Thoughts on IEA's recent Net Zero by 2050 Report

When Aristotle sat down to pen his philosophy of Rhetoric more than two millennia ago in Athens, he based his dialectic on three precepts: Ethos, Pathos and Logos. Understood simply, for a rhetoric to hit home – and I am using the term ‘rhetoric’ here in its mature nonpejorative Aristotlean sense – it should be launched from a position of exalted, blameless authority (Ethos); should appeal to the base, underlying emotion(s) of the targeted audience (Pathos); and should, at a minimum, be able to stand on a sturdy platform stilted on a sensible bedrock of reason (Logos).

The International Energy Agency ‘s (IEA) Net Zero by 2050 Report, published a few weeks ago in Paris, is a superb exposition of the art of rhetoric, scoring heavily in the departments of Ethos and Pathos – especially Pathos – and, as it were, putting the proverbial kitty cat among the climate-change-denying pigeons, some of whose alive and kicking fringe varieties would give the Titanic’s valiant violinists a run for their last laborious gasps of breath on any not-so-frigid, once there used to be icebergs here North Atlantic night any day of April.

An institution of five decades’ standing, mothered (or fathered, if you please) by Austria, Belgium, Canada, Denmark, Germany, Ireland, Italy, Japan, Luxembourg, The Netherlands, Norway, Spain, Sweden, Switzerland, Turkey, United Kingdom, and the United States- a grouping that was the proto version of today’s OECD, backed today by thirty of the world’s richest economies and with a hotline to most, if not all, of the 195 or so energy ministers on the globe, the IEA is as blue-blooded in the department of Ethos as they come.

And what of the report’s Pathos? For an organization that was founded in the immediate aftermath of the 1973-74 Oil Crisis to act as an international forum for cooperation to exert stabilizing influence on the global energy markets and ensure uninterrupted Oil supplies to its member nations, to suddenly declare in the June month of the year 2021 that for the world to achieve Net Zero by 2050 all new Oil & Gas exploration and production worldwide must stop immediately is as radical and definitive a statement of intent (or departure) as you are ever going to see or read even in these times of extreme polarities and the giant no man lands where specimens of the now-extinct species called the ‘Centrists’ once used to roam and rear. Humm. A product of Oil. A forum of cooperation for rich Oil-consuming nations against future oil shocks. An organization steeped in the Oil-fuelled post-Vietnam-War history of this world with a storied history of interventions via its emergency response mechanism into the post-1991-Gulf-War, the post-2005-Hurricane-Katrina and the post-2011-Libyan-Crisis worlds. For such a steeped-in-Oil organization to suddenly, in the Year of Our Lord 2021, call for an immediate stop to all new investments in Oil and Gas is Pathos indeed. Not Cicero, not Lincoln, nor Dr. Martin Luther King Jr. could have bettered that in the hey day of their polemic.

Consider some of the following key planks of the Report that positions itself as “the world’s first comprehensive study of how to transition to a net-zero energy system by 2050 while ensuring stable and affordable energy supplies, providing universal energy access, and enabling robust economic growth….. and economically productive pathway” to a “resilient energy economy dominated by renewables like solar and wind instead of fossil fuels.”:

-         the world must pledge an immediate cessation of all new coal and oil and gas exploration and production projects, as noted above;

-         60% of the vehicles sold in 2030 must be EVs (this figure should grow to 100% by 2035);

-         The world’s annual power demand in 2050 must fall by circa, 30% from its present levels;

-         Solar and Wind annual additions must reach 630 gigawatts and 390 gigawatts, respectively, by 2030 (four‐times the levels achieved in 2020);

-         The world’s power producing utilities must all become zero-emission by 2040;

-         Annual clean energy investment worldwide must triple to circa, $4 trillion by 2030 (total energy investment required by 2030 circa, $5 trillion);

Many of the green bleeders have understandably gone giddy. Op-eds in most leading dailies – including, surprisingly, even those in China – have hailed the report as an epoch-making event. I certainly feel its pull and am quite sure that I am not the only one to feel this way, for when all’s said and done, the world’s planners do latch on to whatever comes out of the IEA’s iconic arched façade in Rue de la Fédération, Paris. Truth be told, unless one has grown up believing the Greek pessimism inherent in Shakespeare’s King Lear to be the essential human condition of this world, it would be hard not to be taken in by the sheer audacity of the optimism characteristic of the Report. Section by data-filled section, it lays out a road map of what and when, thereby sending out a veritable call to arms to the world’s governments that the time for climate action is now and that the window to achieving the COP 21 goal of limiting net global temperature rise to within 1.5°C of the pre-industrialization temperature is very narrow and tricky.

