Thoughts on the conclusion of COP27

Coverage of the most recent climate conference, COP27, tended to emphasize two outcomes. First, participants agreed that they will continue to seek to limit temperature rises to no more than 1.5 °C. Second, they agreed to establish a loss and damage fund to compensate vulnerable countries when they suffer from climate-related disasters. 

But from my perspective, another important item is what didn’t happen: oil and gas survived, at least for now. The United States called for phasing down all fossil fuel projects with unchecked emissions, and a group of others, including India and the European Union, wanted to go further. But the issue is far from settled. Indeed, UN climate chief Simon Stiell noted the existence of “political signals that indicate a phase down of all fossil fuels is happening.” Maybe next year.

Would that be a good thing? Or not? Well, it depends—specifically on how and when. In general, as I have written before, I believe that there is an ongoing and welcome transition toward cleaner forms of energy. But I also believe that the transition needs to be gradual and sensible.

Consider: about 80 percent of global primary demand comes from fossil fuels, and more than 98 percent of vehicles on the road run on oil. Shutting all this down abruptly, particularly given that demand for electricity could triple by 2050, would be disastrous.

Right now, for example, Europe is entering the winter concerned about whether there will be enough power and if so, how much households will have to pay to stay warm. That uncertainty is a lesson in the virtue of energy resiliency—and in the value of diversified sources. And while Germany called for a fossil-fuels phase down at COP27, just a week later, it also signed a 15-year deal gas deal with Qatar—an indication that it, too, doesn’t want to move too fast.

When it comes to energy, the challenge is to make progress on decarbonization, while also ensuring access, affordability, and reliability. It’s a balancing act.  I am not convinced that many climate activists see the transition this way. Yeb Sano of Greenpeace, for example, argued that “the fossil fuel age must be brought to a rapid end” and that COP27 didn’t go nearly far enough, instead pushing “the pedal to the metal on the highway to climate hell.”

I see it differently; this is a long highway, and COP27 was right not to try to force the world to race down it without brakes. In addition, this is a highway that the industry itself must travel. Clearly, the pressure on fossil fuels is growing, and O&G players need to demonstrate that they are part of the solution.

There has been progress. Europe’s biggest producers—Total, Shell and bp—are on track to be net-zero producers by 2050; they are also reducing lifecycle emissions for their products. Saudi Aramco wants to be net zero in operations by 2050. Among the big American producers, ExxonMobil has made becoming a leader in low-carbon solutions a part of its core strategy, and is investing billions in carbon capture and emissions reductions; indeed, it reached its 2025 targets in 2021. Chevron has improved its carbon intensity throughout its operations and cut emissions by 10 percent from 2017-21. And so on.

There is also a practical environmental reason for not pushing O&G companies into rapid oblivion. And that is because they are the ones who are in best position to make the breakthroughs on hydrogen and carbon capture that are important elements in almost all the pathways to 1.5 degrees.) Or at least close to 1.5. The Economist, for one, doesn’t see this target as feasible any more, and  many scientists agree. Even to stay under 2 degrees, I don’t see how we get there without the O&G industry’s money and expertise. For example, McKinsey estimates there is a $460 billion investment gap for hydrogen by 2030; cripple the O&G industry, and that balloons.

And there is a real-life example that illustrates the point. In 2005, coal accounted for almost half of US electricity generation. Now, that is down to just 22 percent. The biggest single reason was the development of natural-gas shale resources: cleaner, cheaper gas displaced coal. That had a huge effect on US emissions, which have declined since then, and on air quality, which has improved—and it was thanks to innovation from O&G producers.

I get it. For some, the industry is simply anathema, preferring, as the saying goes, to “keep it in the ground.” But the industry itself gets it, just differently. Houston, for example, has big plans to become a hydrogen hub and is developing a long-term strategy to transition into a leader of low-carbon energy (I am involved with the latter).

In fact, another takeaway from COP27 is just how invested the private sector is in dealing with climate change. There is good reason for that: demand for net-zero offerings could generate more than $12 trillion of annual sales by 2030, and the effort could result in  the largest capital allocation in history. Climate change is going to be one of the central organizing principles of the global economy.  So it made sense that business people at COP27 were embedded in discussions on investment risk, finance, carbon markets, and standard-setting. That is a big and positive change from most previous conferences, as was the emphasis on practicalities.

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There are still many questions coming out of COP27. How will the impact fund be run? Who will fill it? Indeed, will it be filled? (Previous, similar promises have not been met.) Should the 1.5 degree target be updated? How can natural climate solutions be scaled up?

There are many more. And that makes sense: because when it comes to dealing with climate change, there are indeed more questions than answers.  

All views are mine and not those of McKinsey & Company or of the Greater Houston Partnership.