Shell Climate Change

Can Brazil balance oil and climate ambitions?

dchone September 24, 2024

This post is a guest contribution by Thomas Akkerhuis, Energy Analyst and Richard Baker, Senior Energy Adviser, both in the Shell Scenarios Team.

As the Brazil hosted G20 approaches and thoughts regarding COP30 in 2025, also in Brazil, start to appear, Brazil’s own climate efforts and energy system are becoming headline news. In a recent article, the Financial Times describes the challenge the country faces in balancing two fundamental ambitions: to be a global environmental leader while also growing its position as global player in oil production.

There is natural skepticism over whether balancing these seemingly contradictory positions is at all possible, with the Climate Observatory stating that “you can’t be a leader on the environment and climate and at the same time become a mega-producer of oil.” Perhaps Brazil is following a very narrow path here, but there are good reasons for doing so.

In June this year the Shell Scenarios Team published a Brazil Scenarios Sketch, which there are now several blog postings about, for example, this one. The Sketch is derived from Shell’s latest Energy Security Scenarios. The Scenarios Sketch shows, among other things, that both ambitions are realistic ambitions for Brazil:

Brazil has enormous potential to manage the world’s carbon emissions through land-use change, and it can help decarbonise the world through the production of biofuels. Emerging global demand for this capacity, because of climate change pressures, are important reasons to make use of those opportunities.
Brazil has significant fossil fuel reserves, with the potential to develop significantly more. There is an important economic argument for developing them. Today, Brazil has a gross domestic product that is below the global average (per capita basis), which is also more unevenly distributed than the global average (Gini coefficient basis). Many other countries have also built their wealth on the production and consumption of fossil fuels.

The sketch is an in-depth study of potential futures for Brazil’s energy and carbon system, through the lens of two scenarios: Sky 2050, and Archipelagos. Both start with the realities of the 2020s, including the struggle to end deforestation in Brazil. As time moves on into the 2030s Sky 2050 takes a normative approach that starts with the desired outcome of global net-zero emissions in 2050 and works backwards in time to explore how that outcome could be achieved. By focusing on security through mutual interest, the world achieves the goal and a global temperature rise of less than 1.5°C by 2100. Archipelagos follows a possible path in a world focusing on security through self-interest. Even so, change is still rapid, and the world is nearing net-zero emissions by the end of the century but the temperature outcome in 2100 is a plateau at 2.2°C.

The starting point for a deeper look at Brazil’s oil production prospects is the anticipated global demand in each scenario. The figure below shows that evolution through to 2060. Demand in 2030 remains at least at 2023 levels in both scenarios, and two decades later in 2050 when Sky 2050 is at net-zero CO₂ emissions, the scenario range is still 40-85% of 2023 levels. While a fuel like coal may dwindle quite quickly in a world targeting net-zero emissions, significant oil demand will be with us well unto the second half of the century.

Global oil demand broken down by scenario and use

Oil has an abundance of uses, and for many of them, a lower-carbon alternative is not yet available (at scale). While the world has seen significant progress in electrification of cars and light-duty trucks, and this trend accelerates in both scenarios, the decarbonization of heavy long-haul road freight is a decade or more behind cars: in 2050, oil demand in the road freight sector has not even halved in Sky 2050 and in Archipelagos has even grown.

Other heavy-duty transport has even more difficulties moving away from oil: for example, airplanes, ships and agricultural equipment. Electrification is often not possible, and alternatives like biofuels and hydrogen are in their infancy. In Archipelagos, oil demand for these purposes grows over the next 3-4 decades. And finally, oil is essential to the chemicals industry – which is an industry that is set to grow as more and more people in developing countries move into middle income lifestyles.

Given that the world will need solid and reliable sources of crude oil for decades to come, how might Brazil fit into this picture? The charts below show Brazil’s oil production in the two scenarios, compared with domestic demand and natural field decline given no further investment. Remember that Brazil already makes significant use of ethanol for passenger road transport and increasing use of biodiesel for trucks.

Domestic demand and production of oil in Brazil in Sky 2050 and Archipelagos scenarios. Natural decline assumed 4.5% per year.

Both scenarios have short term production growth already locked in, driven by the development of the Buzios and Mero fields with investment decisions already made. The difference is what happens towards 2040 and thereafter.

In Sky 2050, natural decline matches falling domestic demand from 2040 onwards, but still allows Brazil to maintain a 3% global market share of oil production. In this scenario, Brazil becomes adept at managing carbon emissions and reaches net-zero emissions around 2040 and ahead of almost every other country in the world. Maintaining its role as an oil producer and growing exports in the near term does not undermine it’s net-zero goals.

In Archipelagos, oil production is a growing contributor to the country’s economy, exceeding domestic demand, and growing market share to almost 7% of global production. In this case, Brazilian oil is sufficiently competitive to squeeze out market share from other countries. However, this does not just happen: the best fields have already been commercialized, and while extensive underexplored coastline has huge potential, it does not come with guarantees. Additionally, even if not for export, ongoing investment and exploration would be needed just to maintain current levels of energy security.

In both scenarios, Brazil is an important oil producer – at least in the next decade, offering an opportunity to support its growing economy. And after that, Brazil will keep producing oil – at least to satisfy its domestic demand, and possibly to grow its global market share. Additionally, in Archipelagos, Brazil becomes a key regional supplier offering improved energy security for the Atlantic Basin countries, security being an overriding feature of the scenario. Both the Energy Security Scenarios and the Brazil Scenarios Sketch show a similar view for oil production growth for the next decade, before more substantial divergence starts.

Not all the country’s pathways in the sketch are so divergent, as can be seen below. In both scenarios, biofuel production will double mid-century, and in both scenarios, the trend of ongoing deforestation will be broken. In both scenarios, for biofuels, a large market is emerging as sectors and countries seek to replace their oil-based fuels with biofuels – such as in aviation. Article 6 of the Paris Agreement provides the possibility for sectors and countries to invest in land-use related projects in Brazil to offset their own hard-to-abate emissions.

Biofuel production and land-use change in Brazil in Sky 2050 and Archipelagos

It is a narrow path for Brazil, but the country can make the most of its oil resources while also developing its biofuel and carbon management potential. Both have wider benefit given the continued global demand for oil and focus on security of supply, but also the growing global demand for lower carbon fuels and carbon removal mechanisms. The only real difference between the scenarios is the mix and timing.

	Sky 2050	Archipelagos
Oil	Now to early/mid-2030s: growth Mid-2030s to 2050: energy security	Now to 2050: growth 2030 to 2050: major exporter
Land-use change	Fast turnaround in emissions, an end to deforestation in 2033	Turnaround in emissions, net-zero deforestation in 2049
Biofuels	Doubled by 2050	Doubled by 2050

Note: Shell Scenarios are not predictions or expectations of what will happen, or what will probably happen. They are not expressions of Shell’s strategy, and they are not Shell’s business plan; they are one of the many inputs used by Shell to stretch thinking whilst making decisions. Read more in the Definitions and Cautionary note. Scenarios are informed by data, constructed using models and contain insights from leading experts in the relevant fields. Ultimately, for all readers, scenarios are intended as an aid to making better decisions. They stretch minds, broaden horizons and explore assumptions.

The emerging EV wave knows no bounds

dchone September 5, 2024

In June the Shell Scenarios team launched our Brazil Scenarios Sketch, a deep dive into how the energy transition might unfold in Brazil and how the country can become a world leader in better managing carbon. Since then, the team has been busy sharing the scenarios with many groups, both inside and outside Brazil.

