IEA includes climate change policy scenario in latest forecast

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Dec. 7 -- The International Energy Agency developed a climate-change policy scenario as part of its latest annual forecast because it wanted “to be part of the solution as well as part of the problem,” a top official said on Dec. 2.

“Sixty percent of the world’s carbon dioxide emissions come from energy. We need to start acting now. It’s not going to be easy. But the alternatives are worse,” Richard Jones, IEA’s deputy executive director, said during a presentation on the organization’s 2009 World Energy Outlook at the Center for Strategic and International Studies.

In addition to its usual forecast which assumes no significant changes in national policies, the Paris-based organization of industrialized energy-consuming countries’ 2009 World Energy Outlook includes a scenario which projects impacts of taking steps which would stabilize greenhouse gas concentrations at about 450 ppm carbon dioxide equivalent by 2030.

This “450 Scenario” would avoid the most severe weather and rising sea level consequences by limiting the overall temperature increase to 2° C., it indicates. “Without a change in policy, the world is on a path for a rise in global temperature of up to 6° C., with catastrophic consequences for our climate,” it maintains.

The US Energy Information Administration has included CO₂ emissions forecasts for petroleum, natural gas, and coal in its monthly short-term energy outlook since August. IEA has gone further by advocating that steps be taken to curb GHG releases into the atmosphere.

‘Take the lead’
At a meeting of the group’s ministers in October, “a large majority showed their intention to take the lead, organize themselves, and commit to the challenge to reach the 450 Scenario—the energy path of Green Growth,” IEA Executive Director Nobuo Tanaka said. “Only by mitigation action in all sectors and regions can we turn the 450 Scenario into reality.”

The organization has launched three specific initiatives already, according to Jones. It has started a sustained capacity measurement training project with nonmember countries to get more accurate data from more sources. It is forming partnerships with China, India, Russia, and other non-IEA nations. And it is discussing technology to help countries overcome barriers to understanding what they need and how to get it.

“It’s not going to be easy. But the alternatives would be worse,” said Jones. “We need to start acting now. Whether or not [the United Nations climate conference in] Copenhagen succeeds, countries will need to start acting on their own. We also have to continue economic growth to provide jobs for people already on this planet by 2030. That means providing more energy.”

Actions are necessary despite a likely decline in global energy use in 2009 as a result of the financial and economic crisis, IEA Chief Economist Fatih Birol said. This has led to a plunge in energy investment because of a tougher financing environment, weaker demand, and reduced cash flows, he indicated. For oil and gas companies, this has meant delayed and canceled projects as well as capital spending cuts.

“Global upstream spending is expected to fall by more than $90 billion, or 19%, the first fall in a decade,” he told his audience at CSIS. “If this trend continues and merges with a strong rebound in demand as the world’s economies recover, it poses price implications.”

Forecast outlays
Under the WEO’s reference scenario, where major climate change policies aren’t adopted, $26 trillion in 2008 dollars would be required to meet projected energy demand from 2010 through 2030, equal to $1.1 trillion/year (or 1.4% of global gross domestic product). More than half of that would be needed in countries outside the Organization for Economic Cooperation and Development, where demand and production are expected to increase fastest.

“With little prospect of a quick return to the days of cheap and easy credit, financing energy investment will, in most cases, be more difficult and costly than it was before the [financial and economic] crisis,” the report says.

Under the 450 Scenario, another $10.5 trillion would be needed. “But investments in industry, transport, and buildings are more than offset by fuel cost savings, which in the transport sector alone amount to over $6.2 trillion [during] the period,” the report continues. The scenario also offers environmental and security benefits, with oil and gas import bills for OECD countries in 2030 much lower than in 2008, and 30% lower in China and India in 2030 than in the reference scenario.

Both scenarios assume that energy prices will rise through 2030. “Consumers will need to recognize that the cheap energy era is over,” said Tanaka. “We think that the $147/bbl oil price last year began to change the structure of demand. Two major US automakers went into bankruptcy. The consumer is learning.”

In the reference scenario, the average IEA crude oil import price (a proxy for international prices which in 2008 averaged around $3/bbl less than West Texas Intermediate crude, the US benchmark) is assumed in real terms to reach $87/bbl in 2015, $100/bbl by 2020, and $115/bbl by 2030 (in 2008 dollars).

Lower demand
Under the 450 Scenario, oil prices are assumed to follow the same upward path until 2015 but remain flat from then until 2030 because demand would be weaker. “The oil price is assumed to plateau at $90/bbl in real terms in 2020. Gas prices are correspondingly lower. Coal prices are reduced even more, as demand falls much more than for oil or gas,” the report says.

These prices also take into account carbon prices under cap-and-trade systems which are assumed to be introduced in many parts of the world. Under this scenario, the CO₂ price within the OECD reaches $50/tonne in 2020 (which increases the cost of a barrel of oil by $21) and $100/tonne in 2030 (which increases oil costs $46/bbl), according to the WEO.

“If there’s a financial signal, habits will change. We need a carbon price,” Birol said. “The bulk of the discussion now centers on which country reduces CO₂ emissions by how much. I think that’s wrong. The focus should be on investments and who pays for them.” Manufacturers in industrialized nations might want to consider cofinancing reductions in developing countries where they would cost less, he suggested.

Both scenarios forecast long-term gas demand growth. In the reference case, global demand climbs 41% from 3 trillion cu m in 2007 to 4.3 trillion cu m in 2030, or an average 1.5%/year, driven largely by electric power generation demand. More than 80% of this increase is expected outside the OECD, with the biggest rise in the Middle East.

Gas demand would grow 17% under the 450 Scenario, or an average 0.7%/year, reaching a level in 2030 that would be 17% lower than under the reference scenario.

“The good news is that there’s a silent revolution going on in the United States. There’s a boom in shale gas which poses implications elsewhere,” said Birol. “Many companies and countries thought they could sell LNG to the US, which doesn’t need it now. They’ll have a lot of gas and will be looking for buyers. We see a glut coming, about 200 billion cu m, by 2015, due to weaker demand.”

Contact Nick Snow at [email protected].