Fossil fuel supply, green growth, and unburnable carbon

DISCUSSION BRIEF
Fossil fuel supply, green growth, and unburnable carbon
Findings such as these raise questions
about the implications and wisdom of
further investments in fossil fuel supply
infrastructure. What are the long-term
emissions consequences of major new
investments in unconventional oil and
gas development, or in new coal mines
A semi-submersible oil drilling rig in the Arctic.
and ports? Who is accounting for these
consequences in financial markets or in
long-term planning, especially in countries that are increasUnburnable carbon and lock-in: two key concepts
ingly focused on green growth and Low Emissions DevelopAbsent remarkably rapid advances in CCS, any serious efment Strategies (LEDS)? And if countries move decisively to
fort to mitigate climate change will require leaving the large
reduce global emissions, who gets to benefit from exploiting
majority of fossil fuel assets in the ground. This notion of
the remaining fossil fuel budget?
“unburnable carbon” – that proven fossil fuel reserves may
not be useable – has gained increasing currency, visible in reSEI is exploring these and other questions through case
cent publications and speeches by leaders of the IEA and the
studies and by developing new analytical and accounting
Organisation for Economic Co-operation and Development
frameworks. The work is based on three premises. The first
(Gurría 2013). Spurred by the work of the Carbon Tracker
is that world leaders need to enact policies and measures
Initiative, financial institutions and advisors have also begun
that substantially curtail global CO2 emissions – and they
examining the implications of carbon constraints on capital
will ultimately succeed in doing so. As daunting and wishmarkets, and the financial risks posed by potentially signififul as that premise may seem, it is useful to note that many
major energy companies already assume a significant price
Risks of and responses to the
on carbon in their future business planning (CDP 2013). The
new fossil fuel economy
second premise is that despite its promise to turn high-carbon
fossil fuels, especially coal, into low-carbon resources,
carbon capture and storage (CCS) will not be widely deThis discussion brief is part of a two-year SEI project that aims to deepen understanding of the risks
ployed in the coming decades. Progress on CCS has been
posed by new investments in fossil fuel infrastrucmuch slower than hoped, and many barriers and uncertainture, and of the possible responses by policy-makers
ties remain. Without widespread CCS, a low-carbon future
and civil society to mitigate or avoid these risks. In
will severely constrain fossil fuel exploitation. The third
particular, this initiative examines major decisions
premise is that policies to slow or limit fossil fuel extracregarding new investments in fossil fuel extraction
tion, not just fossil fuel use, will be needed. This is an area
and trade infrastructure, especially in venues where
that has so far been largely overlooked in efforts to mitigreen growth or low-emission development strategate climate change. New analytical tools and approach are
gies (LEDS) are under development or consideraneeded to help policy-makers understand the implications of
tion. Our aim is to provide resources and tools to
new fossil fuel supply infrastructure.
1 See, for example, McDonald, F. (2013). Two-thirds of energy sector will have
to be left undeveloped, Bonn conference told. The Irish Times, 12 June.
http://www.irishtimes.com/news/world/europe/two-thirds-of-energy-sectorwill-have-to-be-left-undeveloped-bonn-conference-told-1.1425009.
help planners and policy-makers assess the risks
of, and responses to, fossil development, as part of
low-carbon and green growth planning.
© Olav Gjerstad / Flickr
Introduction
In mid-2013, International Energy
Agency Chief Economist Fatih Birol
made headlines by warning energy
executives, investors, and national
climate change negotiators that “about
two-thirds of all proven reserves of
oil, gas and coal will have to be left
undeveloped if the world is to achieve
the goal of limiting global warming at
two degrees Celsius.”1 Furthermore,
the IEA has found that enough new
infrastructure is slated to come online
by 2017 to lock in the remainder of CO2
emissions allowable under a 2°C limit
(IEA 2012c).
2035 Global Enregy Production (EJ)
800
vs. 2050 in WEO) and richer regional detail. As shown in
Figure 1, in both the WEO 2012 (450) and GEA (Mix) lowcarbon scenarios, total energy use declines to nearly half of
business-as-usual levels by 2035. These declines are most
pronounced for coal and unconventional oil resources.
600
400
200
0
WEO 2012
WEO 2012
(Current Policies)
(450)
WEO 2012
(Baseline)
WEO 2012
(Mix)
Coal, All
Gas, Unconventional
Gas, Conventional
Oil, Unconventional
Oil, Conventional
Figure 1: Comparison of fossil fuel production by resource
type and scenario for 2035 WEO 2012 and GEA.
