Climate commitments to top energy agendas in 2021

Last year, 2020, climate change became a dominant force for commodities. In response, a slew of companies and governments made ambitious net zero commitments. Renewables grew in importance in some oil and gas companies’ portfolios. Carbon pricing accelerated, with prices for emissions allowances under the EU Emissions Trading Scheme and Western Climate Initiative reaching record highs. This momentum is likely to increase in 2021 as emitters act on plans to meet their climate targets.

So, what are the biggest emissions trends to watch this year? James Whiteside, Wood Mackenzie Global Head of Multi-Commodity Research, and Amy Bowe, Wood Mackenzie Head of Carbon Research, see five key themes:

• Government climate commitments will increase ahead of COP26.
• Technology developments will help reduce emissions from metals extraction and oil and gas production.
• TCFD (Task Force on Climate-Related Financial Disclosures) reporting will become a requirement for a broader range of companies.
• Commodities will increasingly be marketed on their green credentials.
• Energy companies will continue to lead the way in divestment and diversification to manage emissions risk.

‘The 2015 Paris Agreement required signatories to commit to strengthened national climate targets every five years. From the first round of targets submitted last year, significant emitters such as the UK, EU and Canada made pledges to hit net zero emissions by mid-century. These jurisdictions will roll out policy to achieve these objectives in 2021,’ comments Bowe. ‘The world will be watching to see which other countries pick up the mantle. China, India, South Africa, Saudi Arabia and India are among those yet to make submissions, though both China and India have indicated they intend to largely renew existing 2030 commitments.’

Bowe continues: ‘In particular, all eyes will be on China’s targets for new coal power capacity after the country announced its aim to be carbon neutral by 2060. In addition, President Joe Biden’s pledge to re-join the Paris Agreement and enshrine a 2050 net zero goal will be another step forward in climate ambitions in 2021.’

Oil and gas producers are expected to continue to reduce operational emissions, with a focus on immediate wins such as methane leakage and reducing venting and flaring. As part of the Oil and Gas Methane Partnership, many of the world’s biggest national oil companies (NOCs), international oil companies (IOCs) and majors agreed to new methane reduction targets in late-2020 – reducing methane emissions by 45% by 2025 and by 60% by 2030 (relative to 2015 levels) – alongside more stringent reporting measures. Meeting these targets could reduce methane emissions from 13% of total upstream emissions to less than 5% by 2030, says Wood Mackenzie.

‘We expect more oil and gas producers to set their own methane reduction targets, expand methane reporting in their sustainability reports, and roll out methane monitoring and reduction technologies. We also expect routine flaring to decrease across the world, particularly in the US,’ says Bowe. ‘The Biden administration is likely to strengthen regulations regarding emissions management from the oil and gas sector. If all producing US fields were to completely stop flaring by 2022, this would reduce American upstream emissions by 13% and result in an absolute emissions reduction roughly equivalent to Norway’s total upstream emissions. However, considerable structural barriers remain, including infrastructure constraints, weak gas prices and a lack of domestic or export markets in many countries.’

Since the Task Force for Climate-Related Financial Disclosures (TCFD) guidelines were released in 2017, nearly 1,500 organisations have signed up to support them, with natural resources companies among the vanguard. Of the eight sectors reviewed by the TCFD in its 2020 status report, the energy industry had the highest level of disclosure aligned with TCFD guidelines, averaging 40% across all categories.

While still voluntary in most jurisdictions, there is a growing movement to mandate TCFD disclosure for listed companies. Wood Mackenzie expects the number of regulatory authorities mandating climate-related disclosures to increase, with many of those specifically endorsing TCFD guidelines.

‘Details of the EU’s expected carbon border tax, set to be announced in June, will likely favour imports of lower emissions-intensity products for covered sectors, and contribute to the green credentials revolution,’ notes Bowe. ‘Additionally, all climate bills before the US Congress currently include some form of carbon border adjustment mechanism. If these measures were to pass, other economies will undoubtedly look to implement similar mechanisms in response.’

As commodities increasingly compete based on emissions intensity, producers will begin to realise a price premium for green commodities. Wood Mackenzie’s emissions data suggests there is a wide range of emissions intensities associated with LNG, as well as other oil and gas products. Ensuring these differences are accurately captured will spur demand for emissions verification and certification.

‘We expect to see more portfolio adjustments to meet climate targets, especially among major energy companies. To date, moves have been motivated by reducing absolute Scope 1 emissions, but Scope 3 intensity is likely to grow in focus as more companies set carbon neutrality targets. Oil and gas majors… will continue to divest the most emissions-intensive assets to bring down Scope 1 emissions… BP could divest its Australian portfolio including high-intensity LNG assets,’ comments Whiteside. 

While many countries have incorporated green growth strategies in coronavirus recovery packages, the pursuit of economic growth has come at the expense of emissions for some. Chinese have focused on investments in infrastructure, boosting demand for steel, aluminium and other metals.

‘If government stimulus packages need to be sustained in 2021, this could again be focused on carbon-intensive infrastructure investment. Many nations will be desperate to kick-start their economies regardless of the impact on emissions or Paris Agreement goals. That said, investor pressure will not allow the largest energy producers to stray from the path they have now committed to. Even if some nations prioritise near-term economic growth over sustainable growth, there is enough momentum behind the initiatives and commitments made by other public and private stakeholders alike to drive the green agenda forward in 2021,’ concludes Whiteside.