Carbon Free Fossil Fuels

Setting the Scene

Among UN’s Sustainable Development Goals, Goal 7 and Goal 13, namely “Affordable and Clean Energy” and “Climate Action”, are among the most discussed ones, if not the most discussed two.

Goal 7 of “Affordable and Clean Energy has ambitious targets of ensuring universal access to affordable, reliable and modern energy services by 2030 to majority of globe, increasing substantially the share of renewable energy in the global energy mix , doubling the global rate of improvement in energy efficiency. Furthermore, it clearly mentions that international cooperation is vital to facilitate access to clean energy research and technology, and investments in energy infrastructure and clean energy technology for all in developing countries, in particular least developed countries, small island developing States, and land-locked developing countries, in accordance with their respective programmes of support.

Additionally, Goal 13 focuses on Climate Change and fight with it by 2030. On the contrary of the common belief, Goal 13 is a lot more about how to prepare the nations for the consequences of the climate change, which is known as climate change adaptation in the literature, rather than just reducing the carbon emissions into atmosphere. Some of the most important targets for Goal 13 could be summarized as strengthening resilience and adaptive capacity to climate-related hazards and natural disasters in all countries,integrate climate change measures into national policies, strategies and planning improving education, awareness-raising on climate change mitigation, adaptation, impact reduction and early warning, implementing the commitment undertaken by developed-country parties to the United Nations Framework Convention on Climate Change to a goal of mobilizing jointly $100 billion annually by 2020 from all sources to address the needs of developing countries in the context of meaningful mitigation actions and transparency on implementation and fully operationalize the Green Climate Fund through its capitalization as soon as possible.

Most of the time, these two goals are presented in a vicious cycle, more of in the context of chicken-egg problem. Not to diminish their respective importance in the problem solution towards a sustainable future, yet, people seem to miss how these two are directly correlated to Goal 10, which is about reducing inequalities globally by 2030. One of the most vital targets of Goal 10 is about improving income of bottom 40% in developing countries more rapidly than rest of the world.

So how do you really cut emissions, run the world on renewable energy, protect the world for our grandkids, yet provide income, wealth, higher living standards and many more to the bottom 40%? Taking a step back, what is even sustainability? Is it the global warming, is it providing electricity for the first time to a family, live on $2/month?

I am particularly passionate about the intersection between abovementioned goals for Climate Change, Affordable and Clean Energy and Reduced Inequalities. Having worked both for the allegedly good side in “climate change consulting” and allegedly “bad side” of oil and gas folks, I came to conclusion that using developed world lenses to zoom into climate change/global warming issues will lead to even bigger wicked problems in the near future, if more holistic approach is not forced on different stakeholders in very different parts of UN goals. Sustainability means different things for different parts of the world. On one hand, it is about saving the world for our grandchildren, on the other hand, it is about providing wealth and health to developing world to reduce the inequalities.

Setting the scene on these three important SDG goals, I would like to draw your attention now to the bad guys in the room. We all know who they are… The majors(Shell, XoM, BP, Chevron). Recently, all of them, have done some big pledges to fight climate change. Shell is being the most vocal out of all the majors also did some internal strategy alignment work towards those pledges.

Building on the important pledges both publicly, as well as at Paris Agreement meetings, Shell announced couple important steps towards the vision. First, they announced the Net Carbon Footprint ambition. Accordingly with this ambition, Shell aims to reduce the net carbon footprint of our energy products, in step with society, by around 20% by 2035 and 50% by 2050. Secondly, it announced supporting the major CDP project at global level. Furthermore, RDS launched Nature Based Solutions project, which has huge potential to change the way oil and gas business works and how it impacts the climate change.

The reality is that to achieve the 2035 target to reduce the Net Carbon Footprint of fossil fuel products by 20% will predominately be a portfolio game – relying on increased proportion of gas and new energies projects in any portfolio as well as potentially deploying Nature Based Solutions (offsets) and/or Carbon Capture and Storage to offset or reduce Scope 3 emissions from ‘use’ of the products. To achieve the above -mentioned ambition, it is believed that biggest emissions reductions will be achieved through NBS products and electric mobility.

But what is really Nature Based Solutions(NBS)?