The GEA Mix scenario represents a balance between the GEA’s more purely
efficiency-driven and more “clean supply” driven scenarios.
cant overvaluation of fossil fuel assets (HSBC 2012; HSBC
2013; Goldman Sachs 2013; Rystad Energy 2013).
Another key concept is that of “lock-in”: that once fossil fuel infrastructure is built, it becomes difficult to avoid
fully using it throughout its full economic lifetime. Lock-in
is both a financial and a political economy phenomenon:
as new infrastructure is built, and capital investments are
financed, marginal costs of production drop, and incumbent
interests will act to ensure its continued operation. Supplyside investments in expanding fossil fuel extraction (e.g. coal
mines, gas and oil deposits) render economies and societies
reliant upon and thus supportive of fossil fuels, creating the
economic and political constituencies that perpetuate global
high-emission pathways. A prime example is Canada’s
oil sands development, which has transformed the country’s domestic politics and helped precipitate an end to its
international climate leadership.
IEA analysis suggests the scale of lock-in already in place:
the continued operation of existing energy infrastructure –
from power plants to oil wells – alone would emit 80% of the
CO2 emissions allowable through the year 2035 under a 2°C
goal (IEA 2012c). This finding suggests limited “room” for
new fossil fuel infrastructure. Such “room” could be expanded if existing infrastructure were abandoned before the end of
its useful life. However, this seems unlikely given the generally lower cost of continuing production at existing facilities
relative to building new ones. Indeed, the IEA’s scenario for
a 2°C emissions pathway does not envision the stranding of
any oil or gas reserves that already undergone development
(IEA 2013b); most of the fossil fuels that would need to be
left in the ground are new – unconventional oil and gas as
well as yet-to-be-exploited coal.
To get a more detailed picture of what a global carbon budget
might mean for fossil fuel production and reserves, we look
to the work of the Global Energy Assessment (GEA 2012).
While similar in many respects to IEA’s World Energy Outlook – both develop low-carbon scenarios that adhere roughly
to a 2°C limit – the GEA has a longer time-horizon (to 2100
As we look out to the year 2100, the potential longer-term
implications of a 2°C constraint become clearer: coal and
unconventional oil – the most carbon-intensive of five resource categories shown – are the predominant resources that
would be stranded in a low-carbon world, as illustrated in
Figure 2.2 These are also the classes of fossil fuel resources
that, collectively, provide less net social benefit as compared
with conventional oil and gas resources. The economic rents
(i.e. profits) per unit energy and per unit of greenhouse gases
(GHGs) tend to be lower, as their production costs are closer,
on average, to market prices, and the external costs per unit
energy and GHG are also far higher (Collier and Venables
2013). These conclusions are unlikely to differ dramatically
under a less ambitious emission reduction target, such as a
3°C or 4°C limit. Thus, barring a surge in CCS deployment,
the vast majority of coal reserves and most unconventional
oil resources (proven or otherwise) would need to be left in
the ground at least through 2100.
Consequently, these resources (coal, unconventional oil)
are a principal focus of our project. We will use case studies to examine the implications of tapping oil shale, the
most significant of all unconventional oil resources, in Utah
(U.S.), Estonia and Jordan, as well as to examine the expansion of coal mine and export infrastructure in the Pacific
coal market, and oil sands and heavy deposits in the Orinoco
Basin of Colombia.
The fossil fuel industry continues to expand
In the face of the constraints that eventual climate action
would impose, and the risk of a carbon asset “bubble”, new
fossil fuel extraction and infrastructure investment continue
to grow rapidly. Upstream oil and gas sector investment
increased 20% between 2008 and 2012, and is projected to
remain at high levels – nearly $700 billion per year – for the
next two decades (IEA 2013c).
Despite a major shift from coal to gas in the U.S., coal remains the fastest-growing fossil fuel globally. The expected
growth in coal use from 2012 to 2017 (1.2 billion tonnes
per year) is equal to the current coal consumption in Russia
and the United States combined (IEA 2012b). The IEA also
projects that 40% of growth in coal production over the current decade will be destined for interregional exports, largely
to meet demands in India and China (IEA 2012c). Major new
investments in coal mines and ports are under way or being
considered in Australia, Indonesia, Russia, South Africa,
Colombia, and the U.S. (IEA 2012a).