The scenario storyline for Brazil features two scenarios, Sky 2050 and Archipelagos. Both start with the realities of the 2020s, including the struggle to end deforestation in Brazil. As time moves on into the 2030s Sky 2050 takes a normative approach that starts with the desired outcome of global net-zero emissions in 2050 and works backwards in time to explore how that outcome could be achieved. By focusing on security through mutual interest, the world achieves the goal and a global temperature rise of less than 1.5°C by 2100. Archipelagos follows a possible path in a world focusing on security through self-interest. Even so, change is still rapid, and the world is nearing net-zero emissions by the end of the century but the temperature outcome in 2100 is a plateau at 2.2°C.

The scenarios stories and findings have been very well received, but one element of the scenarios has led to quite fierce (albeit friendly) debate. Of course, the whole purpose of scenarios is to challenge the status quo and the linear trend thinking that can emerge from it, so this debate was always welcome.

The contentious scenario issue is the speed at which electric vehicles will enter the Brazil market. In both the Sky 2050 and Archipelagos scenarios Brazil is not insulated from a powerful global trend towards electric vehicles (EV), as shown below. By 2050 in Sky 2050 the fleet is nearly 90% electric and in Archipelagos the trend is strongly upward, although by 2050 the fleet is approaching 70% electric. Today, EVs can certainly be seen in Brazil, and I rode in an electric Uber in Sao Paulo, but the numbers are currently small.

In almost every presentation of the scenarios, but particularly those in Brazil, this idea of rapid EV penetration into the Brazil market was challenged, usually in the first audience question. The challenge emerged from the reality of Brazil already having a low carbon footprint vehicle fleet, with sugar cane ethanol dominating the fuel mix today. Typically, the audience was split, with half believing that ethanol was here to stay and the other half agreeing that EVs were the future. However, in one presentation, nobody believed that EVs would make a dent in the market status quo.

So, what’s the story behind our thinking and is Brazil insulated from a global trend towards EVs?

Firstly, it’s important to give some context to the two scenarios, but particularly Sky 2050. That scenario is designed to get to net-zero CO₂ emissions globally by 2050 and to do that, all the possible energy transition levers need to be pulled. This includes rapid electrification of the global passenger vehicle fleet, not just to eliminate emissions from fossil fuel use, but also to make biofuels and biofuel feedstocks used for these vehicles available for other purposes, such as sustainable aviation fuels (SAF). Brazil is an important producer of ethanol, so electrification of road transport in the country frees up a considerable amount of biofuel.

However, in Archipelagos, which is a fully exploratory scenario, the same trend of electrification emerges, albeit at a slightly slower pace. The rationale behind this in Archipelagos, but also to attach a plausible narrative to Sky 2050, is one of market forces. There is no indication in Brazil that the government is applying pressure to electrify the vehicle fleet, unlike places such as the EU and UK, so why would it change?

In both scenarios the premise put forward is that the global trend towards EVs is now unstoppable. There will doubtless be hiccups along the way, and we appear to be in a dip now in some markets as purchasing of such vehicles has slowed, but that was equally true for commercial transactions in the dot.com boom in the late 1990s, with the second coming in the 2000s bringing with it a tsunami of change. The EV market has brought with it a number of new entrants, something that the incumbents in the conventional vehicle market were perhaps not expecting. These companies are entering markets such as Brazil; for example, BYD is now establishing electric vehicle manufacturing in Brazil, with production of 150,000 vehicles per year by early 2025. In both scenarios this starts a fierce competition with the incumbents, companies such as VW who has already announced it will be adding $1.83 billion to its existing $1.4 billion investment (totalling $3.2 billion) in its Brazilian business and will be launching 16 new hybrid and electric models over the next five years.

This competitive trend in Brazil takes hold and change accelerates. At the same time, big companies active in Brazil are slowly phasing out their global combustion engine businesses and the flex-fuel combustion engine business in Brazil, while maybe having a bit more staying power, eventually suffers the same fate and comes to an end. For a global player, it becomes too expensive to maintain as a standalone business for one country.

As well as the competitive push, there is a pull from the ethanol producers. Initially there is concern as their market starts to shift, but this spurs the deployment of ethanol to jet fuel conversion technology in Brazil and the Brazilian ethanol producers find themselves making a high value product in strong demand around the world. The airlines need SAF and there isn’t enough global production, hence the pull. The bioenergy business in Brazil shifts as a result. The illustrations below show the shift from 2023 to 2050 in Sky 2050. The same shift happens in Archipelagos, but it isn’t as pronounced.

The change in Brazil is so rapid that the country becomes among the earliest to eliminate oil-based fuels from aviation and move entirely to alternatives, mainly bio-based SAF. In both Sky 2050 and Archipelagos oil-based Jet-A1 is phased out completely during the 2060s. This could mean that as well as the country exporting bio-based SAF, airlines in Brazil could transfer some of the lead they will have in SAF uptake through book-and-claim systems to other airlines around the world.

So that is the passenger vehicle story behind the Brazil scenarios. It’s not a prediction or a forecast, but a plausible outcome for the country given the very visible trends and pressures we can see today.

To complete the story, here’s an AI rendition (thanks to Bing and Copilot) of Ipanema beachfront in 2050, with electric cars traversing Av. Vieira Souto.

Note: Shell Scenarios are not predictions or expectations of what will happen, or what will probably happen. They are not expressions of Shell’s strategy, and they are not Shell’s business plan; they are one of the many inputs used by Shell to stretch thinking whilst making decisions. Read more in the Definitions and Cautionary note. Scenarios are informed by data, constructed using models and contain insights from leading experts in the relevant fields. Ultimately, for all readers, scenarios are intended as an aid to making better decisions. They stretch minds, broaden horizons and explore assumptions.

In Brazil, land use change looms large

dchone July 19, 2024

The recent release of the Brazil Scenarios Sketch, based around the Shell Energy Security Scenarios, highlights the role that land-use change could play for Brazil to achieve two important outcomes; reaching net-zero CO₂ emissions within its domestic economy and becoming an important supplier of carbon removal units into the global economy as the world strives to balance carbon emissions and reach net-zero. In fact, these two outcomes are inextricably linked.

The CO₂ emissions starting point from Bazil is shown in the illustration below, with land-use change being the largest component of the story, eclipsing fossil fuel emissions and even exceeding the large bioenergy CO₂ loop.

Within the scenarios team in Shell, understanding and accounting for land emissions has become a core component of the modelling expertise that has been developed. It is approaching the level of detail that is used in energy system modelling, although the uncertainty related to land-use emissions is much greater than that associated with energy system emissions. Nevertheless, by using a consistent data focused approach, clear trends emerge, and conclusions can be reached relating to changes of direction.

In Brazil, the 785 Mt CO₂ emissions shown above come mainly from ongoing deforestation. However, there are contributions from other ecosystems which are under threat. The breakdown is shown below and illustrates the detail available in the scenarios land-use database, which includes nearly twenty different land-use change types. While the categories are referenced by ecosystem type, the fact that they are shown as net positive emissions means that degradation is underway.

Both scenarios incorporate significant shifts in land-use policies and practices in Brazil. These are partly driven by government and incentive structures, but also driven by necessity and the recognition across society in Brazil that the threats emerging from ongoing deforestation, such as biodiversity loss and changes in South America rainfall patterns are unsustainable in the shorter term.

In Sky 2050 there is global recognition that Brazil holds the keys to net-zero emissions for many countries, in that the potential for natural carbon removals coming from Brazil can balance ongoing emissions in scores of economies. This leads numerous countries to invest in actions in Brazil to end deforestation, an essential first step towards delivering credible carbon removal credits from reforestation. In the scenario Brazil still overshoots its 2030 goal to end deforestation but has certainly achieved the goal by 2035. By then reforestation activities are becoming extensive with some 4 Mha of land under project management.