Nature-based solutions, or natural climate solutions, are projects which protect, transform or restore land. In this way, nature absorbs more CO2 emissions from the atmosphere. Such activities can lead to the marketing, trading and sale of carbon credits. Each credit represents the avoidance or removal of greenhouse gases equivalent to 1 tonne of CO2.Such projects have the potential to provide over a third of the cost-effective climate mitigation needed between now and 2030 to stabilise warming to below 2°C, according to leading academics and non-governmental organisations. Such projects also have extra benefits such as offering alternative sources of income to local communities, improving soil productivity, cleaning air and water, and maintaining biodiversity. We are also supporting nature-based solutions and plan to invest up to $300 million over the next three years, between 2019 and 2021. Just to give couple of examples, Shell already started one of the most important forestration projects in Kenya, with projects planned in Spain, UK and the Netherlands to follow.

In the Netherlands, Shell and Staatsbosbeheer, the Dutch National Forestry Department, will plant more than 5 million trees over the next decade. In Spain, Shell is collaborating with Land Life Company on a 300 hectare reforestation project in Spain: around 300,000 TREES will be planted by the end of 2019.

How the business model is evolving thanks to NBS?

From an NBS perspective, a great example worked well for Shell is the Carbon Free Driving project. Shell launched pilot projects in the Netherlands, which are called as “bundled products” as those NBS credits with products we sell, to provide “decarbonized” products. This will be done at no extra cost for customers who choose Shell V-Power petrol or diesel, while those who fill up with regular Shell petrol or diesel can participate for an additional 1 cent a litre. Shell buys these credits – each of which is subject to a third- party verification process – from a portfolio of nature-based projects.  It is also providing this service to companies like Accenture, for example – with a lot of interest in the market.

It is a well known fact that in traditional fossil fuel chain, especially in natural gas chain, majority of the carbon emissions come from Scope 3 emissions rather than Scope 1 and Scope 2. In terms of proportion of GHG emissions along a typical LNG value chain would have the following approximate split:

• Upstream: 3-5%
• LNG Plant: 10-12%
• Shipping: 3%
• Regas and transport to end user: 1%
• End user i.e. combustion in power plant: 80%-85%

 

Given scope of work for the majors, one could argue that has direct control of upstream, processing, shipping and regas/transport to end user of the chain, which translates to a traditional oil and gas company to control up to 20% of the value chain.

 

So who really bears the cost? Customer or producer??

 

As mentioned earlier, if you are only producing 20% of any work, would you claim that you are the sole responsible of it? Not really right? So how can we make sure the responsibility is somehow shared between all parties without creating any scapegoats? Furthermore, how can we secure the fight against climate change is on the right and fast track? Elaborating on that point, for majority of the end customers, such as power plants and industrial players, there is no regulatory or market pressure to switch to cleaner products, except the ones in Europe and some parts of US, so how do we ascertain the right incentives are put place for initial phase.

 

Drawing from retail pilot experience from Shell, it could be argued ideally that a producer can offer subsidies fully in its Scope 1 and 2 emissions, if customer is paying their Scope 3 emissions through NBS offset VER credits. This has three foreseen benefits; help fossil fuel with external image on leading the energy transition at marginally low costs, as subsidies provided to customers to offset our Scope 1 and 2 emissions come at lower costs than profit could be made by selling NBS credits to offset customers’ Scope 3 emissions  ,encourage more customers to experiment with carbon credits, and thirdly create public pressure on industry and power players to pay for their parts through public and marketing campaigns so create more demand for sustainable energy business. Moreover, there is a great argument to be made for commercial incentivization. Instead of talking a lot about the stick, this could shift the direction of the discussion towards the carrots. The carrots for the fossil fuel producers, businesses who use the gas and ultimately the customers, who will benefit from internalizing the externalities.

 

Surely, as big as the opportunities, so as the risks. One of the major risks is “shifting the responsibility” without really tackling the real issue at hand. Given that bundled products would focus on Scope 1 and Scope 2 emissions to incentivize customers without putting them off about the emission costs, it might lead to forgetting all together about Scope 3 emissions, if scale could be achieved in this method. Building on the scale point, the supply chain relies heavily upon the idea that nature-based solutions could be scaled up fast enough and sustainably enough that they will be able to cover real costs of emissions thanks to ever increasing fossil fuel demand.

 

Climate change is real, there is no question to it, even though we were not responsible for it, rather inherited a bad hand from our grandparents and parents. Yet, it is within our responsibility to tackle it in the most inclusive and sustainable way without ignoring the real needs and costs for societies at large, without disrupting the way capital markets work, the way companies work. Because, the successful outcome will be achieved only, if multi layered stakeholders could be coordinated rather than the environmentalist bubble talking to each other and wining about the situation without taking any real step towards future.