Just as forces of technological innovation have led to remarkable advances in renewable energy and energy efficiency,
they have also enabled continued growth in fossil fuel supply,
particularly for oil and gas, and have made fossil fuels ever
harder to displace. These innovations include 3-D seismic
2 Note that recent analysis by SEI and partners (Baer et al. 2013) suggests that
pathways commonly described as 2°C-compatible actually correspond to less
than a 50% chance of staying below 2°C per the latest Intergovernmental
Panel on Climate Change estimates (IPCC 2013).
“The 2oC budget”
Produced within
the 2oC budget
Produced under BAU scenario
Produced beyond
the 2oC budget
Coal
8,700
Oil, Unconventional
7,300
Remaining resources
Gas, Unconventional
Additional production 2010-2100,
GEA Baseline scenario
Oil, Conventional
Production 2010-2100, GEA Mix scenario
Historical production
(through 2010)
Gas, Conventional
1,000
500
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Carbon content (Gt CO2) of fossil fuel resources
Figure 2: Fossil fuels exploited vs. left in the ground, through 2100, relative to a 2°C emissions budget, in terms of CO2 emissions
resulting from fuel use.
Drawing from data on historical fossil fuel use (IEA 2013a), fossil fuel reserves and resources (GEA 2012), and projected fossil fuel use under GEA’s Mix and Baseline
scenarios, this figure shows the amounts of five categories of fossil fuel – conventional natural gas, conventional oil, unconventional gas, unconventional oil, and coal –
that have been burned (pale pink bars) and could still be exploited and combusted through 2100 (pale purple bars) under a scenario (GEA Mix) that represents at least a
50% chance of staying within 2°C. The dark pink bars illustrate the additional amounts of fossil fuels exploited and combusted through 2100 under a business-as-usual
scenario (GEA Baseline). The dark purple bars represent the amount of additional recoverable resources. As shown, the vast majority of the resources left in the ground as
the result of achieving a 2°C target would be coal and unconventional oil.
imaging, horizontal drilling, multi-stage hydraulic fracturing, and process controls for deep-water projects, which,
together with higher oil prices, have made production in
previously inaccessible regions such as Brazil’s pre-salt
fields and Venezuela’s extra-heavy oil deposits not only
feasible but profitable (U.S. EIA 2013). In part because of
such advances, Venezuela recently overtook Saudi Arabia
in terms of proven oil reserves.
© Travis S. / Flickr
Major fossil fuel infrastructure development or expansion projects are also under way or being considered in
many countries. According to a recent Ecofys report for
Greenpeace International, 14 upstream projects could supply “29,400 billion cubic meters of natural gas, 260,000
million barrels of oil and 49,600 million tonnes of coal”,
which might lead to 300 gigatonnes of CO2-equivalent
emissions between 2012 and 2050, or 20 to 33% of the
remaining carbon budget under a 2°C target (Meindertsma
and Blok 2012). These projects range from deep-water
oil drilling in Mexico and Brazil and oil sands extraction
in Canada and Venezuela, to coal mining and export in
the U.S. and Australia.
The Trans-Alaska Pipeline System, built in the 1970s, conveys oil from the
Prudhoe Bay oil field.
A major gap in in low-emissions development
and green growth planning
If global climate objectives such as a 2°C limit are seriously pursued, many new and existing fossil fuel supply
investments could be stranded, with potentially significant
negative consequences for global financial markets. Indeed, some economists have argued that if countries hold
to agreements to meet such a target, financial markets will
have seriously overvalued coal, oil, and gas assets, leading to a “carbon bubble” (Carbon Tracker Initiative 2011;
Carbon Tracker Initiative 2011; Leaton et al. 2013; HSBC
2013; Hsueh and Lewis 2013; Gurría 2013). Detailed
analyses of these issues have so far focused only on publicly traded companies, but many governments appear to
face similar risks: about three quarters of proven reserves,
as measured by carbon content, are held by governmentowned companies (IEA 2012c).
At the same time, proposals for new fossil fuel infrastructure are increasingly controversial in many coun-
© Jon Fischer / Flickr
Coal mining along a river in East Kalimantan, Indonesia.
tries. Concern over the emissions consequences of U.S.
West Coast coal export terminals and the Keystone XL
pipeline has galvanized climate change activism in North
America. Resource competition, and concerns over local
social and environmental impacts have motivated communities in India, Indonesia, China, and elsewhere to slow the
building of coal mines and coal-fired power plants (Sierra
Club 2011; 2012). The sizable water requirements of many
unconventional oil and gas extraction and processing technologies have also created resource concerns and conflicts
in the development of oil sands in Western North America
and oil shale deposits in Estonia, Jordan, and Utah (Water in
the West 2013).