That acknowledged, there are many tricky assumptions / facets to the Report that lend themselves more to the hallucinogenic mid night goings-on of A Midsummer Night’s Dream than the gritty, choke cough realities of the modern, fossil fuel powered world, thereby stretching its 'Logos'.

A key plank of the report is the assumption that whilst the global GDP will be 40% higher in 2030 than in 2020, the corresponding energy usage will be 7% lower than what it is today! This is on the back of the assumption that rapid energy efficiency improvements with an annual run rate of 4% through to 2030 shall be made to bear on this world, besting human ingenuity’s last two decades’ average annual efficiency improvement growth rate three times over. Projected out 20 years from 2030, this would mean a 2050 world with an economy that would use up to 30% less energy than it did in 2020. Even accounting for gravity defying advancements in energy usage efficiencies in the developed world, one wonders how it will all come off in the net aggregate, given that per capita electricity consumption in the developing world is still orders of magnitude smaller than what it is in the OECD, and that this emerging market power consumption will have to go higher and higher in the near to the mid-team future if the quality of lives of the people in these countries has to be improved and the United Nations’ Sustainable Development Goals (SDG) met (those 800 million or more who burn thick smoke spewing biomass today to cook their meals need to be transitioned to cleaner sources of fuel and, sure enough, in due course they too will require electricity to power their smart phones and make their ceiling fans go round). And that is before we start talking about the 1.8 billion net new human beings that are slated to get added into this world from now up to 2050 with their attendant electricity demands. I do not want to make this write up excessively data heavy but suffice it would to say that all these existing and new denizens of the developing world will require trillions of new kilowatt hours of electricity to raise their standards of living. It can be assumed safely that for the multitude of their rulers and governors, fossil fuels will continue to present the cheapest sources of energy to do so, at least in the short to the medium term, (more about this in the forthcoming paragraphs) and that a lot – if not all – of the attendant energy usage efficiency escalation in these regions will lag that in the developed world, at least for the next few decades. I do not want to confound this energy demand growth analysis further by pointing out the obvious, but those living in the developed world too are finding yet newer ways of consuming more and more electricity (as the Bitcoiners that burn up the equivalent of the entire year’s energy bill of Netherlands in mining the elusive Bitcoins would sheepishly attest to, and to think that a mere ten years ago our world wasn’t even alive to the possibility of such a new use of electricity!) and will continue to do so even as the developed - and, increasingly, the developing world’s, too - world’s cumulative archive of captured data continues to burgeon forth, adding trillions of teraflops of archival material every day to the energy-guzzling data and server farms of the Amazons, the Alibabas, the Baidus, the Pinduoduos, the Microsofts, the Facebooks and the Alphabets of this rapidly digitalizing world.

The world today relies on fossil fuels for 85% of its energy demand. The Report proposes to bring this down to 25% by 2050, Solar, Wind, Nuclear and Hydro making up the balance 75%. Much as I admire the pathos behind this I am gonna throw the kitchen sink at it spirit inherent in the Report, it beggars belief that a rapidly reopening post-pandemic world that is already, by and large, seeing its economic activity recapture the highs of 2019 on the back of an easy availability of fossil fuels, and that will have to continue to be on a rapid GDP-growth trajectory at least for the next decade in order to be able to service the enormous debt piles run up in the last one year in emergency pandemic support measures, would willingly inflict a haemorrhaging by a thousand cuts upon itself by refusing to use what’s already there – and cheaply so - and instead wait for the proverbial solar and wind chickens to come home to roost.

One need only look at the rapidity with which the rich world (and China) in the last few months has already burnt through the gargantuan strategic oil reserve top-outs they had greedily built-up last year when for a few days in July, Oil was going down the drain for free: the OECD reserves are now at their historic lows and will soon have to start getting replenished. That, among many other reasons, is why the Brent Crude managed to regain the $75 mark earlier this week and why the members of the OPEC feel sanguine that they will be able to roll back the 500,000 barrel production cut they had inflicted upon themselves last August in a bid to shore up the Oil price (they no doubt draw a lot of comfort, too, from the model behaviour the perennial infant terribles of the Oil industry – the Shale guys – have exhibited so far this year, focusing on shareholder return rather than rig counts which in North America remain lower than 500 today as compared to over 1000 back in 2018-19).