In the second half of the 2020s in Sky 2050 the agricultural sector adopts sweeping reforms, driven by a clear financial incentive structure underpinned by both domestic and international demand for soil carbon credits. The use of biochar in farming is taken up, together with changes in cropping and grazing. By 2030 these three new practices are drawing down 34 Mt of CO₂ per year, or about 10 Mt of carbon added to the soil, which in turn means improvements in farm output. The carbon credits produced by the farmers are sold into the domestic emissions trading system or transferred out of Brazil to other countries via Article 6 of the Paris Agreement. In 2030 farm income is bolstered by well over $2 billion as a result.

Biochar use has a long history in Brazil. Analysis of soils has revealed that more than 2,000 years ago, Amazonian Indians used to bury stable carbon in the soil. A mixture of broken pottery and various other organic materials has maintained the high fertility potential of these areas to this day. Biochar production is a technique through which carbon from biomass is transformed into stable carbon that can be captured in the soil. In addition to this long-term carbon sequestration role, biochar is also beneficial to soil performance as it improves the retention and diffusion of water and nutrients. Biochar is a soil additive produced through pyrolysis, a process that involves heating biomass waste (manure and agricultural residues) at high temperature in an oxygen limited environment.

By 2050 in the Sky 2050 scenario, Brazil is drawing down nearly 700 Mt of CO₂ through nature-based removals, with reforestation and agricultural biochar practices accounting for well over half the amount. But changed grazing and cropping practices as well as forest management and agroforestry also play important roles. The role of carbon markets acting as a conduit for international financing of domestic actions in Brazil cannot be understated. Without a global demand for carbon removals, the nature-based project investment required and incentives paid out to farmers cannot emerge on the scale necessary for Brazil to make all the changes that the scenario imagines.

In the Archipelagos scenario self-interest prevails globally. As a result, Brazil is not presented with the same level of partnerships or the major global demand for carbon removals. The result is that the country doesn’t end deforestation, although by mid-century the practice has been halved and the net-CO₂ impact is zero as reforestation and forest management activities balance the losses still being seen. Agricultural practices do change in Archipelagos, but with the global voluntary market being the primary driver of change rather than a mixture of voluntary and compliance markets, progress is slower than Sky 2050. However, the same endpoint is eventually reached, albeit one to two decades later.

In both Sky 2050 and Archipelagos the changes that Brazil can deliver in land-use practices mean that net-zero CO₂ emissions in the country is quite possible, coming a decade either side of mid-century with Sky 2050 delivering the outcome more rapidly. In both cases fossil fuel emissions have been reduced by some 20% when net-zero CO₂ emissions is achieved, but that reduction is far from being the major contributor to the outcome.

Note: Shell Scenarios are not predictions or expectations of what will happen, or what will probably happen. They are not expressions of Shell’s strategy, and they are not Shell’s business plan; they are one of the many inputs used by Shell to stretch thinking whilst making decisions. Read more in the Definitions and Cautionary note. Scenarios are informed by data, constructed using models and contain insights from leading experts in the relevant fields. Ultimately, for all readers, scenarios are intended as an aid to making better decisions. They stretch minds, broaden horizons and explore assumptions.

Brazil: Leading the world to net-zero emissions

dchone June 24, 2024

As the world strives to get to net-zero emissions, Brazil can play a formidable role in helping to enable such an outcome, but it won’t happen without the broad recognition of carbon removal credits and a trading capacity to shift the credits between countries.

I have recently been in Rio de Janiero, Sao Paulo and Brasilia participating in the launch of a new analysis by the Shell scenario team that is focused on Brazil and looks in depth at the energy transition in the country, but also the enormous potential for managing carbon dioxide on a scale that is globally relevant. That analysis or country Scenarios Sketch, Brazil: Leading the world to net-zero emissions (in both Portuguese and English), builds from The Energy Security Scenarios, using the detailed country level data for Brazil that we in Shell have available from our World Energy Model.

Brazil is both unique and fascinating from a carbon cycle perspective, given the size of the rainforest, the large agricultural sector, and the important role that both bioenergy and hydroelectricity play in the country today. As such, this Scenarios Sketch is entirely different to all the others we have worked on, in that it draws heavily on our land carbon analysis work and required a deep dive into the Brazil bioenergy sector.

The emissions starting point for Brazil is unlike any other country. Fossil fuel CO₂ emissions, primarily from oil, are 453 Mt per year, but significantly less than land use CO₂ emissions of 785 Mt per year, largely coming from ongoing deforestation in the Amazon region. Fossil fuel CO₂ is also surpassed by the bioenergy system, although that system is effectively carbon neutral. Total CO₂ emissions are around 1.3 Gt per year, but total greenhouse gas emissions are just over 2 Gt per year, with the addition of methane and nitrous oxide mainly coming from the agricultural sector.

The Brazil Scenarios Sketch incorporates two scenarios, Sky 2050 and Archipelagos. Both start with the realities of the 2020s, meaning that the energy system and future energy policy landscape are showing real signs of change, but also recognising that an insufficient amount of progress has been achieved on the scale required to reduce emissions substantially by 2030. As time moves on into the 2030s Sky 2050 takes a normative approach that starts with the desired outcome of global net-zero emissions in 2050 and works backwards in time to explore how that outcome could be achieved. By focusing on security through mutual interest, the world achieves the goal and a global temperature rise of less than 1.5°C by 2100. Archipelagos follows a possible path in a world focusing on security through self-interest. Even so, change is still rapid, and the world is nearing net-zero emissions by the end of the century but the temperature outcome in 2100 is a plateau at 2.2°C.

In the context of Brazil, while the energy transition takes some interesting twists and turns, the initial focus in Sky 2050 is on ending deforestation. In the scenario this is achieved in the early 2030s through a concerted government effort, in combination with the existing efforts through the voluntary carbon market. Government-to-government partnerships flourish and support the effort as countries outside Brazil recognise it is in their interests to see deforestation end such that Brazil can move into a phase of bona fide carbon removal through land-use change.

This achievement sets the scene for significant reforestation efforts driven by carbon markets, as the global demand for carbon removals ramps up and compliance markets, such as the EU Emissions Trading System, open their systems to an inflow of removals from outside their domestic boundaries. The important dynamic that results from ending deforestation is a leap in confidence that land-based credits from Brazil now represent true carbon removal and questions on additionality, that have hampered the avoided deforestation credit market, are put to rest.

Not content with land-based removals, in Sky 2050 Brazil sets about developing a CCS industry, starting with the many ethanol plants in the Sao Paulo region where the prospects for geological storage of CO₂ look good. The fermentation of sugar to produce ethanol releases CO₂ in pure form which can be captured and geologically stored. Further, the combination of bioenergy production or use with carbon capture and storage (BECCS) delivers permanent removal of CO₂ from the atmosphere.

In Sky 2050 in CO₂ terms, by 2040 Brazil is already in a net-drawdown position, with a complete turnaround in land-use emissions and a CCS industry well established and storing over 50 Mt CO₂ per year.

As the transition proceeds in Sky 2050, Brazil also reaches net-zero greenhouse gas emissions by 2050. But doing so requires considerable investment in CCS and mechanisms to incentivise landowners and the agricultural community to adopt new practices and change behaviours. In Sky 2050 a good proportion of these investments and incentives come through the carbon market, both from the domestic emissions trading system and projects channelled through Article 6 of the Paris Agreement. Importantly, Brazil has sufficient space in its carbon budget to allow for international trading of removal credits.

