Zeroing In: A guide for the finance sector on the IEA’s Net Zero Emissions scenario and its implications for oil and gas finance
This briefing gives financial institutions an overview of the IEA’s first 1.5°C-aligned scenario and what it means for oil and gas. We show that the IEA’s conclusion about ending new oil and gas field development is not a product of scenario design; it’s the arithmetic of 1.5°C.
Briefing by Greenpeace, the International Institute for Sustainable Development (IISD) and Oil Change International
February 2022
The International Energy Agency’s new Net-Zero Emissions by 2050 scenario, published in May 2021 and incorporated in the World Energy Outlook, sparked wide debate on the future of oil and gas.
It made headlines with the finding that oil and gas in already-producing or under-development fields will be sufficient to meet demand in a world that limits warming to 1.5ºC. There is no need for any new oil or gas fields to be developed after 2021.
This briefing aims to give financial institutions an overview of the new scenario and what it means for corporate, investor and lender capital allocation decisions and engagement, especially in oil and gas.
Until publication of the NZE, the IEA’s previous climate scenario, known as the Sustainable Development Scenario (SDS), was designed to align with the upper limit of the Paris goals: keeping warming well below 2°C. The emissions trajectory of the SDS does not match what is needed to meet the 1.5°C ambition, but the NZE’s does (with a 50% probability of limiting warming to 1.5°C). That is not to say that the NZE is without flaws – like the SDS, it relies on some questionable assumptions (on which more below) – but rather that its ambition is correctly aligned.
Key messages:
The IEA has published a scenario aligned with 1.5°C for the first time: financial actors should use this scenario as a new minimum standard for guiding decision-making, in place of other less ambitious scenarios.
Oil and gas production must decline by about 3-4% per year; this leaves no room for new oil or gas fields to be developed after 2021.
The conclusion about ending new oil and gas field development is not a product of scenario design; it’s the arithmetic of 1.5°C. Limiting emissions at this level requires global oil and gas use to fall 3-4% per year – including in IPCC scenarios – which is roughly equal to the expected decline of production from existing fields.
The only 1.5°C scenarios that require new oil and gas fields rely on future deployment of carbon dioxide removal (CDR) or carbon capture and storage (CCS) technologies to a greater extent than is plausible.
If anything, the IEA’s conclusion may be a conservative one. The NZE scenario itself relies on extremely rapid growth in CCS, breaking with current trends. If we are more cautious about the likelihood of very large-scale CCS or CDR, or if we aim for a greater than 50% probability of limiting warming to 1.5°C, some existing fields will have to close early.
All sectors must rapidly decarbonise.
Limiting warming to 1.5°C requires a transformation of the energy system, not just incremental emissions reductions. This has implications across investment portfolios, including rapid decarbonisation in power, vehicle manufacture, buildings and heavy industry.
Conversely, NZE indicates a market exceeding USD 1 trillion per year by 2050 – comparable to today’s global oil market – in wind turbines, solar panels, lithiumion batteries, electrolysers and fuel cells.
The financial sector can play an essential role in ensuring oil and gas company investments are aligned with the Paris goals.
The NZE is a vital tool for financial institutions to assess alignment of their portfolios with the Paris goals, and the transition risks they face. We suggest some topics financial actors can ask
investees and borrowers about to judge their alignment.
Financial actors should consider incorporating the issue of new oil and gas licences and development into their public policy work on climate change; and support calls on governments to cease issuing new licences and approvals for extraction projects.