Now imagine a thought experiment in which the oil producers, following the suggestion in the Report, were to stop all new projects of exploration and production. Knowing therefore that the stocks they hold in their wells are imminently finite, and also realizing that the alternatives to Oil will take years to take them over, what stops them from turning the taps tighter, inflicting an artificial scarcity on the unsuspecting world and setting the Oil prices soaring, precisely at a time when the world’s economies ought to be clocking in GDP growth rates that are meaningfully higher than the interest rates they are required to serve on the debt piles they have run up due to Covid-19 (interest rates that will start inching up as early as 2023 in which year the US FED – as recently announced - will start tapering down its bond buying program)? A $200/Bbl Oil will inflict an incalculably bigger – and potentially irreversible – harm on the global economy than the Covid-19 viruses could have ever conceived. 

But how much dent can the rich world really make to the hydrocarbon economy? Three decades ago, the combined GDPs of the G7 nations accounted for almost 70% of the global GDP. Today, that figure has whittled down to 45%. Whilst a majority of the carbon dioxide and methane concentrations in the atmosphere can be traced back to the historic industrial activity of the rich world, it is nevertheless a fact that today the G7 nations and their close-run western contemporaries account only for circa, 30% of the annual global emissions. Obviously then, the ‘Critical Pathway’ to decarbonization of the global economy lies in the non-G7 world that, on the evidence on hand, is decades – and not years – away from weaning itself away from fossil fuels. Take China. It recently pledged to become Net Zero by 2060. Yet, it is also equally true that China added over 20 GW of new Coal-based electricity plants (net new additions) to its energy complex in 2020 when most of the world was still under a lock down. I hasten to add here that the same China is also building some 180 new nuclear power plants that score heavily in the credit column of the new green deal proposed by the Report; but still, the fact that some regional governments in China still find it worthwhile to keep Coal in their energy mix, driven no doubt by the cost-of-energy considerations among others, is not going to be lost on the many other developing economy governments in the region and elsewhere along the Belt and the Road who are determined – and rightly so – to uplift the standards of living of their citizens.

As invariably happens in almost all fossil fuel related debates, the discussion soon veers towards the much-hated global transport sector and the fossil fuels it burns. Let’s take the tradition forward in this analysis. The world produced as estimated 78 million vehicles in 2020, admittedly, a little lower than the 90 million cars made in 2019. However, proponents of the theory that people in the post-Covid world will increasingly choose to work from home and that therefore the total annual output of automobiles will go down, as happened in 2020, perhaps overstate their hand, for if the evidence on hand of what’s happening with the second hand car sales in the United States – there’s a mad rush currently on to buy second hand cars triggered by work-from-home people’s pent up need to go on ‘Revenge Tourism’ and thereby show Covid-19 their proverbial middle finger at a time when a lot of the new car production capacity in the Western world is idling due to the paucity of electronic chips – is anything to go by, there will be a class of people who from here on will choose to vote on the security and the hygiene of their own personal transport than take a chance on the dodgy atmosphere inside a public transport bus or train, for their tourism and leisure travel needs, thereby balancing out the equation for the automobile industry as a whole. But these are first world problems. There’s another world out there. At the moment of writing, an estimated 1.4 Billion cars and commercial vehicles ply the world’s roads. In the twenty years from 1976 to 1996, the world went from 342 million to 670 million vehicles. Force fitting that trend twenty years out from now, I expect to hear the background bass of some 3 billion vehicles crawling a gridlocked planet, come 2040. China has already overtaken the US as the world’s biggest car market by units sold. However, its per-capita car penetration is till significantly smaller than that in the US. The 1.3 billion Chinese would sure want a car each, one day or the other. India’s burgeoning middle class, too, has aspirations for car ownership and we haven’t even begun to talk about the 1.2 billion unborn Africans that will open their eyes to the big blue skies between now and 2050 (an additional 700 million will do so in Asia, many of them in India). The world’s total electric car stock stood at 7 million units in 2019. It seems a daunting climb from there to the 3 billion mark by 2040, for even assuming a levelized run rate of 100 million EVs per year (a statistical impossibility unless you factor in gargantuan theoretical production rates of 300-400 million EVs per year starting 2035 and decide to turn a blind eye to vexing supply-side calculus of copper, nickel, lithium and the rare earths’ prices – ores of which are concentrated either in far flung places such as Chile, Peru and Bolivia, or in ethnically-disturbed jurisdictions such as the Democratic Republic of Congo, or in increasingly geopolitically polarizing nations such as China and Australia – and the oxymoronish, Report-led-production-cessation triggered shortages of crude-oil based paints and coating that will be required to paint the EVs red, black and blue) from now till 2040, such a prodigious output would still leave 1 billion petrol / diesel guzzling vehicles plying the roads that year in the distant future. To think that the emission outputs from the transportation sector together comprise just 27% of the total is already beginning to have a dampening effect on my spirits as I contemplate what to write next.