Picturing Brazil from an emissions trading perspective in the early 2030s, it might look like the illustration below. There are many potential counterparties, but the illustration imagines the EU ETS and the aviation sector as two potential partners. In Europe the EU ETS (I) will reach a point of zero new allowances by 2040, so by the 2030s industrial concerns could already be feeling the pressure given the lack of immediate abatement opportunities. In the aviation sector in the 2030s, technical solutions (e.g. SAF, e-fuels, hydrogen) for abatement will take decades more to fully implement, so carbon removals are the only short to medium term option.

By 2040, say, Brazil could be supplying significant volumes to these counter-parties but not compromising its own net-zero ambitions. A similar story could emerge domestically through the implementation of the planned emissions trading system.

Importantly, trade in carbon removals can bring investment and income into the Brazilian economy. But much of the story depends on a fully functioning Article 6 and a willingness by regions such as the EU to make use of it. To date, the signs pointing to such an outcome have been limited, despite some effort by the Article 6 negotiators at UNFCCC meetings.

The Brazil Scenarios Sketch provides many energy and greenhouse gas insights into a vibrant country with an interesting story to tell. You can find that story here.

Note: Shell Scenarios are not predictions or expectations of what will happen, or what will probably happen. They are not expressions of Shell’s strategy, and they are not Shell’s business plan; they are one of the many inputs used by Shell to stretch thinking whilst making decisions. Read more in the Definitions and Cautionary note. Scenarios are informed by data, constructed using models and contain insights from leading experts in the relevant fields. Ultimately, for all readers, scenarios are intended as an aid to making better decisions. They stretch minds, broaden horizons and explore assumptions.

Normative or exploratory – how should scenarios be developed?

dchone June 10, 2024

In a time when there is much being written about limiting warming to 1.5°C, the so-called normative scenario has come of age. These emerge from a class of scenario analysis where a principal outcome is predetermined, rather than the traditional exploratory scenario which finds an outcome as a result of applied societal and geopolitical trends. In the case of 1.5°C scenario analysis, the story-line and findings are determined by the need to achieve net-zero emissions by 2050 and to limit cumulative CO₂ emissions to some specified amount, which is the 1.5°C carbon budget. A further constraint is applied when a scenario with no or limited temperature overshoot is created. In that case the carbon budget would be rigidly enforced such that future atmospheric CO₂ removal technologies and practices cannot be applied to correct an excess in shorter term CO₂ emissions.

A no-overshoot 1.5°C normative scenario with a fixed carbon budget delivers a prescribed pathway that must be followed in order to achieve that same outcome in the real world; a recipe of sorts. However, picking and choosing certain parts of the pathway and calling for their implementation as policy approaches may be somewhat perilous; it could ignore inter-dependencies that the scenario requires for the outcome it achieves. Such is the case for the call to place a moratorium on new fossil fuel projects.

A new paper from researchers at University College London and the International Institute for Sustainable Development explores ways in which fossil fuel extraction can be curtailed, with their analysis opting for the development of a social-moral norm against completely new fossil fuel projects rather than an attempt to limit extraction from exiting projects or shut existing extraction sites down. The paper was recently discussed in a Financial Times article.

The researchers assess a range of 1.5°C scenarios compiled for the Intergovernmental Panel on Climate Change’s (IPCC’s) Sixth Assessment Report (AR6). For these particular scenarios the demand for oil, coal and gas can be met from fields and mines already in production or under development. The scenarios that they assess are the C1 scenarios (limiting warming to 1.5°C with low or no overshoot), including only those scenarios that do not exceed IPCC feasibility and sustainability thresholds on carbon sequestration. Such thresholds effectively exclude scenarios dependent on high levels of carbon sequestration technologies, such as carbon dioxide removal (CDR), which the authors argue are unproven at scale and which, if they failed to materialize, would pose a risk to the achievability of the 1.5° goal. While a tight limit on future CDR deployment can be a valid scenario assumption, it is a questionable assumption in the real world, given that society is now so close to the 1.5°C threshold.

In any case, the scenarios chosen by the researchers, like the IEA NZE Scenario, make some highly challenging assumptions about the energy system to meet the net-zero, no overshoot and carbon budget constraints imposed within them. These assumptions include reducing the demand for energy services such that fossil fuel demand falls even faster than would be the case based on substitution alone. The IEA had to make the same assumptions in its own NZE 2050 scenario and states the following on its website;

Clean energy technologies are deployed at unprecedented speed in the NZE Scenario, but many CO₂-intensive energy assets will still be in use in 2030. Reducing their emissions or replacing them depends on scaling up novel or complex low-emissions solutions and deploying them around the world, and that will take time . . . . . . In the absence of energy demand reductions from behaviour change, achieving the same emissions reductions in end-uses would require ramping up low-emissions technologies at staggering speed. In aviation, the use of sustainable aviation fuel would need to increase more than twice as fast as in the NZE Scenario . . . . . . In road transport, the use of more EVs would require an additional 1.3 million tonnes of critical minerals by 2030 – roughly the amount of critical minerals used in the EV sector today . . . . .

Examples of the assumed IEA behavioural changes come from every sector. In the buildings sector, they include adjusting space heating and cooling temperatures. In the transport sector, they include more public transport and reduced car use in cities, eco-driving on highways and switching from planes to trains or videoconferencing.

As already noted, these behavioural changes mean that oil, gas and coal demand fall even faster than would be the case for a mitigation or substitution only story, which in turn allows the scenario to meet the carbon budget and no-overshoot constraints. This also means that the need for new fields and mines for fossil fuel production is reduced, to the extent that the scenario designers can then make the claim that no new fossil fuel production facilities are required.

We then come to the UCL/IISD report. Within the paper there is no mention of the need to see a long list of behavioural changes emerge across global society; rather, it launches into an analysis and discussion about the policy framework that should be implemented to limit development of further fossil fuel resources. The authors reach the conclusion that state and non-state proponents of ambitious climate action should engage in policy and advocacy aimed at diffusing and institutionalizing a social-moral norm against new fossil fuel projects. The researchers note that a social-moral norm is a standard of appropriate behaviour that is expected of an agent with a particular identity.

The problem with this argument is that it tackles the result of energy demand, rather than the cause. Simply shutting off supply will of course limit fossil fuel use, but the outcome could be very disruptive and have unintended consequences, such as limiting energy access to those most in need. If the solution to the carbon budget problem involves curtailing energy service demand, then surely the social-moral norm that the authors should have argued for is around limits on energy service use. This is basis for the so-called Flygskam in Sweden, a word that literally means “flight shame”. The movement discourages people from flying to lower carbon emissions. Japan used such a mechanism quite effectively after the Fukushima nuclear accident to encourage higher temperatures in buildings in the summer, therefore lowering the need for energy for air conditioning.

But shaming and aggressive persuasion aren’t always welcome and may have a limited duration before reversion kicks in. The Sierra Club argued in a 2023 article that climate-obsessed travelers should ditch the guilt and support efforts to cut aviation’s carbon footprint. They saw three problems with the shaming approach – it puts the burden on individuals, rather than accelerating the systems changes that will cut carbon from flight; it simply won’t scale as flying is a large and growing sector, and we live in a diverse, interconnected, and increasingly mobile world; finally, other solutions do exist and need to be scaled rapidly. The article concludes that society needs to support the kinds of policies and investments that will allow fossil-fuel-free travel. But then the aforementioned IEA issue of speed of deployment crops up and the carbon budget is under threat once again.

