We are getting used to the world suffering from major floods, huge rainfalls and severe drought simultaneously. As long as these calamities are far away from where we live, we feel safe and the threat seems like another tragedy for people being in the wrong place at the wrong time. This year, however, the regions experiencing heat waves and wildfires were so large that the resulting smoke polluted the air for a significantly larger part of the world population. The scientific community clearly warned us that the widespread changes in weather patterns will intensify as we release more greenhouse gas (GHG) in the atmosphere. The longer the world waits in significantly reducing GHG emissions, the more difficult it will be to also avoid catastrophic scenarios as many carbon sinks of biodiversity may also be affected.
So then, why is the world not reducing GHG emissions faster? The share of fossil fuel in the global energy mix has remained a stubbornly high ~80% of total energy consumption. The policies stated by governments over time could reduce this percentage over time. But despite all the progress achieved so far and assuming all climate pledges are fully attained, there is a large gap between where the world is headed and a 1.5 degrees Celsius world. The technologies are available for us to reach a more sustainable world in the coming decades if the private sector and governments take appropriate actions to tackle climate change.
What are the main obstacles towards achieving the 1.5-degree Celsius stabilisation?
In 2023, eight years after the Paris Climate Accords, the GHG emissions are still going up. Most of the emissions come from the production of oil and gas and from the consumption of these fossil fuels. The fossil fuel industry clearly has a conflict of interest in dealing with climate change. The main objective of oil and gas corporations is to maximize the value for its shareholders. Most shareholders have different time horizons for their investments. For some investors, a one-year time-horizon may be considered short term or medium term while a five-year time-horizon could be considered long term. So, management works for maximizing shareholder values with this in mind. Currently, oil and gas companies can make better returns in oil and gas explorations and production than investing in technologies that will help the energy transition. Therefore, the conflict of interest for a CEO working in the oil and gas sector is obvious. It is not surprising to see that major oil and gas companies have pared down their actions and commitments to deal with climate change this year.
National Oil Companies (NOCs) are oil and gas organisations whose governments are the main shareholders. Governments of oil producing countries have a goal to maximize the revenues and profits of their NOCs in order to receive the highest level of dividends, which in turn are added to government revenues. Reducing the oil production would increase the price of oil and this would, only makes sense if the higher oil price does not trigger lower demand in the future. Finding this equilibrium is a complex balancing act for petroleum producing nations. Here too, the conflict of interest for any CEO working for a NOC is clear. Mitigating climate change is definitely not the priority.
Given the underlying forces that affect oil production decisions, we understand why UN Secretary General Antonio Guterres said the fossil fuel industry is “the polluted heart of the climate crisis”. Let us remember that at the 2022 COP27 in Egypt, the oil producing countries vetoed any reference to a “fossil fuel phase-down”.
The compliance with the 2015 Paris climate agreement cannot happen if oil and gas production continue to rise. To get to 1.5 degree Celsius, we need to reduce oil production and consumption. GHG emissions occur when oil is produced and refined. This is approximately 20% of the GHG emissions of the oil and gas sector (scope 1 and scope 2). The remaining 80% of GHG emissions occur when oil and gas is consumed (scope 3).
The falsehoods about fossil fuel production and CO2 emissions:
The fossil fuel industry claims the real problem is not the fossil fuels but the emissions from fossil fuels. They can reduce the emissions by providing solutions such as Carbon Capture and Storage or Sequestration (CCS) or Direct Air Capture (DAC). However, after many years of R&D on these technologies, CCS or DAC solutions are still not commercially viable unless they receive major subsidies from governments. Since DAC technology is extremely expensive and especially energy-intensive, it is not feasible for widespread use. We have not seen a wide adoption of CCS technologies by the oil and gas industry in Canada because it does not make economic sense even when the cost of emissions is $CAD65 per tonne of CO2e in 2023. We are in the situation of moral hazard when the oil and gas industry does not bear the risk of climate change, or in other words, does not bear the full cost of its GHG emissions. That is also why the oil and gas companies continue to spend most of their capital expenditure on increasing their oil and gas production.
The Canadian oil and gas industry is currently in negotiations with various levels of governments to maximize the subsidies, and to ensure better visibility (contract for differences) for deployment of CCS technologies in their operations. The process is painfully slow and may be finalized this year. But even if CCS technologies are deployed, the remaining 80% of GHG emissions occur during consumption. This will not solve the larger issue of GHG reduction, and it should not provide an incentive to the oil and gas industry to produce more as it reduces its scope 1 and scope 2 CO2 emissions. We, as citizens, need to find ways to wean off fossil fuel.
If we are serious about combating climate change, we must invest in solutions that accelerate the energy transition toward other forms of energy such as wind and solar and even nuclear. It is against the financial interest of oil and gas companies to adopt these new forms of energy and to actively reduce oil and gas consumption.
If we are serious about climate change, we must lobby our governments to:
1. Bring more incentives to move towards renewable energy, smart electrical grids, the adoption of e-mobility and regenerative agriculture
2. Incentivise the financial system to participate in the energy transition and
3. Regulate the production of oil and gas
Climate apathy and the COP process:
Climate COP28 in 2023 will be held in Dubai, ironically under the presidency of the CEO of Abu Dhabi National Oil Company (a NOC). It is very alarming that the oil and gas industry has increased its presence each year at Climate COP events. Why? Because it has an increasingly stronger voice and more power to direct the agenda, drive the process towards climate apathy and undermine the need to take bold action and slow or obstruct the process of decarbonization.
We need to get to net zero CO2 emissions as soon as we can. This will stop the increase in temperature very quickly after we reach it. We have the means to do it. Let us not fall in despair just because COP28 is this year in the hands of the oil industry.
There are many initiatives worldwide that are driving the energy transition. We need to continue pressuring governments to act faster than they have so far.