Geopolitical tensions threaten global commitment to decarbonization

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As global attention remained riveted on the ongoing battle between Russia and Ukraine, the UN’s Intergovernmental Panel on Climate Change (IPCC) issued its starkest warning to this about the dangers humanity faces from our ever-changing climate.

To think of the energy in the face of the unfolding humanitarian crisis in Ukraine and amid the resulting standoff between global superpowers that the world thought had largely been left behind seems tone-deaf to the point of parody. Although this is above all and unquestionably a human tragedy, Russia’s role as a key exporter of oil and natural gas, and Ukraine’s position as a link between this oil and this gas and one of the largest consumer markets in the world underscores that this is also a conflict at least in part over energy.

The sharp and steep rise in energy prices has added to an already significant inflationary burden for most people around the world. Dated Brent crude oil prices soared to their highest levels in nearly 15 years as the world decided to divest itself of Russian hydrocarbons amid unprecedented supply, and world leaders renewed their call for more oil and gas drilling to supplement energy. short-term supply and in the name of energy security.

The change in rhetoric comes just months after the conclusion of the UN climate summit COP26 in Glasgow, where world leaders pledged to cut global emissions to meet the 1.5 degree Celsius temperature rise predicted in the Paris Agreement. While kept out of the headlines by the Russian-Ukrainian war, the release of the latest IPCC report highlights the importance of rapidly decarbonizing the entire global economy, a goal that is now increasingly questioned, at least in the short term. in the medium term at a time

COP26 in November 2021 saw significant progress made on global climate goals, but it turned out to be a deep disappointment for others. S&P Commodity Insights’ Integrated Global Energy Model – even before Russia’s invasion of Ukraine caused global energy prices to skyrocket – predicted a global temperature rise of 2.7 degrees as part of current global climate commitments (and this is even if their commitments are respected), well above the 1.5 degrees envisaged in Paris. A 2.7 degree scenario is far above the level that can be considered safe for humanity.

In the absence of a strong international regulatory framework, it is essential that we continue to decarbonise despite everything; the IPCC report makes it clear that we have no other choice if the worst predictions are to be avoided.

The question before us is really how to do it effectively. Prices are a funny thing: high prices can be bad for consumers, but they are great for producers. When it comes to energy, the surge in crude oil and gas prices – Platts Dated Brent is the marker for nearly 70% of global crude oil – will make many previously harder-to-extract energy assets more attractive. and profitable than they otherwise would be. Additionally, many of these assets will likely require more energy to extract them from the ground and refine them for use, which will significantly increase the carbon intensity of the entire company.

As the latest IPCC report shows, the planet cannot afford it, but under our current mitigation approaches within the private sector, industry certainly can. Even as energy prices have soared, global carbon prices – whether compliance programs like the European Union Emissions Trading Scheme (EU-ETS ) or voluntary programs such as the carbon credit market – have fallen sharply. Carbon markets work as a way to put a cost on greenhouse gas emissions, and the higher the cost of claiming emissions (compliance systems) or offsetting (voluntary), the more a company or an industry has a financial incentive to reduce its overall emissions.

The recent trend in carbon prices has been bullish, especially ahead of COP26, and 2021 has been a banner year. The EU-ETS has more than quadrupled from its previous high, reaching almost triple digits for the first time in early 2022. A new round of decarbonization commitments across different sectors has seen demand surge: Platts CNC, which prices nature-based credits, went from a starting price of around $4 per metric ton of carbon dioxide equivalent in mid-June to more than $16 per metric ton of carbon dioxide equivalent. here the beginning of 2022.

Emissions suddenly started to have a significant cost, making active decarbonization an attractive alternative not only for the planet but also as an economic choice. But the question that continues to beset companies is whether a drop in carbon prices – particularly if it proves to be sustainable – will affect the collective commitment to decarbonisation, even if rising commodity prices makes the cost of pollution less onerous for the potential polluter.

Carbon markets are a tool, but for them to have any hope of working they must also incentivize clean, comprehensive and responsible emissions reductions at all levels. Given the unfortunate tendency of many to underestimate the volume of emissions, they must be measured scientifically and comprehensively through carbon accounting. And we must learn to own not only the emissions for which we are directly responsible – Scope 1 and Scope 2 – but also the emissions for which we are only indirectly responsible in Scope 3. There is no danger in overestimating, but he is a significant threat to continue to undercount.

The geopolitical challenges facing the world are profound and the ripple effect they have had on the already significant increase in the cost of living for most people must remain a priority. But it is important that this current crisis does not derail the progress made so far on climate change, or strangle future progress towards short-term solutions to a much larger problem. Decarbonization must remain a priority and failing to address it now, as the window of opportunity to do so continues to shrink, will only dramatically increase the challenges we will all face in the future.

Energy transition is energy security.

Paula Van Laningham is the Global Head of Carbon at S&P Global Commodity Insights.


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