While the arguments put forward in the UCL/IISD paper are cogent and thought through, they do over-simplify a complex problem. In fact, there isn’t a simple solution to the 1.5°C issue, even though many argue that there is. Perhaps the root of the problem is a gospel like belief in extreme normative scenarios that only deal with the period from now to 2050, rather than attempting to understand the alternative solutions and outcomes that full century exploratory scenarios can highlight.

The Shell Energy Security Scenarios offer such insight. Sky 2050 is a blend of normative and exploratory, in that it does meet the goal of net-zero emissions in 2050 and does adhere to a 1.5°C carbon budget, but it explores the possible outcomes more holistically, embracing near term stubbornness (for change) in the energy system, land use reform, future industrial removals and carbon credit trading, all part of a world also transitioning rapidly towards a new energy system. Archipelagos is an exploratory only scenario. It recognizes the accelerating rate of the energy transition as multiple pressures are placed on it, including climate action, supply disruption and price volatility. Both scenarios extend their analysis beyond 2050 and chart a course through the second half of the century, a necessity to fully understand where the energy system is ultimately headed. The often used end-point of 2050 for energy system scenario analysis is now too near for such scenarios to offer an appropriate solution set for the Paris Agreement goals.

You can find The Energy Security Scenarios here.

Note: Shell Scenarios are not predictions or expectations of what will happen, or what will probably happen. They are not expressions of Shell’s strategy, and they are not Shell’s business plan; they are one of the many inputs used by Shell to stretch thinking whilst making decisions. Read more in the Definitions and Cautionary note. Scenarios are informed by data, constructed using models and contain insights from leading experts in the relevant fields. Ultimately, for all readers, scenarios are intended as an aid to making better decisions. They stretch minds, broaden horizons and explore assumptions.

‘Phantom’ carbon credits or a transparent attempt to innovate?

dchone May 9, 2024

In the past week, a story published by the Financial Times based on a report from Greenpeace claimed, inaccurately, that Shell had benefited from selling “millions” of Canadian carbon credits that were not traceable to a direct emission reduction. In fact, the carbon credits in question come from the gold standard for managing CO₂ emissions, a carbon capture and geological storage project (CCS). There is a story to be told about this, but it isn’t the one you’d have read in this weekend’s article. It’s also a story that involves me.

The story dates back to the early 2010s as Shell (and its JV partners) was planning the construction of a first CCS facility both for Shell and Canada, but also one of the first of a handful to be operating in the world. The Shell-operated project is known as Quest (current Shell interest 10%), and since startup in 2015 it has been storing about 1 million tonnes per year of CO₂ in a safe geological formation deep below the prairies in Alberta.

First, it’s crucial to understand the nature of CCS projects. They take years to be planned, engineered and constructed before capturing CO₂ on a large scale. But they don’t come with an obvious business model that provides a return to investors, such as through the sale of a product or the provision of a service that is in high demand. Instead, innovative policy mechanisms and regulatory measures are needed to underpin a CCS project. This remains true in 2024. While some governments recognise the need and are rising to the challenge, the deployment of CCS technology is significantly behind the pace and scale needed to realise 2050 net zero targets, largely because of the absence of sustainable long term business models. The technology itself is well proven and ready to go.

Two main business models exist today; in the US there are tax credits ranging from $80 to $180 per tonne of CO₂, depending on the exact nature of the project. In the EU there is the EU Emissions Trading System (EU ETS) and its prevailing carbon price that has reached as high as €100 in recent times. Even these robust mechanisms aren’t always enough for projects, but in the late 2000s there was far less in play to underpin CCS, so project developers and government policy makers had to get creative, which is what happened.

In 2008, a solution that had emerged in the EU in which I was involved used emissions allowances from the EU ETS as a source of funding for CCS projects. The idea targeted the notionally ‘spare’ allowances in the ETS New Entrant Reserve and 300 million of these were earmarked for sale for CCS funding (sadly, as the ETS carbon price collapsed to around €3 this mechanism never delivered as intended). In Canada, Shell brought this concept to the attention of Alberta policy makers, and they decided to use their own carbon credits in a related way.

At the time Quest was being considered, Alberta introduced its Specified Gas Emitter Regulation (SGER), which established a CO₂ emission performance benchmark for large emitting facilities. The benchmark would decline by a set rate each year. Parties had to comply by either reducing emissions, buying “credits” from companies that had performed better than their benchmark, purchasing offsets from pre-approved programs, or else paying a fee into a technology fund. The regulation is now known as TIER, but the core concept remains the same. Quest was issued credits under Alberta’s CCS Protocol which could be used to comply with the regulation.

In 2011, the carbon price was low with an uncertain outlook, making the development of Quest uneconomic. To address this, the Government of Alberta and Shell agreed on a mechanism that would support the project in the initial phases, with the government issuing a second CCS credit for a maximum period of 10 years, or less if the project reached cost neutral status. Quest reached that milestone in 2022. There were limitations on how the additional credit could be used, including that it should primarily be used for regulatory compliance by affiliate company facilities. Then, as now, only the holder of the Base credit has the right to claim an emission reduction. Accordingly, these additional credits were not counted when determining Shell’s corporate greenhouse gas emissions.

To return to the claim in the Financial Times article, all the additional credits that Shell earned were used only to meet our own environmental obligations in Alberta. We did not sell them to any other company. Additionally, this program was not a secret. The government of Alberta described the mechanism in a 2011 press release and Shell acknowledged the same mechanism in the official project close-out report published by the Government of Alberta in 2016.

At the very least, Quest is an important proof of concept for Canada and the world, and it issues an annual knowledge sharing publication, which serves academic institutions, industry and regulators. But it’s much more than that: without innovative fiscal and regulatory frameworks in place that enabled the Quest investment, 8.8 million tonnes of CO₂ that have been captured and stored by the project would otherwise have been released into the atmosphere.

For that reason, it is great to see more structural incentives, like Canada’s proposed Investment Tax Credit and Alberta’s proposed Carbon Capture Incentive Program, which could support the next wave of CCS investments. But it is also sad to see conceptual and innovative funding ideas, to get critical carbon management technologies up and running, facing undue criticism .

Cautionary note | Shell Global

Temperature, tensions and two scenarios

dchone April 18, 2024

Just a year ago the scenarios team in Shell published The Energy Security Scenarios, a look at the world through the dual lenses of climate change and rising security concerns. Today, the two scenarios seem more prescient than ever as ongoing events continue to reinforce these two very separate directions of travel.

The two scenarios are Sky 2050 and Archipelagos. Both start with the realities of the 2020s, meaning that the energy system and future energy policy landscape are showing real signs of change, but also recognising that there is little in place on the scale required to reduce emissions substantially by 2030. As time moves on into the 2030s Sky 2050 takes a normative approach that starts with the desired outcome of global net-zero emissions in 2050 and works backwards in time to explore how that outcome could be achieved. By focusing on security through mutual interest, the world achieves the goal and a global temperature rise of less than 1.5°C by 2100. Archipelagos follows a possible path in a world focusing on security through self-interest. Even so, change is still rapid, and the world is nearing net-zero emissions by the end of the century but the temperature outcome in 2100 is a plateau at 2.2°C.

In recent days multiple events have reminded us of the stark realities we are collectively facing. This starts with the temperature. Copernicus, the EU climate change service, announced that March 2024 was warmer globally than any previous March in the data record, with an average surface air temperature of 14.14°C, 0.73°C above the 1991-2020 average for March and 0.10°C above the previous high set in March 2016. The month was 1.68°C warmer than an estimate of the March average for 1850-1900, the designated pre-industrial reference period, and the global-average temperature for the past twelve months (April 2023 – March 2024) is the highest on record, at 0.70°C above the 1991-2020 average and 1.58°C above the 1850-1900 pre-industrial average. The world is currently tracking above 1.5° and has been for several months. One data service, Berkeley Earth, also reported that 2023 was the first 1.5°C calendar year and others have subsequently reported a non-calendar year twelve month period being above 1.5°C.

