Zeroing In: A financial industry guide to the IEA’s Net Zero Emissions Scenario and its implications for oil and gas financing

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Briefing from Greenpeace, the International Institute for Sustainable Development (IISD) and Oil Change International

February 2022

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The International Energy Agency’s new Net-Zero Emissions by 2050 scenario, published in May 2021 and included in the World Energy Outlook, has sparked widespread debate on the future of oil and gas.

He made headlines with the discovery that oil and gas in fields already in production or under development will be enough to meet demand in a world that limits warming to 1.5ºC. There is no need to develop new oil or gas fields after 2021.

This briefing aims to provide financial institutions with an overview of the new scenario and what it means for corporate, investor and lender capital allocation decisions and engagement, particularly in the oil and gas sector. gas.

Until the release of the NZE, the IEA’s previous climate scenario, known as the Sustainable Development Scenario (SDS), was designed to align with the upper bound of the Paris goals: keeping warming well in below 2°C. The SDS emissions trajectory does not match what is needed to achieve the 1.5°C ambition, but the NZE does (with a 50% chance of limiting warming to 1.5° VS). This is not to say that the NZE is flawless – like the SDS, it is based on questionable assumptions (more of which below) – but rather that its ambition is correctly aligned.

Key messages:

  • The IEA published for the first time a scenario aligned with 1.5°C: financial actors should use this scenario as a new minimum standard to guide decision-making, instead of other less ambitious scenarios.
  • Oil and gas production is expected to decline by around 3-4% per year; this leaves no room for the development of new oil or gas fields after 2021.
    • The conclusion on the end of the development of new oil and gas fields is not the product of a scenario design; it is the arithmetic of 1.5°C. Limiting emissions to this level requires a drop in global oil and gas use of 3-4% per year – including in IPCC scenarios – which is roughly equal to the expected drop in production from existing fields.
    • The only 1.5°C scenarios that require new oil and gas deposits rely on the future deployment of carbon dioxide removal (CDR) or carbon capture and storage (CCS) technologies in a more greater extent than is plausible.
    • On the contrary, the conclusion of the IEA could be conservative. The NZE scenario itself is based on extremely rapid CCS growth, breaking with current trends. If we are more cautious about the likelihood of a very large-scale CCS or CDR, or if we aim for a greater than 50% chance of limiting warming to 1.5°C, some existing fields will have to close more. early.
  • All sectors must quickly decarbonize.
    • Limiting warming to 1.5°C requires a transformation of the energy system, not just further emission reductions. This has implications for investment portfolios, including rapid decarbonization in power, vehicle manufacturing, buildings and heavy industry.
    • Conversely, NZE points to a market exceeding $1 trillion per year by 2050 – comparable to today’s global oil market – in wind turbines, solar panels, lithium-ion batteries, electrolysers and fuel cells. combustible.
  • The financial sector can play a key role in ensuring that investments by oil and gas companies are aligned with the Paris goals.
    • The NZE is an essential tool for financial institutions to assess the alignment of their portfolios with the Paris objectives and the transition risks they face. We suggest a few topics that financial actors can ask
      recipients and borrowers about to judge their alignment.
    • Financial actors should consider integrating the issue of new oil and gas licenses and development into their public policy work on climate change; and support calls for governments to stop issuing new licenses and approvals for extractive projects.

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