The need for a more diligent focus on “implementation” over “ambition” has never been greater, and the imperative for state actors never more critical.
So, how are countries progressing on updating their targets and on actual implementation? The UNFCCC’s report published on 26 October 2022 says current country commitments will increase emissions by 10.6% by 2030, compared to 2010 levels, leading to a temperature rise of 2.5°C. So, better than last year’s assessment, when countries were on a path to increase emissions by 13.7% over the same period. But significantly far from the 43% reduction the IPCC believes is necessary to be on the 1.5°C pathway!
But it’s not all gloomy. We have seen policy action in some parts of the world, especially in the EU and the USA. Interestingly, Egypt, the host of COP27, announced in May 2022 that it was committing $40bn of funds to green hydrogen and ammonia, helped by its gas infrastructure, the Suez Canal, and high solar and wind resource potential. This in turn saw private investment announcements totalling $100bn, second only to Australia. The investment in Egypt has been helped by the single permitting process, a great example of creating an enabling environment for change.
The US example: Carrots over sticks
The landmark Inflation Reduction Act (or “IRA”) that passed Congress in August 2022 is a game changer according to customers, policymakers and sector associations. The generous tax credits that can be enjoyed by technology suppliers, renewables developers, component manufacturers, etc., will likely spur rapid action. To show how attractive this legislation is, one of our global engineering customers decided within just two weeks of the announcement of the IRA to set up a manufacturing facility in the USA, so beneficial were the credits.
We are now no longer looking at an energy “transition” but a full on “transformation”.
Our recently published Energy Transition Outlook (ETO) 2022 indicates that to achieve 1.5°C, some regions will need to get to net zero well before 2050, while others will still be emitting CO2 well beyond 2050. So, for example, China would need to bring forward its net zero target from 2060 to 2050, and India from 2070 to 2060.
Source: Energy Transition Outlook 2022
This variation by country is dictated by the ability of certain regions to go faster based on where they are on the journey to decarbonization; their access to the technology needed to make it happen; and the availability of financial resources. And it is affordable. So, while there are higher upfront costs of additional renewables, early retirement of fossil plants and significant investments in Carbon Capture, Utilization and storage (CCUS), the savings from energy efficiency measures and the lower cost of most renewables, means that just 2.1% of global GDP will be spent on energy in 2050 compared to 3.4% today.
This is also part of the “Just Transition” debate, in which historical emissions have largely been generated by the wealthy north, but the climate impacts are being faced most by the developing south. For example, Europe, while emitting just 9% of global CO2 emission in 2020, has total accumulated emissions since 1750 of around 23% (Global Carbon Project, 2022). The topics of Loss & Damage (the climate impacts already felt today by the developing world and largely caused by the developed nations) along with the finance flows, are likely to be the topic of hot debate at COP27.
The policy toolbox: what actions can governments take?
On policy, there are a range of mechanisms that can facilitate a transition. They each come with either incentives or penalties, and these vary by market. DNV identified 12 areas that break down into three broad areas: Innovation, Standards and Demand-side signals:
- Innovation. Technology cost reduction through innovation funding is present in many countries to close the gap with conventional technologies. But the challenge is to create a regulatory landscape that converts the innovations into significant roll-out. To take renewables, as an example, the biggest barrier appears to be permitting, something policy measures can really help.
• So, for example, while the EU has stipulated “go-to-zones” to enable faster permitting of wind and solar, the actual action needs to be at the country and municipality level to unlock this barrier and make it go faster.
• We have good examples in Germany, which has stipulated that 2% of land must be set aside for onshore wind. But more nations need these policies in place to enable that innovation policy to deployment on the ground. - On Standards – these are important as they drive the expectation of what is needed, particularly in such areas as EE, pollution, waste.
- On the Demand side. A good example of mechanisms are carbon pricing schemes in the form of carbon taxes or Emissions Trading Systems (such as the EU ETS). But these mechanisms cover just 23% of global emissions and mainly cover large polluters. Policymakers in more regions need to look at setting these demand signals to help reduce CO2 faster, and the carbon price needs to be much higher.
Policy factors included in our Energy Transition Outlook
Source: Energy Transition Outlook 2022
In summary:
- Countries have a huge responsibility to create the regulatory environment to move their energy transition faster; but it is not happening anywhere in the world, and not at nearly enough speed to be aligned with the Paris commitments.
- To achieve the 1.5 °C, some regions will need to go much faster than others and demonstrate the kind of leadership needed to shift other countries along with them.
- The policy toolkit is extensive but requires the type of foresight and bold commitment from policymakers who can look beyond the re-election cycles to the wider needs of the planet and humanity.
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