From the Editor: Pledges and policies – mind the gap [Gas in Transition]
According to the International Energy Agency’s World Economic Outlook 2021, by 2050, global gas demand could be a) 5,115bn m3, b) 3,852bn m3 or c) 2,452bn m3.
The first figure reflects the IEA’s global energy forecast under its Stated Policies Scenario (STEPS). Gas demand would be more than 25% higher than the 3,999bn m3 consumed in 2020, but the world would be far from the desired pathway leading to net zero emissions and the stabilisation of global temperatures at 1.5°C above pre-industrial levels.
The second figure is the Paris agency’s Announced Pledges Scenario.
This assumes that all the pledges made in the run up to the COP26 in Glasgow, Scotland, are backed by policies which are successfully implemented, which would be no mean task. In this scenario, global gas demand continues to rise, albeit less quickly, to 4,249bn m3 before peaking and falling to 3,852bn m3 by 2050, only slightly less than today.
But, again, the news on climate warming is not good. By 2100, global temperatures would be 2.1°C higher than pre-industrial levels and would not have stabilised, owing to the world not having reached net zero carbon emissions.
The near 40% drop in gas demand by 2050, with only marginal growth to 2030, is the result of the IEA’s Sustainable Development Scenario (SDS), which is fully aligned with the goals of the Paris Agreement on Climate Change to hold the rise in global temperatures to not more than 1.5°C above pre-industrial levels. The gap between this and the already arguably optimistic APS is huge:
“Today’s pledges cover less than 20% of the gap in emissions reductions that need to be closed by 2030 to keep a 1.5°C path within reach,” the IEA says.
Additional pledges have come thick and fast from the COP26 climate conference in Glasgow, but they are nowhere near filling the gap.
The most important include more than 100 countries promising to reverse deforestation by 2030, a pledge backed by $19.2bn in public and private capital. Another pact, also of more than 100 countries, has been signed to reduce methane emissions by 30% from 2020 levels by 2030. And 40 countries have banded together to create markets for new low-carbon products.
South Africa has landed a deal to get $8.5bn from France, Germany, the UK, the US and the EU to end its heavy dependence on coal. More than 40 countries have committed to a shift away from the carbon-heavy fuel, promising to end all public investment in new coal power domestically and internationally. Pledges have been made to end the funding of unabated fossil fuel development overseas by a number of countries, including the US.
However, these non-binding promises are far from concrete policies and contain some big omissions in terms of participants. China, the US and India, the world’s three largest coal producers and users, did not sign up to the coal commitments. China, Japan and South Korea held back from the pledge to end investment in overseas unabated fossil fuel developments. Russia, China, India and Australia have not committed to the Global Methane Pledge.
Given the enormous gap between polices and pledges on the one hand and between pledges and the SDS on the other, the huge sums of capital that need to be mobilised and, perhaps most importantly, the degree of international solidarity required in deploying that capital to realise a global net zero energy transition, it seems reasonable to assume that the IEA’s SDS will not be realised.
Different regions of the world will see energy transitions of different speeds.
Assuming that energy transitions will be determined by a combination of political will, financial muscle and industrial capacity, particularly in research and development, the developed world, China, and Europe in particular, are likely to progress fastest. The US’s trajectory remains uncertain because of the polarisation of its politics and the likelihood that the presidency will continue to oscillate between climate-friendly Democrats and climate-sceptic Republicans.
An uneven energy transition on a global scale implies heavy regional shifts in gas demand, ones which pose unique problems for Europe’s pipeline gas suppliers in particular, not least Russia. The capacity to reach Asian markets will become ever more important, potentially leaving major pipeline assets stranded.
The WEO already assumes differing levels of success when it comes to reducing gas demand. Even in STEPs, European gas demand drops by 99bn m3 by 2050, while Asian demand surges by 603bn m3. In the SDS, Asian demand for gas is still slightly higher in 2050 than it is today and shows reasonable growth out to 2030 before falling. That demand is located primarily in China and India.
Rising gas consumption in these countries is a fundamental element of eradicating coal use, but there are clear risks that in an investment environment unsympathetic to long-term gas use, supplies will be insufficient, or that there will be geographical mismatch between supply and demand.
LNG delivery flexibility
There will be winners and losers as global demand for gas shifts. North African gas suppliers should turn their attention to increasing LNG capacity in order to expand their market reach, while Russia will need not just to realise its stated LNG ambitions, but consider more seriously progressing its second major pipeline project to China. Algeria’s LNG plants provide a much brighter outlook than its subsea pipelines to Spain and Italy.
Projects like the long-mooted Trans-Caspian Pipeline look dead in the water, while the always problematic Turkmenistan-Afghanistan-Pakistan-India pipeline can at least be said to be pointing in the right direction. But in such an uncertain world, investors may well balk at building the giant trans-national pipelines of the past, which lock suppliers into specific markets, many of which already have the capacity to import LNG, therefore providing price competition with pipeline gas.
The high price of gas in European and Asian markets today highlights the danger of mismatches in supply and demand as the energy transition progresses. A lack of affordable gas will continue to see a fallback on more carbon-intensive fuels because the near-term political need to keep lights on and houses warm will always trump longer-term climate ambitions. As a result, there remains a need for continued investment in gas supply, supported by LNG delivery flexibility, until renewables and other technologies expand sufficiently and coal use is eradicated.