Surfers are pragmatic – they understand the need to decarbonise but are unapologetic about their economic development targets.

For this reason, they are happy to continue using fossil fuels at the same time as transitioning to renewable energy. Additionally, Surfers would seek strategic partnerships with other archetypes and, in return, offer better access to mineral resources, thereby growing markets and labour.

What does the future hold?
We do not have a crystal ball, but that does not stop us from exploring what the future may (or may not) look like. Using scenario modelling, Shell examines how nations may respond to the energy transition and two possible futures that may emerge as a result: Archipelagos and Sky 2050 (see Figure 2).

This short article originally appeared in the 2023 ERTC Newspaper, which you can VIEW HERE