What is Behind the Divergence between World Energy Outlooks and the Two-Degree Climate Pathway?

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Highlights

• Base long-term energy scenarios do not provide any hope for a timely reduction in Green House Gases emissions to levels required for a 2-degree climate pathway.

• Energy policies are yet to respond adequately to the challenges posed by a warming climate.

• Pricing of GHG emissions, which is essential for mitigating global warming, is inefficient and not universally adopted.

• Renewable energy is not a solely sufficient substitute for fossil energy, nuclear energy is essential.

• The present stance on nuclear energy should be reconsidered if climate objectives are to be achieved.

• Climate change trends and world economic and social development are interlinked and likely mutually exclusive.

• If climate objectives are to be met, international financing of energy investments need to be enhanced and refocused to support a green energy path in the developing world.

Introduction

The warning by the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) about the likely extinction of over a million of the world species, is the latest in a series of scientific reports out of specialized agencies warning us about the consequences of the ongoing warming of the climate. Meanwhile climate change is causing increasing damage and harm as a result of extreme and unprecedented climate events worldwide. In spite of these worrying developments, world efforts on climate change mitigation remain, not only at levels well short of the needed response but bordering at negligent. Base long-term energy scenarios do not provide any hope for a timely reduction in Green House Gases (GHG) emissions to levels required to keep warming below two degrees centigrade. On the contrary, all energy industry outlooks forecast noticeably higher mid-century levels than at present.

These mostly objective but bleak assessments are not due to a lack of greener alternative scenarios but are the result of policy shortcomings and energy market failures. Pricing of GHG emissions, which is essential for mitigating global warming, is inefficient and not universally adopted. Furthermore, renewable energy as an alternative green energy source, cannot be a full substitute for fossil energy, and needs to be supplemented by nuclear energy if climate objectives are to be met.

Consequently, the present negative stance on nuclear energy in the Organization of Economic Cooperation and Development (OECD) member countries should be reconsidered. Because of its capital-intensive nature, and the fact that all future growth in energy consumption will come from the developing world, international financing of energy investment needs to be enhanced and refocused to support a green energy path in the developing world.

The Resilience of Demand for Fossil Energy

Energy policies are yet to adequately respond to challenges posed by a warming climate. Most concerning is the fact that the outlooks up to the middle of the century do not foresee, under base forecasts, any evolving measures to address these challenges. The share of fossil energy, the primary source of global warming, in total primary energy (which stood at about 85 percent in 2017) is expected by British Petroleum Co (BP) to modestly decrease to 73 percent by 2040. This decrease is due mainly to equal losses in the shares of oil and coal, while natural gas is expected to boost its share in total energy (Figure 1).

Renewable energy (solar, wind, bioenergy, and hydro) is expected to double its market share to 22 percent of primary energy by 2040. Nuclear energy, the other important source of green energy, however, fails to make any gains in market share over that period.

The above outlook for fossil energy seems to reflect a near consensus of international energy forecasts. Exxon/Mobil Co for example, sees a roughly similar share for fossil energy (77 percent) by 2040. The oil major however, sees a larger share for oil than BP, while the forecast for coal and natural gas are in very close agreement. Furthermore, Exxon/Mobil foresee noticeably smaller share for renewables (16 percent), but a relatively higher share for nuclear energy (7 percent) (Figure 2).

What is also concerning is that the outlook for fossil energy does not change fundamentally under climate responsive scenarios. In these scenarios, climate change mitigation is presumably driven by stronger policies and measures designed to speed up and enhance reductions in GHG emissions. For instance, in BP’s Low Carbon emissions scenario, the share of fossil energy in 2040, is expected to decrease to 57 percent, a mere seven points decline from its share in the Evolving Transition (base) scenario. This share is considered well above the levels required to meet the targets of the Paris Climate Accord. Notably in this regard, the loss of market share in this scenario is mainly due to a sharp decline in coal consumption and a moderate decline in oil. Natural gas, on the other hand, counterintuitively gains market share (Figure 3).

Most concerning is the continued stagnation of nuclear energy, an important but albeit controversial source of green energy. The market share of nuclear energy, which is forecast at 4 percent in the Evolving Transition scenario, is forecast to increase to 6 percent under the Low Emissions scenario. This share is too little to make a tangible impact as a substitute for fossil energy.

While the performance of nuclear energy is dramatically influenced by policy impediments in most of the member states of the Organization of Economic Cooperation and Development (OECD) countries out of concerns about its safety and risks of proliferation, renewable energy does not face similar challenges. However, while all outlooks foresee relatively high rates of growth - particularly for solar and wind energy - these rates are not sufficient to achieve the climate objectives. Even in the Low Emissions scenario, the share of renewables rises to 37 percent of total energy by 2040, well short of the needed levels.