Following on from the temperature announcement, the Executive Secretary of the UNFCCC, Simon Stiell, speaking at various events and then repeated on X (previously Twitter), said we have “two years to save the world“. He was referring to the two important COPs in 2024 and 2025 where nations will attempt to significantly step-up climate finance (COP29) and then submit new Nationally Determined Contributions (COP30), both in response to the recent global stocktake (COP28) and with the COP29 financial promises in hand.

The global security situation doesn’t require a reminder from me, but it has arguably deteriorated over the past twelve months. The recent exchanges between Iran and Israel are a reminder of the essence of the Archipelagos scenario, where mutual interest prevails and shorter-term geopolitical security challenges continually disrupt the focus and collective effort required to deliver net-zero emissions in 25 years.

Both Sky 2050 and Archipelagos see coal use declining rapidly by 2040 (much sooner for Sky 2050), but in Archipelagos shorter term concerns and the recent disruption in the global gas market see coal demand rising.

Unfortunately, the Archipelagos trend may also be playing out in reality. Coal capacity is continuing to rise despite the pledges and promises made at Glasgow and the statement in the Glasgow Climate Pact which called for ‘accelerating efforts towards the phase-down of unabated coal power’. A new report from Global Energy Monitor and others highlights the recent growth trend for new facilities. The report notes that 2023 saw the highest net increase since 2016 in operating coal capacity. The increase is primarily driven by a surge in new coal plants coming online in China (47.4 GW), and lower retirements in the United States (9.7 GW) and Europe (5 GW) compared to recent years.

But the eventual trend, even in Archipelagos, is that solar PV and wind are installed at such a rate that coal is outpaced and rapidly forced out of the mix. The turning point in both scenarios for a global decline in fossil power generation is this decade.

There are positive changes as well, although one comes as a bit of a shock. It is clear that there is a genuine global uptick in interest in the family of carbon capture and storage technologies. This includes the considerable funding incentive under the US Inflation Reduction Act (up to $180 per tonne of CO₂ for direct air capture with storage), venture capital funding flowing into direct air capture (DAC), projects in China and the Middle East, renewed interest in Japan and the final investment decision on key hub projects, like Porthos in Rotterdam. But the surprise (and shock) came with the release of the EU Commission plan for a 90% reduction in emissions by 2040, which included references to perhaps 150-200 million tonnes per annum of CO₂ storage (but even more CO₂ captured due to the need to supply carbon for e-fuel production). This is required in just 15 years, which makes it more than a challenging target, perhaps formidable is the word. It is coming from an organisation that has tried hard to raise interest in CCS over many years, but after initial efforts in 2008 fell foul of the financial crisis, nothing much has happened. Suddenly, the EU needs 200+ projects by ‘tomorrow’!

Another feature of The Energy Security Scenarios that is worth a second look is the development of national archetype responses to the energy security challenges that countries are confronted with. Different nations respond to energy security concerns in different ways. To be able to reflect these differences in behaviour, we produced a set of four archetypes, which reflect the ability of countries to secure their own supply of energy and to cope with energy price volatility.

Innovation Wins can be seen in countries like the USA and major resource-holders such as those in the Middle East. These countries are often self-sufficient in energy so are not vulnerable to supply failures, but they are susceptible to swings in energy prices. They invest heavily in innovation and infrastructure as longer-term solutions to their energy needs and the needs of their energy customers.
Green Dream can be observed in the European Union. The EU’s wealth makes it relatively able to deal with energy price volatility, but its advanced economies and depleted energy reserves make it highly vulnerable to energy supply failures. These countries seek security by driving hard to reduce energy use, increasing energy efficiency and massively boosting renewable generation.
Great Wall of Change is mainly relevant to China. The size of China’s economy, its large coal reserves and the scale of the investments it is making in its own energy supply and infrastructure insulate it from both supply and price concerns. It looks to use its manufacturing strength to build its position as a global low-carbon energy powerhouse.
Surfers are countries that tend to be vulnerable to both energy supply disruption and price swings. They seek partnerships with others and try to ride the opportunities created by the actions of other archetype countries. These can be dynamic, fast-moving economies with much to offer, but still need strong ties with others to shape their actions.

One year on and The Energy Security Scenarios appear to be as relevant as ever. Please do take a second look, or for new readers, a welcome first look. You can find it here. And do explore the timeline!

Note: Shell Scenarios are not predictions or expectations of what will happen, or what will probably happen. They are not expressions of Shell’s strategy, and they are not Shell’s business plan; they are one of the many inputs used by Shell to stretch thinking whilst making decisions. Read more in the Definitions and Cautionary note. Scenarios are informed by data, constructed using models and contain insights from leading experts in the relevant fields. Ultimately, for all readers, scenarios are intended as an aid to making better decisions. They stretch minds, broaden horizons and explore assumptions.

Seeing the forests and the trees

dchone March 19, 2024

I was fortunate to be in Brazil recently and as part of the trip I visited the offices of Carbonext¹ in São Paulo, one of the leading companies in the voluntary carbon market space, in this case currently focused on avoided deforestation projects. They are engaged in projects that, in total, are conserving between 1.5 and 2 million hectares of Amazon rainforest. The rainforest itself covers an area of some 670 million hectares, but much of this land isn’t necessarily under immediate threat. Rather, the strategic focus of the company is along the southern border of the rainforest, in effect creating a line of defense against further encroachment northwards. In exchange for their efforts, the company, like many others, sells carbon credits into the global voluntary market, which are then used by all sorts of entities for carbon offset purposes.

This latter practice of selling credits on the back of avoided deforestation has drawn criticism, but particularly by a small number of prominent media outlets which almost seem to have set themselves the task of ending the voluntary carbon market. While it might be fair to debate the philosophical issues around avoided emissions being an offset for actual emissions, the criticisms that are made are more often aimed at the credibility of the projects themselves, rather than how the project carbon credits might be used. The argument that is put forward is that there is no guarantee the trees don’t get chopped down at some later time, or that a similar level of deforestation will just happen somewhere else, such that in reality nothing is truly avoided. But none of this chimes with what I saw when visiting the company’s offices. The capacity that now exists to manage these projects and tackle the issues associated with avoided deforestation inspired me.

When we entered their main office, we were presented with large monitors displaying satellite images of the southern regions of the Amazon, with the company projects almost looking like a string of fortifications that you might have seen had satellite images of the Maginot line been available in 1939. But the next step we saw was truly impressive. Zooming into a particular project, it was suddenly possible to see details of the individual projects, almost down to the tree level. An AI system is used to monitor the project images and as new satellite images are received from the likes of the European Space Agency, differences are instantly highlighted. For example, on one project a red alarm was flashing on the fringe of the project border because the tree cover had started to decline over the last few days. This had already been acted on and it was found that an adjacent landowner had started clearing part of the preserved rainforest. As a result of the detailed monitoring, this activity was flagged and the landowner was immediately contacted by someone in the vicinity of the project. It was ascertained, at least in this case, that a genuine error had been made by the landowner regarding the location of the border. The land clearance was stopped, and the damage was contained to a tiny fraction of the overall project.

The attention to detail and the systems in place to monitor individual projects with a granularity that was probably impossible just a few years ago is impressive. It ought to give everyone confidence that a genuine effort is underway through the voluntary carbon market to limit further land clearance in the Amazon rainforest. But I do wonder if the journalists writing the disparaging articles have done their own due diligence into the current state-of-the-art technologies used to monitor forest cover and manage avoidance projects. From what I saw, it’s difficult to believe they have.

