Paris, big oil and climate change

Few will have missed the jubilation that greeted the news of the first truly global climate change agreement agreed in Paris on December 12. This is a milestone in that 195 countries agreed a deal which recognises that climate change is an issue and set a framework by which to address it.

Yet the Paris Agreement is a framework and not law. There are no penalties, direct liabilities or even legal commitments behind the lofty goals to which countries have signed up.

The mechanism for driving emissions reductions, known as “intended nationally determined contributions” (INDCs), consists of a series of voluntary pledges by each country to curb domestic greenhouse gas emissions by its chosen amounts.

At present, as widely noted, these fall short of the ambition to hold the increase in the global average temperature to “well below 2C above pre-industrial levels” let alone “to limit the temperature increase to 1.5C above pre-industrial levels”. However, sometimes “soft law” can be as effective as the harder-edged version.

Before the Paris Agreement can be implemented, at least 55 countries (that account for at least 55% of global emissions) must have ratified it. If this level is reached before 2020, the commitments and goals of the Paris Agreement will only begin to apply in the next decade.

Some have suggested that in reality, therefore, the Paris Agreement does not really impact their businesses or policies just yet – but that may be short-sighted.

The changes anticipated by the Paris Agreement will be more pronounced for countries which have not yet had to consider strategies for addressing the effects of climate change.

For the first time, both developed and developing nations have signed up to address the impacts of greenhouse gas emissions – and these pledges will affect businesses throughout the world, including those involved in the oil & gas industry, many of whose operations are in developing countries.

By comparison, the 1997 Kyoto Protocol which extended the 1992 UN Framework Convention on Climate Change – the convention under which the Paris Agreement was reached – set binding greenhouse gas emissions targets mainly for the developed countries.

The UK made its own headlines back in 2008 when it enacted the Climate Change Act – the first national law to set legally binding targets to reduce emissions – targeting a reduction in UK greenhouse gas emissions of at least 80% from the 1990 baseline by 2050.

Headline pledge

Arguably, this is stronger than the EU-wide commitment (in the EU’s INDCs) of which the UK is a part, where the headline pledge is to reduce domestic EU greenhouse gas emissions by “at least 40%” by 2030, against a 1990 baseline.

While on the face of it the UK’s statutory target complies with the Paris Agreement’s 2C target, the ambition of the Paris Agreement, especially in relation to transparency and global stocktake, goes further than the current legislative framework.

A global uptake was not anticipated and the peer-pressure to be applied through the ratcheting and transparency initiatives was not envisaged under the Kyoto Protocol.

Now, along with other countries around the world, the UK will need to take stock of what needs to be done to make more ambitious INDCs every five years and implement them – something industry will watch with interest.

Over the last few years, UK has made great strides in its transformation to a low-carbon economy championing the growth of the renewable industry and investigating new technologies.

This included seeking the development of carbon capture and storage on a commercial scale – a technology promoted not only by the EU and the UN, but also one that has been of interest to many in the oil & gas industry.

Yet, the recent changes in UK energy policy appear to undermine this aim with the Cameron Administration having withdrawn the £1billion funding ring-fenced for the CCS competition, leaving the two preferred bidders, the White Rose project in Yorkshire and the Peterhead project in Aberdeenshire, without a future and dashing the hopes of some that CCS would give a new purpose to the North Sea.

Business leaders, knowing now the expectations set out in the Paris Agreement, will rightly question how the UK will contribute to the “aim to reach global peaking of greenhouse gas emissions as soon as possible” then “achieve a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of this century”, given the apparent contradictions in recent policy.

Commitments

Instead, defining what UK energy policy will look like in light of the Paris Agreement is likely to fall to investors and shareholders. Already, over 2,000 companies, including oil majors like BP, BG Group and Statoil, and nearly 450 investors have made commitments to address impacts of climate change.

Opportunities lie also in technology development and transparency initiatives. With the Paris Agreement advocating for developed countries to help with the financing of developing nations’ efforts to address the impacts of climate change, the UK and its oil & gas businesses are well placed to help lead these efforts.

Having pioneered some of the best practices in health & safety and impacts of oil & gas (and other developments) on the environment, these can be exported to those countries seeking to grow their economies in a safe and sustainable manner, and to develop new local industries and jobs at affordable costs.

This could be the silver lining for those in the industry that see the turn away from hydrocarbons in favour of nuclear and renewables, coupled with the low oil price, as a blow to traditional oil & gas operations.

What businesses, both in the oil & gas industry and others, will of course expect is reliable long-term strategies for how national governments will meet their pledges in Paris and signals for continued efforts to ramp up the current ambitions.

Hydrocarbons will not be replaced overnight – rather, a gradual transition requiring sweeping social, technological, industrial and efficiency developments will be needed over the course of the coming years.

Steps can be taken relatively swiftly though – Oil & Gas UK has recognised that one of the fastest and most cost-effective steps towards decarbonising our economy is substituting coal with natural gas in power generation, which could mean new opportunities for gas storage and gas transportation.

The global economy has been built on hydrocarbon fuel resources, and the insatiable demand for electricity means that this is unlikely to change in the short term.

This article was produced first in The Press & Journal’s Energy supplement and Energy Voice website on 12 January 2016.