The implications of the above trends for future energy consumption - particularly of fossil energy - is that reductions in carbon emissions under all the above scenarios will not be sufficient for a two-degree climate pathway. In the Evolving Transition scenario, BP, along with Exxon/Mobil expect CO2 emissions from energy use to continue to rise - increasing by almost 10% by 2040 - rather than falling substantially. While the Low Emissions scenario offers a relatively better but insufficient path.

Factors Impeding a Climate-Supporting Energy Outlook

The outlook for fossil energy, the primary source of GHGs, is heavily influenced by the relative competitiveness of green energy sources. The latter however is a result of multiple factors including relative cost, regulations, public policy, economic and social environment, and financial and technological capacity, among others. Unfortunately, the present energy outlooks are shaped by these factors, many of which are suboptimal and outright biased against green energy. The following are considered the most consequential reasons:

Pricing of GHG emissions is inefficient and not universally adopted: The prevalent prices of carbon dioxide emissions, whether in the form of carbon taxes or cap-and- trade systems applied in most of the developed economies, are below the cost of removing the pollutant or the cost of a clean substitute. The price of carbon dioxide has ranged between 35-50 US dollars per ton in the member countries of the OECD. This level is well below the cost of carbon emissions mitigation or removal, and consequently fails to achieve its functional objectives.

Furthermore, carbon pricing is not universally adopted yet in the majority of countries around the world. Effective mitigation of climate change requires much stronger global commitment.

Renewable energy alone is not a sufficient substitute for fossil energy: Except for large scale hydroelectric plants, other renewable energy sources such as solar and wind, are highly intermittent with relatively low capacity factors, due to changes in solar insolation and wind speeds. Hydroelectric energy, on the other hand is capped by limited capacity, environmental constraints, and high investment cost. In comparison, power plants fueled by coal, oil, natural gas, or nuclear power, do not have this limitation since their availability is usually predictable. Consequently, solar and wind power plants cannot be considered full substitutes of fossil fuelled power plants. The German experience convincingly demonstrates this fact. After growing its renewable energy capacity to equal peak demand under its much lauded “Energiewende” program, Germany finds itself still heavily reliant on power generated by coal and gas plants.

Furthermore, fossil fueled plants, particularly coal plants, tend to be of high capacity – reaching several hundreds of megawatts on centralized sites. These large, central plants have evolved over time to serve the large power needs of urban and industrial centres. This evolution has also shaped the structure of the transmission and distribution networks (the grid). Solar and wind power plants in comparison, are naturally of much less power density, with greater need for land resources (for every megawatt of capacity a solar power plant requires approximately 9 acres, a wind plant 87 acres, and a nuclear power plant 0.8 acres). This adds to their real cost and raises the cost of their integration into the existing grid.

Therefore, it is submitted that the full substitute of a large central fossil fueled power plant is not an intermittent and distributed low capacity (relatively) solar or wind power plant, but a comparable capacity nuclear power plant. If this fact is considered in pricing models of carbon dioxide, the competitiveness of fossil energy will be drastically reduced to the extent that it will fundamentally change the energy outlooks to the benefit of green energy sources and climate friendly evolution.

The pricing models of GHGs ignores the cost of damages caused by a warming climate: Prevalent carbon pricing models, not only ignore the above issue of substitutability, but also fail to account for the economic and social damages caused by climate events linked to global warming. The complexity of accounting for such damages notwithstanding, it is essential that these costs be incorporated in pricing GHG emissions. Taking these costs into consideration would further enhance the price competitiveness of green energy sources.

The present stance on nuclear energy, particularly in the OECD countries, should be reconsidered if climate objectives are to be achieved: The lackluster performance of nuclear energy in energy outlooks stems from many factors associated with this green energy source. Safety concerns have led many OECD countries to halt the construction of new nuclear plants and phase-out existing ones. In the non-OECD countries however, nuclear plants are being constructed, albeit at a very slow rate (except for China and few other countries).

The primary obstacles facing faster adoption of nuclear energy, besides the “manageable” plant safety issue, are valid concerns about nuclear proliferation resulting from fuel enrichment processes, shortages of capital, and lack of adequate technical and institutional capacity in many countries for fuel waste management and disposal. High capital costs and long construction periods caused by complicated regulations and licensing procedures are considered primary economic and administrative obstacles to the expanded use of nuclear energy.

The issues facing the nuclear energy industry are thought to be the primary factors behind the resilience of fossil energy under the various scenarios, particularly natural gas and to a lesser extent coal and oil. Natural gas however is not a green energy source; it is only relatively less polluting than coal and oil and not a credible substitute for the purpose of climate change mitigation ( Figure 4).