Moving out from an individual project, the totality of the effort is also impressive. A bit like the Maginot line, the string of projects is creating a crucial buffer defense against further clearance, ensuring that the other problem associated with avoidance credits, i.e. different trees just get chopped down somewhere else, doesn’t materialize, or is at least limited. But also like the Maginot line, there is the real possibility of breakthrough because the buffer isn’t big enough or there are gaps in it. In 1939 the Wehrmacht famously bypassed the fortifications that had been built and invaded France through Belgium. And here lies a potential problem in Brazil as well, but I would argue that the fault lies not with those developing the string of projects along the edges of the rainforest, but with those criticizing their efforts. By undermining the efforts of the project developers that are creating the buffer, they could also be undermining the buffer itself as new investors and potential buyers for the offsets shy away. This may then limit future project development, leaving gaps in the effort, which in turn may become weak spots in the overall programme. This string of events then snowballs, creating further criticism (always easier than providing support or offering constructive criticism) which in turn may further limit investment and new projects. It’s time for this to stop.

None of the above is meant to argue that everything rests on the back of voluntary carbon credit companies and their projects, it doesn’t. The Brazil government are clearly stepping up their efforts as well, for example by challenging illegal land clearance. But these voluntary market projects are often taking land that can be legally cleared and providing an incentive to landowners not to do so. All these efforts add up to the critical first steps required to end deforestation in the Amazon, so we need the voluntary carbon market acting in this space as much as we need the Brazil government to limit illegal land clearance. Both are important. Allowing the voluntary market to prosper and invest heavily in avoided deforestation will facilitate the creation of a true and complete line of defense. The end result is that deforestation stops, and everyone’s collective attention and efforts can then turn to reforestation, which also means carbon removal from the atmosphere rather than continued addition.

Note that Shell has a minority stake in Carbonext. ↩︎

The EU in 2040 – systemic change is now required

dchone February 12, 2024

On February 6^th the European Commission published its Communication and Impact Assessment (IA) for a 2040 Climate Target for the EU, recommending a net greenhouse gas (GHG) emissions target of 90% against a 1990 baseline. According to the IA, this means less than 850 MtCO₂-eq of GHG emissions remaining in 2040.

Scenario analysis provides a useful mechanism for looking at such future goals, so this discussion is in part framed around the EU data in our two Energy Security Scenario stories, Archipelagos and Sky 2050. These are stories that are full of technology and innovation, with rapid change resulting. Firstly, just a reminder of the two scenarios:

Archipelagos depicts a global narrative of shifting political winds driving the transition away from fossil fuels. Despite encountering challenges, the pace of the transition accelerates due to heightened security concerns and competition. This scenario envisions a world where energy security takes precedence over emission management.
Sky 2050 explores a world in which long-term climate security is the primary anchor. Society rapidly moves towards net-zero emissions but doing so requires major interventions from policymakers in the energy system.

The goal for 2040 means systemic change for the EU energy system in 16 years. This is in stark contrast to the path that has largely been followed over the past 20 years where emissions have been progressively squeezed through efficiency, industrial upgrades, wind and solar at times of abundant wind and sunshine, some use of biomass for power generation and the first wave of electric vehicle uptake in most places in combination with biofuel blending. The energy system has certainly shifted since 2000 but it hasn’t materially changed, except for the use of coal which has more than halved since 2000.

In 2000 fossil fuels made up 78% of the primary energy system and by 2023 this had fallen to 71%. But a 90% fall in emissions by 2040 will mean almost no fossil fuel use by that time, or where there is ongoing fossil fuel use, emissions must be captured and stored or compensated by removal of carbon dioxide from the atmosphere. This is because agricultural emissions, but particularly methane from rearing cattle, make up much of the 10% of emissions that would be left. Today in the EU, methane emissions account for around 10% of total GHG emissions and of that methane, three quarters comes from agriculture and waste.

This is why I have framed the discussion in terms of systemic change, meaning that by 2040 the energy system in Europe looks nothing like the energy system of today. Key technologies that must be fully commercialised and scaled up over the next sixteen years include;

Energy storage, such that a very high renewables contribution to electricity can be managed during the night and/or when large areas on the EU are covered by high pressure systems with typically low wind speeds.
Grid development and interconnections, again to manage renewable intermittency but in the shorter term to allow new renewable projects to connect to the grid.
Full acceptance of electric vehicles and no gaps in the recharging network, anywhere. Ideally, only electric vehicles will be purchased by consumers from 2030 onwards for a 2040 90% goal. The average lifetime of a passenger vehicle in the EU is 12 years, but this varies widely from Denmark (8.5 years) to Greece (17 years). As such, some form of early scrappage incentive may be required.
A fully operational solution for trucks, perhaps ranging from electric trucks for shorter haul operation to hydrogen fuel cell for long distance heavy freight vehicles. In some categories of truck today there is no commercial solution, although development activity in the sector is high.
Sustainable aviation fuels making up between a third and half of aviation fuel needs, compared with less than 1% today. In addition, a fully established synthetic fuel capacity must be in place producing some 200,000 barrels per day of synthetic aviation fuel. There is none today. But the Commission document sees some 75-100 million tonnes of carbon dioxide captured each year by 2040 for synthetic fuels. That’s about 25 million tonnes of carbon or 30 million tonnes of hydrocarbon fuel, which is 500,000 barrels per day of production. The large Shell synthesis plant in Qatar (which uses natural gas as its source of hydrogen and carbon) is 150,000 barrels per day and the largest in the world, so the EU needs three of these but with hydrogen from electrolysis and carbon dioxide capture at the back end. Since the Shell facility started up over a decade ago, no new large synthesis plants have been built anywhere. The technology is there, but these are complex processes.
Direct air capture (DAC). This is a nascent technology that has emerged from the USA, Canada and Switzerland. Most of the global activity in DAC is outside the EU, although there are a handful of start-up companies in Europe.
Natural gas for home heating and cooking being rapidly phased out in favour of electricity, or in some instances bio-methane as a direct substitute for natural gas.
Widespread use of electricity, hydrogen or biomethane in industry, but almost no coal. The latter means a radical change for the roughly 50 remaining EU blast furnaces all running on coal.

There is considerable activity in all these areas across the EU and certainly substantial change will happen over the next 15-20 years. But one thing is almost certain, there will be fossil fuels being used in the EU in 2040. Even the EU Commission recognises this and as such, they state there is a need for carbon capture and storage (CCS) and carbon dioxide removals to reach the 2040 goal. But this need goes way beyond recognition, the requirement is for some 300+ million tonnes per annum of carbon dioxide capture through industrial processes (including direct air capture) and 300 million tonnes of land-based removals, such as through changes in forestry and agricultural practices. For the industrial capture of carbon dioxide, about 200 million tonnes will be stored geologically. That’s 200 significant commercial facilities like the Shell Quest CCS plant in Alberta, Canada. It’s also about the same as the number of facilities in Sky 2050. By contrast in Archipelagos in the EU there are 20 such facilities by 2040.

For the CCS requirement, if this were the USA, I might think of this task as challenging yet achievable. But it’s the EU, not the USA with its established carbon dioxide pipeline network, numerous existing and in development projects and clear business model for CCS through the Inflation Reduction Act tax credits. Readers of this blog will know that I have posted dozens of stories over the years, many about the EU, sharing my frustration at the slow progress of CCS. The sum total of operational (not pilot plants) CCS facilities in the EU is zero, although there are two projects operating in Norway and there is actual construction on several sites within the EU. To be fair, according to a November report from the Global Carbon Capture and Storage Institute, interest in CCS in the EU is surging, with the number of commercial-scale CCS projects in various stages of development in Europe rising 61% since last year and reaching 119 in 2023. For this more upbeat view of EU efforts, see here.