And with this, I come to the nub of the matter.

The Report calls for massive, unheard of investment numbers for the world to transition from its current, fossil-fuel-based order to one which will be required for a Net Zero by 2050. It stipulates US$ 5 Trillion in annual energy investments by 2030, apportioning some $4 Trillion of it to renewables or renewables-related upgradations and grid enhancements. If sustained at this rate, the estimated investment capital required over the next twenty years starting 2030 would be some $80 Trillion. This is at a sharp divergence from the $33 Trillion projected by IRENA- the International Renewable Energy Agency, as the cumulative renewables investment capital required in its pathway to a net 1.5° C increase in the global temperature by 2050. $80 Trillion or $33 Trillion, these are massive numbers. Where will all this money come from? And how will some of it be channelled into the regions / areas where it will be needed the most? The Report, and frankly, even IRENA, don’t have a lot to offer on this front.

Before the now famous COP (Conference Of Parties) 21 meeting in Paris in 2015 that has gone down the annals of history as the conference at which the decision to adopt the Paris Agreement to limit the rise in global temperatures to 1.5° C was taken, there had been another conference, the COP 15 (or the 5th Meeting of Parties to the Kyoto Protocol of 1997 for those who are academically inclined) of Copenhagen of December 2009 in which the paucity of action by the world’s rich nations on reducing emissions led to a threat by the participating developing nations’ representatives to walk out. Their demand was a major promise of funding to help them cope with climate impacts and to do the work of reducing or avoiding emissions. In response, developed nations committed to provide “scaled up, new and additional, predictable and adequate funding” to meet “a goal of mobilizing jointly US$100 billion per year by 2020 to address the needs of developing countries”.

In the event, 2020 came and went and the world is none the wiser on what happened to the above pledge. Part of the problem of course is that there is no accepted framework under the United Nations Framework Convention on Climate Change (UNFCCC) to account for what counts as climate finance and what does not. As a result, whilst the OECD, in a report published in 2020, claimed to have already contributed some $78.9 Billion in annual climate funding, the said figures have been summarily rejected by developing country representatives. The following table, taken from an article published in Vol 11 of Nature’s March 2021 edition (pp180-182) is symptomatic of the mistrust at hand:

As can be seen from the above, against OECD’s estimate climate finance contribution figure of circa, $38 Billion for 2013, the Indian Finance Ministry’s estimate stands at only $2.2 Billion! Now try to begin to imagine these figures in trillions of dollars.

Three issues plague the believability of the contribution made by the rich world to supporting climate change prevention initiatives in the developing world. The first is simply that the rich countries count everything – grants, loans, insurance, and so on – at its face value as contribution towards the $100 Billion by 2020 goal. So, a project finance loan that will have to be begun to be repaid by the ‘beneficiary’ after a certain stage of project development to the lending institution together with interest is being counted at the same face value as a grant! Second, the contributing rich nations – and they all use different methodologies for categorization – get to choose how much of a project they are funding gets categorized as either ‘principally’ or ‘significantly’ climate-related. Western-backed multilateral financial institutions such as the World Bank are using their own disparate methodologies to categorize climate investments as countable or otherwise toward the $100 Billion goal set in COP 15. Lastly, there’s the long-standing issue of whether the funds being pledged or made available under the ambit of the COP 15 proceedings are ‘new’ or simply readjustments from the account books of the pre-COP 15 development assistance.

An issue that was already fraught in the pre-COVID world is now set to burn aglow come the COP 26 in Glasgow later this year. For, with all those trillions of Dollars, Pounds and Euros printed to help their economies out of the morass of the pandemic, and most of them likely to linger on in the liability section of the rich nations’ balance sheets for many decades to come, what sort of cosmic karma would be needed to convince the rich world to look beyond the realities of their own civilizational prerogatives and political realities and dish a sliver of cash out to the developing world and, thereby, come good on the climate pledge? If you, like me, have been following the cacophony of vaccine protectionism (patriotism) and each one for themselves of the last many months, you would, hopefully, forgive me for being a votary of King Lear’s pessimism.