Consequently, if an acceptable climate path to be realized, the world will need to address the challenges facing nuclear energy. This is because, for the foreseeable future, it remains the only viable green source of energy which is a full substitute for fossil energy. The supply of electricity to the large base loads of urban and industrial centres would require large size power generating plants with low land requirements and proximity to existing grids (Figure 5).

If climate change is not mitigated, socio-economic development is put at risk and becomes highly uncertain: All future growth in world energy consumption is expected to come from the developing world. OECD consumption is expected by BP to stay the same under the Evolving Transition scenario, and even decrease under the Low Carbon scenario (Figure 6). This expected growth in developing country consumption is driven by economic growth and rising standards of living. People in the developing world are expected to consume more energy as they acquire the means of comfort and mobility. Consequently, proponents of the status quo and the gradualists in energy supply evolution, argue that the developing world will have to keep building fossil energy capacity, given the cost advantage of these sources compared to the green substitutes.

These expectations, however, could be false because the underlying the assumptions on economic growth and social development, in the developing and developed world alike, ignore the potential adverse impact of climate warming. Certain climate scenarios expect large parts of the world to become uninhabitable

under runaway climate change. How rational is it then to assume business-as-usual socio-economic scenarios in isolation of highly probable climate developments?

If climate objectives are to be met, international financing of energy investments need to be enhanced and refocused to support a green energy path in the developing world: One of the main obstacles for green energy uptake and development in the developing world is the lack of financial resources to invest in capital intensive green energy sources such as nuclear energy and large hydroelectricity projects. As a result, developing countries, if left to rely on their own resources, will naturally opt instead to invest in less capital-intensive fossil fueled plants such as natural gas and oil-fired plants. The latter are also less demanding technically and administratively.

Given the defining impact of energy development in the developing world on the climate path and its global impact, the benefits of a green development path in the developing world will be global, and all world inhabitants will share in them. Consequently, helping developing countries directly, through planning, financing, and building their green energy sectors is considered of vital importance. This assistance should be commensurate with avoided costs of climate change resulting from realizing a clean development path.

In this context, it is believed that reforming the prices of GHG emissions by incorporating all climate costs, including the proper pricing of green substitutes to fossil energy as discussed above, would help the adoption of this policy by the international community, and support the mobilization of required financial and other resources.

Roadmap to a 2-Degrees Climate Pathway

Revise the basis of GHG emissions pricing to better reflect the actual cost of substitutes to fossil energy: The pricing system should reflect, for the foreseeable future, the cost of nuclear plants as the viable and full substitute for comparable capacity fossil fueled plants. Intermittent renewable energy can be a viable substitute for comparable capacity fossil fueled plants such as gas turbines and diesel generators. Emissions market should accommodate this price duality in order to operate efficiently.

Incorporate the costs of damages caused by climate warming into the price of GHG emissions: Notwithstanding the complexity of estimating such damages, it is important that the prices of fossil energy reflect these rising costs. Excluding these costs is tantamount to an indirect subsidy of GHG emitting fossil energy.

Ensure the universal adoption of GHG emissions pricing: Given the global nature of climate change, whether in cause or consequence, mitigation measures should also be global. Partial adoption of these measures creates challenges to world trade, which in turn becomes an obstacle for necessary international cooperation and coordination on climate issues and policies.

Ensure that cost escalation due to pricing of GHG emissions are revenue neutral: Public opposition to GHG emissions pricing whether by a cap-and-trade mechanism of direct taxation is considered the largest obstacle standing against the adoption of efficient climate policies. If left without offset, they will reduce the disposable income of consumers and corporate profits. Consequently, in order for these policies to be adopted, their impact on income must be fully offset by equivalent reductions in general taxes.

Reduce the risks associated with nuclear energy in order to enhance its use: Risks of nuclear proliferation can be reduced by creating innovative multilateral regional and international mechanisms that puts fuel enrichment processes under neutral authority and control. Similar arrangements may also be made for the management and disposal of spent nuclear fuels. Consequently, countries will not have a national capacity for fuel enrichment or handling of spent fuel, thus reducing the risks and speeding the uptake of nuclear power generation.

Remove anti-nuclear regulations and policies in OECD countries: Nuclear energy will not be able to achieve its full potential in mitigating climate warming without the full support of the developed world. Obstruction of nuclear energy development has contributed strongly to the unsatisfactory progress on the climate front. Political headwinds against nuclear energy will be expected to decrease when the strong dependence of the climate agenda on the fate of nuclear energy is publicly elaborated. Particularly, the anti-nuclear stance of the pro-environment Green parties in Europe and elsewhere is becoming more conflicted, given the worsening climate developments.

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