Green growth planning efforts and LEDS studies have
been remarkably silent on the question of new fossil fuel
supply infrastructure, despite its growing importance and
relevance to sustainability and climate change. Under way
in over 40 developing countries, these efforts tend to focus
instead on promoting cleaner energy production and more
efficient energy use. Many similar analyses and processes,
from sustainable development scenarios to low-carbon
plans, have been conducted in developed countries as
well. We have reviewed nearly two dozen green growth
and LEDS guidance documents, as well as 40 countryspecific studies, and have found almost no consideration
of the emissions implications of continued fossil fuel
infrastructure development (beyond the direct emissions of
production facilities) or of scenarios that consider reorienting economic growth away from fossil fuel extraction
and supply infrastructure expansion. A notable exception
is Norway, a major fossil fuel exporter, where an active debate is emerging on future reliance on fossil fuel
development and revenues. The Norwegian Ministry of the
Environment recently commissioned a study to examine
the potential consequences for petroleum exploration and
development of a 2°C scenario (Rystad Energy 2013).
The limited consideration given to the emissions consequences of fossil fuel supply is hardly surprising. Fossil
fuel development is often viewed as a way to enhance
energy security and promote economic development – even
though in many countries it has come with a “resource
curse”, or more recently the “carbon curse”, whereby
benefits are unevenly distributed, other industries become uncompetitive, and broader development objectives
are undermined (Sachs and Warner 2001; Frankel 2010;
van der Ploeg 2011; Barma et al. 2011; Bjorvatn et al.
2012; Friedrichs and Inderwildi 2013).
Furthermore, the predominant GHG emissions accounting
frameworks count only the emissions that occur within the
boundaries of a given jurisdiction. As a result, the consequences of expanding fossil fuel supply may be quite
limited, especially where these supplies are exported or substitute for imports. Given that fossil fuel supply investments
are often major elements of countries’ expected economic
growth, their emissions implications tend to be left unquestioned, except to explore energy efficiency improvements
and (potentially profitable) methane gas capture. In addition, the impacts of new fossil fuel supply on global GHG
emissions are comparatively less well understood, and accounting frameworks and climate policies have yet to come
fully to grips with how to address these emissions.
New tools to address the supply side
New and alternative frameworks for GHG emissions accounting and analysis can help to bring supply side considerations, and potential policy approaches, into the focus of
analysts, planners, and decision-makers. Our hypothesis is
that this can then lead to more effective and comprehensive
strategies to reducing global GHG emissions. One such
framework is extraction-based emissions accounting, which
we explored in another discussion brief from this project
(Erickson and Lazarus 2013a). In another brief, we looked
at multiple perspectives for assessing the emissions implications of new fossil fuel infrastructure – assessments that are
now only rarely undertaken (Erickson and Lazarus 2013b).
By developing and testing these and other tools more fully,
we seek to understand whether they can help to bring new
insights and, on a practical level, identify and advance policy
options to address gaps and weakness in current emission
reduction efforts.
To date, climate change policies and actions have focused
largely on the demand side of the fossil fuel equation – tax-
ing or regulating carbon where fossil fuels are consumed,
promoting alternatives such as renewable energy, or encouraging more efficient fossil fuel use. While such policies and
actions can be highly successful in some cases (particularly
in spurring more efficient vehicles and appliances, and wind
and solar technologies), they also face systemic challenges.
The prospect of stringent demand-side climate policies in
the future – as reflected in steeply rising carbon prices –
could accelerate the extraction and use of fossil fuels in the
near term, undermining the benefits of these policies. This
potential outcome has been termed the “green paradox”
(Sinn 2009; 2012) or “inter-temporal leakage” (Collier and
Venables 2013). Some have questioned the conditions under
which it might occur (Edenhofer and Kalkuhl 2011; Grafton
et al. 2012; van der Ploeg and Withagen 2013). Supplyside policies and actions could reduce the risks of a green
paradox, as well as of international leakage (due to nonuniform adoption of climate policies and carbon prices),
while providing new options for policy-makers to consider
(Collier and Venables 2013).
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This discussion brief was written by Michael Lazarus and
Kevin Tempest, of SEI’s U.S. Centre in Seattle, WA. It
is part of a project financed through SEI programme
support from the Swedish International Development
Cooperation Agency, Sida. Sida does not necessarily
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Author contact:
Michael Lazarus,
michael.lazarus@sei-international.org
Media contact:
Marion Davis, SEI Communications
marion.davis@sei-international.org
sei-international.org
2014
Twitter: @SEIresearch, @SEIclimate