The Paris Agreement at COP21 reached in mid- December to tackle climate change has elicited mixed reactions. Some feel it is a truly historic agreement, fundamentally accelerating the move towards de-carbonisation of our energy mix, while others believe that nothing much has really changed.
Some of the key elements of the agreement are:
First of all, to keep the increase in global temperatures to well below 2°Celsius, with a hope to restrict global warming to 1.5°C.
Secondly, most countries announced voluntary pledges to curb emissions (158 submissions covering 185 countries and 90 per cent of global emissions were announced). These submissions are a first step, with most countries having to announce further reductions in 2020 and continuing to increase the cuts every five years.
Thirdly, the developed countries will supposedly provide the poor nations with $100 billion a year till 2025, and then step up this funding.
The problem with the above is that the actions taken do not deliver the desired outcome of limiting global warming to within 2°C, forget 1.5°C. Not even close.
Prior to Paris, assuming no change in policy, we were on track to achieve a global warming trajectory of about 3.6°C. With all the pledges made in Paris, we would see an improvement, but emissions would still keep rising till 2030, and the path towards global warming would improve to 2.7°C. An improvement, but nowhere near enough. To limit warming to 2°C, carbon dioxide emissions will have to be cut by 25 per cent more than the pledges already made. To limit global warming to 1.5°C, we will need additional cuts in emissions of 40 per cent by 2030, according to Bernstein Research.
Just to give a sense of the enormity of the task, the additional emissions cuts needed to restrict warming to 1.5°C imply a total phase-out of coal from the energy mix and replacing oil from all transport uses - and all this by 2030. Clearly highly unlikely.
The takeaway from this is that while a target of 1.5°C is impractical, we are going to see much higher cuts in emissions than what has been pledged - it is inevitable.
This brings us to the question of stranded carbon: the concept that some of the proven reserves of fossil fuels will never be burnt and will remain stranded.
Thinking of the challenge in terms of a total carbon budget, to stay within the 2°C target, we only have about 1,100 giga tonnes (gt) of carbon dioxide (CO2) that can still be emitted. Assuming emissions peak today (not likely), we would only have another 22 years or until 2037, before carbon emissions would have to go to zero.
Looked at another way, current proven reserves of fossil fuels are about 812 billion tonnes of oil equivalent (oil, gas and coal). Just burning all these proven reserves (not counting contingent reserves or those yet to be discovered) would generate about 2,512 gt of CO2 equivalent emissions. The world cannot afford to have more than 1,100 gt of incremental emissions if we are to stay within the 2°C framework. Thus, no more than 40 per cent of the existing proven reserves of fossil fuels can ever be burnt. Probably even less, as some of the carbon budget will be taken by non- fossil fuel applications like agriculture.
Within the fossil fuel carbon budget, coal will lose out, given its carbon intensity and sheer abundance. Bernstein estimates that only about 25-30 per cent of the proven global coal reserves will ever get used. More than 50 per cent of oil reserves will get burned and upwards of 60 per cent of gas reserves, given its relative carbon efficiency. The major oil companies, given their short reserve life and speed of extraction will not suffer stranded assets - unlike sovereign nations, many of whom like Iran and Iraq, have been too slow to work their reserves. Whatever oil and gas is stranded will be at the cost of the sovereign nations in Organization of Petroleum Exporting Countries (OPEC).
What are the implications for India?
First of all, we need to ramp up coal production as soon as possible, otherwise the bulk of our coal will never get burnt. There is probably a limited window of another 20-25 years for coal, beyond that it will be impossible to use.
Secondly, there is a possibility that we could see a race to produce as much oil as possible by OPEC members, if countries like Iran and Iraq get convinced that much of their oil will never be burnt if they keep producing at current rates of extraction. This carbon race will be highly damaging to petroleum pricing. We may already be seeing some form of this dynamic playing out, as OPEC production has continued to surprise to the upside throughout this crash in oil prices. The Saudis may be playing a game beyond just crushing US shale: They may simply be maximising the value of their reserves by pumping flat out.
Thirdly, natural gas will gain prominence as the only way to lower emissions in the short term and provide a low carbon bridge to renewables, electric vehicles (EVs) and energy storage systems till they gain economic viability. We need to ensure long-term linkages for gas; it will be far more important than oil in the future. Locking in long-term contracts today when prices are low may be prudent.
An inexorable shift away from coal and other high carbon fuels (oil sands) is underway. This will benefit lower carbon fuels like natural gas, and zero-carbon technologies like renewables, energy storage systems, batteries and electric vehicles. As much as 60 per cent of current emissions come from power generation and transport; both will be disrupted as EVs and solar combined with energy storage gain prominence.
We need to attain a technology position in these new fields. China already dominates solar, and South Korea leads in battery technology powering EVs and energy storage systems. India has to use our likely leapfrogging and mass adoption of these new technologies to build a viable eco-system in these areas. We should encourage local players in both areas.
The writer is at Amansa Capital. These views are his own
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