There isn’t a technical reason that would stop 200 facilities from being built, which is why they exist in Sky 2050, but there are political, social and commercial reasons why this may be a step too far for the EU. For example, unlike the USA, clear business models for CCS and removal technologies aren’t in place, there are numerous social and civil community objections to facilities being built and political will on CCS has always been difficult to muster.

For the removals part of the story, there is a significant dependency on change in the agricultural sector, which erupted into protests over other environmental goals very recently. In Sky 2050 we assume that such headwinds part as the mutual interest required to solve the climate issue prevails throughout society. But in the EU there are no clear business models in place to encourage farmers to engage in so-called ‘carbon farming’, meaning practices that result in an increasing carbon stock within the soil. There is some discussion, but in practice such initiatives take years to mature and deliver. Australia has had such a model running for over a decade and only now there is sector discussion around a Carbon Farming Industry Roadmap that envisions a vibrant domestic carbon farming industry by 2030 that contributes significantly to Australia’s economy, community and climate repair.

Much more will be written on the EU ambitions, but in the meantime readers may find it useful to look through the Sky 2050 scenario, or a piece of work prepared in 2020 by the Shell Scenario team that looks specifically at the EU.

Note: Shell Scenarios are not predictions or expectations of what will happen, or what will probably happen. They are not expressions of Shell’s strategy, and they are not Shell’s business plan; they are one of the many inputs used by Shell to stretch thinking whilst making decisions. Read more in the Definitions and Cautionary note. Scenarios are informed by data, constructed using models and contain insights from leading experts in the relevant fields. Ultimately, for all readers, scenarios are intended as an aid to making better decisions. They stretch minds, broaden horizons and explore assumptions.

Schrödinger’s COP?

dchone January 17, 2024

From the perspective of the UAE Consensus and the progress made on Loss and Damage, the COP process is very much alive and the UAE Presidency should be congratulated on all that they managed to achieve. But if you are a keen follower of progress on Article 6 of the Paris Agreement, a vibrant living and developing process was hard to see.

In this post, my colleague Malek Al-Chalabi discusses COP 28 from the perspective of the Article 6 negotiations. Malek co-Chairs the International Working Group within the International Emissions Trading Association and is the Senior Carbon Pricing Policy Adviser within Shell.

COP28, held in the UAE in December 2023, progressed many aspects of the international climate negotiations. This includes the first reference to transitioning away from fossil fuels, operationalising the Loss and Damage Fund, the Canadian led Global Carbon Pricing Challenge and the UAE Consensus which sets the scene for COP30 when nations resubmit their Nationally Determined Contributions.

But while carbon pricing announcements featured heavily in and around COP28, negotiators failed to agree on specific issues related to Article 6 of the Paris Agreement, which is one of the foundation elements of a broader international carbon trading mechanism and by implication a catalyst for wider adoption of carbon pricing. Parties could not agree to provisions relating to Article 6.2 or Article 6.4 – despite lengthy consultations in the lead up to COP28 and many nights of long deliberations throughout the COP. What happened and what does this mean for Article 6?

On Article 6.2, the EU, the Latin American and Caribbean Alliance (AILAC) and the Alliance of Small Island States (AOSIS) pushed for more oversight on Party-to-Party agreements, while the Umbrella Group (including the U.S., U.K, Australia, Canada and New Zealand) and the Like-Minded Developing Countries (LMDCs) group (including China, India and Saudi Arabia) opposed because they believed that the bilateral nature of Article 6.2 meant that it should be managed by Parties engaging in the bilateral trades and not by another authority. This difference could not be resolved in the negotiating room despite apparent clarity in the Article 6.2 rulebook where there is a statement to the effect that ‘guidance will not infringe on the nationally determined nature of nationally determined contributions’.

On Article 6.4, another set of differences emerged across a variety of topics, including removals, methodologies, and registries. Notably, the Supervisory Body had worked on recommendations for removals and methodologies throughout the year and agreed drafts for both in November. However, at COP28, the EU and the Coalition for Rainforest Nations expressed strong opposition to the removals recommendation, while willing to accept the methodologies paper. However, the LMDCs and others were not willing to progress one recommendation and not the other, which could not be overcome, as many believed they needed to be adopted together. Differences also emerged on how registries would interact with countries unable to find compromise.

Outside the negotiating room the EU called for advanced global cooperation on carbon pricing with the World Trade Organization, International Monetary Fund, and the World Bank, but in the negotiating room the EU was seen as one of the main blockers of progress on Article 6. Different reasons have been reported, from wanting to focus on quality and integrity of markets to blocking progress on Article 6 to focus on expanding the EU ETS and its own domestic removals certification system, as Article 6 is a tool that the EU says it is unlikely to use towards net zero.

For context, the first carbon price that entered the market was in 1990 (Finland, Poland) and since then carbon pricing has taken a country specific and region-specific approach as it is not a global commodity. Therefore, it should not come as a surprise that when negotiating to develop a global carbon market framework (6.4) or rules to engage in bilateral trade (6.2) that different country and regional perspectives and preferences would emerge. What works in Brazil will be very different to what works in the UAE which will be very different to what works in Canada.

Article 6 provides an opportunity to develop a global, UN-led carbon market – but the politicization of markets was on full display and did not foster the spirit of what was needed to progress the international carbon market agenda, which was disappointing as other obstacles had been overcome as highlighted above.

There have been calls to end the politicisation of carbon markets in the Article 6 negotiating room and focus instead on developing the framework that is very much needed to achieve 1.5°C. As has been shown in the Shell Energy Security Scenarios and country Sketches such as the UAE and Singapore, Article 6 is one of the key tools that is required to help accelerate decarbonisation efforts across jurisdictions. It is also clear from the Sky 2050 scenario that countries such as Brazil hold huge potential to deliver net-zero emissions globally earlier than would be the case without them due to the carbon removal capacity they can create through land change practices. However, unlocking this removal potential requires a substantial cross border mechanism such as Article 6.

Looking ahead, the lack of progress on Article 6.2 means that the decisions that took place in Glasgow and Sharm El Sheik still stand. As a consequence, parties can continue to utilize Article 6.2, but individual bilateral decisions will prevail, rather than a more robust multi-lateral approach. This week Switzerland and Thailand concluded their first transaction under Article 6.2. The expectation is that further bilateral use of Article 6.2 will substitute for the absence of an operational Article 6.4. Some experts predict 2-3 years until 6.4 is operational. On Article 6.4, significant uncertainty now exists – including the scope of the Supervisory Body work plan for the future. The loss here could be literally thousands of project focused transfers and the significant emission reductions that they would bring, simply because there is no common standard available for project evaluation and credit issuance.

Bringing Article 6 to full operational status is required now more than ever – but next year will mark a decade since the Paris Agreement’s inception and the world is still unlikely to have an operational 6.4 mechanism by then. Ten years to deliver a working outcome from a key provision of the Paris Agreement is unacceptable, particularly when we know that the limited remaining carbon budget is now counted in single years and not in decades. As confidence in the COP process with regards carbon markets continues to waver, market players may look elsewhere to close the gap, such as making even more use of the voluntary carbon market. This might offer some hope and cause for optimism, but it is hard to see a voluntary mechanism doing the heavy lifting required to get the world to net-zero emissions in 25 years. And as argued previously, without a functioning Article 6 net-zero emissions may not be achieved at all in the desired time-frame.