Given its location, business lobbying scandals, resulting criticism, and the language adopted in the final agreement, COP 28 in Dubai put the fossil fuel industry at the front of the conversation in a way that it never has been before.
While there was disappointment that language was formulated as “transitioning away from fossil fuels in a just, orderly and equitable manner,” rather than “phasing out” or “down”, for the first time “fossil fuels” were directly referenced.
WHAT TO DO WITH VAGUENESS
Long-term environmental activist Bill McKibben responded positively, saying that “the COP is the scoreboard, not the game”—that while it looks like legislating, it’s not. What it represents is the spirit of what the world wants today. McKibben argues that the new formulation gives parties the power to define what its vague meaning implies.
His position is that these vague sentences forestalls investment in and development of any new oil fields, pipelines or LNG export terminals. It’s up to other parties to decide or be convinced if it means the same thing to their future plans—for example, imagine how governments of small island nations will.
IEA SEES AN END
But beyond debates over language and intention, the International Energy Agency (IEA) says that “A moment of truth is coming for the oil and gas industry” in its November 2023 report “The Oil and Gas Industry in Net Zero Transitions”.
Remember, you could say that the IEA is on the fossil fuel industries side—it was founded because of the 1973 oil crisis to maintain stability of energy supplies, and is made up of OECD countries that hold an emergency stock of a minimum 90-days’ worth of oil imports.
In a Net Zero world, IEA sees oil demand at “one-quarter of the 2022 level” (three-quarters of which are not combusted when used, such as in petrochemical feedstocks). That’s a massive shrinkage of the industry.
And when it comes to Carbon Capture, Utilization and Storage (CCUS), the agency delivers the bad news that deployment of CCUS to meet 1.5 degree C target in 2050 under current policies would require more energy than 2022 demand (not mention capacity to store 32 Gigatons of CO2 by 2050).
WHAT DOES THIS MEAN FOR THE BUSINESS WORLD?
It’s hard to see under these conditions how investors and banks, not to mention oil and gas companies themselves, continue to develop and grow their businesses.
For major energy purchasers, if they haven’t already begun to explore Power Purchase Agreements (PPAs) for renewable energy, it’s time to start planning to do so.
In Japan, companies face a scarcity of options. It’s time for individual corporations and industry associations to wield their lobbying power to accelerate development of renewable sources in the country. If they don’t, Japanese companies may face higher cost of capital compared to international competitors with better access to renewables--and, as a result, improved ESG performance--as well as experiencing unwelcome exposure to a traditional energy market that is likely to become more unpredictable in pricing in supply in the mid- to long-term, if not the short.
Not everyone may have gotten what they wanted out of COP28, but it’s become clear that the writing is on the wall for the future of the fossil fuel industry. Companies should be making adjustments today.