While the outcomes and legacy of COP26 are still up to debate, the lead up to the climate summit—co-hosted by the UK and Italy—marked an unmistakeable shift in global climate ambitions. Numerous countries pledged long-term targets to reach net zero emissions and put forth a patchwork of near-term commitments to get emissions on the right track. The IEA estimates all the pledges —if they are met in full and on time — would be enough to hold the rise in global temperatures to 1.8 °C by the end of the century. It is the first time that governments have come forward with targets of sufficient ambition to hold global warming below 2 °C.
However, there is a big “if”. The IEA sees a growing divide between ambitions and reality. In our World Energy Outlook 2021 (WEO2021), we estimate that today’s concrete policy measures would only be enough to plateau energy related emissions, with only a modest decline by 2050. This trajectory would result in a warming climate by the end of the century, reaching 2.6 °C.
Beyond the climate implications of this dangerous level of warming, this disparity between ambition and implementation presents a risk of a disjointed energy transition—one that could be characterised by volatile markets, shifting energy security implications, competing interests, and stop-and-go policymaking.
The clean energy gap
The step-up in ambition is producing global signals for capital markets and investors to shift away from coal. But governments have yet to find the right market structures and incentives to attract investors to the suite of clean energy technologies needed to fill the supply gap growing in its place.
We are already seeing this impact today: energy prices are rising as the economy rebounds strongly and investments in oil and gas production have fallen in recent years to the levels roughly consistent with what is needed in our Net Zero Energy by 2050 scenario. However, clean energy investments are still insufficient: they need a four-fold ramp up four-fold by the end of this decade for the world to be on track with net zero emissions by 2050.
This gap is particularly pronounced in end-use sectors (transport, homes, industries), where influencing decisions is complicated by consumer preference and is not as cut-and-dry as a simple pay-back. Accordingly, companies and governments often focus their efforts on shifting supply, providing supports for large capital projects needed to decarbonise electricity or produce low-carbon fuels. However, without shifting the ways we use energy (e.g. consumers remaining slow to adopt electric heat pumps or retrofitting your home), we could see a bumpy transition. This is just one such risk in the shifts afoot in how we consume and produce energy. This is why it is imperative that measures pursued by governments reflect a balanced portfolio of decarbonising measures, as detailed in the IEA’s Net Zero Roadmap. Implementing these measures must move in lockstep to ensure energy security and must keep an eye on the global picture — where some countries may be surging ahead with decarbonisation while others face uneven progress against their stated goals.
The ongoing global natural gas crunch and coal shortages are being depicted by some as the first crisis of the energy transition. But the reasons behind those are different. First, we are witnessing the largest economic rebound in 80 years and this is being fuelled by energy. Second, unplanned outages at LNG liquefaction plants, upstream supply issues, unforeseen repair works, and project delays all further tightened the global gas market — we estimate nearly 30% more LNG supply was affected by outages this year as compared with 2015-2020. Third, weather: a very cold winter at the beginning of the year and low wind in October have contributed to the high gas demand in Europe.
It is important to note that clean energy transitions aren’t inherently fraught with energy security and affordability risks. Lower demand for fossil fuels reduces traditional energy security risk exposure. While the situation varies widely by country, we expect a pathway consistent with net zero by 2050 to reduce average household energy bills by nearly 10% by 2030 — largely driven by increased energy efficiency, electrification, and lower average prices for oil and gas induced by lower demand globally. Under today’s policies, household energy prices are set to rise by 15% by 2030. These cleaner, more efficient households are also more resistant to price shocks. Under price rallies similar to today’s situation, average household bill increases would be 30% less costly in the case of rapid transitions.
However, reaching these outcomes requires unequivocal and long-term policy support to increase the deployment of efficiency retrofits, especially in buildings, electric cars, low-emissions equipment and so on. Fortunately, many of the policies and technologies needed to bridge the gap are cost-effective and well-understood technologies and proven policy measures to accelerate their deployment.
The possible policies ahead
These transformations also shouldn’t be seen solely in the light of climate catastrophe and guarding against potential transition risks. They present huge commercial, industrial, and employment gains for those making the leap into the new global energy economy. If the world gets on track for net zero emissions by 2050, the cumulative market opportunity for manufacturers of wind turbines, solar panels, lithium-ion batteries, electrolysers, and fuel cells would amounts to USD 27 trillion. In a net zero pathway, these five equipment markets alone would be of comparable size to today’s oil market by mid-century, creating enormous prospects for companies that are well positioned along a growing set of global supply chains.
There are opportunities in a range of other areas, too – even in a much more electrified system, there are major openings for fuel suppliers: companies producing and delivering low-carbon gases in 2050 are handling the equivalent of almost half of today’s global natural gas market.
Governments are starting to align their decisions with their ambitions. In the wake of the pandemic, governments have mobilised 470 billion in government spending to clean energy, according to the IEA’s Sustainable Recovery Tracker, which was developed with the support of the Italian G20 Presidency. The majority of that spending is going to end-use measures and clean power. However, this total is expected to only mobilise 40% of investments the IEA highlighted in the next two years that would be needed to put the world on a net zero by 2050 trajectory, while also rebooting the global economy and creating 9 million jobs.
Much of the spending to date makes the portfolio missteps highlighted above, with governments favouring sectors that have strategic importance to the local economy, or leaning on existing clean energy programmes, leaving other critical interventions to the wayside.
More concerning, the vast majority of government spending and support is occurring in advanced economies, likely to leave emerging and developing economies at only 20% of the investment increases needed. These countries continue to face limited fiscal leeway to spin this investment up on their own.
These imbalances in government support are consistent with the IEA’s projections under state policies, which leave the world much closer to a business-as-usual trajectory than a net zero pathway. On this trajectory, we risk heading deeper into this great divide, unless there is greater global alignment on near-term pathways.
Managing imbalances between supply and demand without resorting to emissions-intensive fuels requires a fundamental transformation of how energy systems operate and how we hedge against these risks. It takes cohesive demand-side and supply-side planning, supply-side pricing models that help ensure availability amidst more uncertain fuel prices and demand, and markets and policies that seriously de-risk clean energy investment, and open the floodgates on the end-use investments we need.
This is a tall order, but we have solutions to tackle these challenges. As such, while COP26 has left us with a lingering ambition gap to get to 1.5 oC, we are at a critical milestone: global consensus on the direction of travel has never been as clear. Global signals for investors are aligned to address the fossil fuel side of the equation, but now we have the hard work ahead to set the policies and global agreements in place to solve the clean energy part. It’s possible, and in many cases it’s profitable. But it needs to happen quickly to sidestep the growing risks of sluggish progress disrupting global energy systems, and with it, losing hard-earned ground we’ve gained in the battle on global emissions.
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