TODAY’S STUDY: THE ECONOMY’S ROLE IN THE CLIMATE CHANGE FIGHT

Too late for two degrees? Low carbon economy index 2012

November 2012 (PriceWaterhouse Cooper)

Too late for two degrees?

The PwC Low Carbon Economy Index evaluates the rate of decarbonisation of the global economy that is needed to limit warming to 2°C. This is based on a carbon budget that would stabilise atmospheric carbon dioxide concentrations at 450 ppm and give a 50% probability of limiting warming to 2°C.

This report shows that global carbon intensity decreased between 2000 and 2011 by around 0.8% a year. In 2011, carbon intensity decreased by just 0.7%.

The global economy now needs to cut carbon intensity by 5.1% every year from now to 2050 to achieve this carbon budget. This required rate of decarbonisation has not been seen even in a single year since the mid-20th century when these records began. Keeping to the 2°C carbon budget will require unprecedented and sustained reductions over four decades.

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Governments’ ambitions to limit warming to 2°C appear highly unrealistic.

Stabilising atmospheric carbon dioxide concentrations at 450 ppm, according to broad scientific consensus, will give the world a 50% probability of limiting warming to 2°C above pre-industrial levels. The 2°C target was formally agreed at COP-15 at Copenhagen 2009. Governments have since agreed to launch a review in 2013 to consider strengthening the long-term goal to 1.5°C.

We published the first Low Carbon Economy Index (LCEI) ahead of COP-15, to look at the progress of the G20 economies against a global carbon budget1 necessary to stabilise atmospheric carbon dioxide concentrations at 450 ppm. We estimated a low carbon pathway for the 21st century for the global economy, which required the world to decarbonise at 3.7% a year to 2050.

This is the fourth edition of our Low Carbon Economy Index, and a stock-take of progress since the Copenhagen summit. The failure of the global economy to reduce carbon intensity beyond business-as-usual levels has magnified the low carbon challenge.

Since 2000, the rate of decarbonisation has averaged 0.8% globally, a fraction of the required reduction. From 2010 to 2011, global carbon intensity continued this trend, falling by just 0.7%. Because of this slow start, global carbon intensity now needs to be cut by an average of 5.1% a year from now to 2050.

This rate of reduction has not been achieved in any of the past 50 years. Even if it might be achievable in the longer term, it is unrealistic to expect that decarbonisation could be stepped up immediately – which means that the reduction required in future years is likely to be far greater than 5.1%.

Governments’ ambitions to limit warning to 2°C now appear highly unrealistic. This new reality means that we must contemplate a much more challenging future. Whilst the negotiators continue to focus on 2°C, a growing number of scientists and other expert organisations are now projecting much more pessimistic scenarios for global temperatures. The International Energy Agency, for example, now considers 4°C and 6°C scenarios as well as 2°C in their latest analysis.

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Progress in 2011

The pace of reducing global carbon intensity has been slow, despite the growing international focus on climate change. The financial crisis, which started in 2008, has dampened progress even further – carbon intensity has fallen less than 1% in these four years. Continued slow progress in 2011 means that our estimate of the required annual rate of decarbonisation to 2050 has increased to 5.1%, from 4.8% in last year’s LCEI. Total emissions from the E7 countries grew by 7.4% while those of the G7 economies fell by 2.0% in 20111. The E7 now emits more than the G7 countries, and further projected economic growth implies that emissions will continue the upward trend.

Developed Countries

In the last year, major EU economies top our league table of countries with the highest rate of decarbonisation, with the UK, Germany and France all reducing carbon intensity by over 6% in 2010-2011. The irony is that a key reason for lower energy use was the milder winter in the region. Both UK and France also witnessed increased generation in low emissions nuclear power, whereas Germany’s exit from nuclear is reflected in its relatively lesser decline in emissions.

Emissions in the United States fell by 1.9% in 2011. A mild winter helped, but the shift from coal towards shale gas in its fuel mix and more efficient vehicles on the road signalled that decarbonisation may continue.

At the bottom of the league table for 2011 is Australia, a region where climate change is projected to cause more frequent and severe extreme weather. The result reflects an anomalous 2010 rather than a structural shift; since 2000, Australia averaged 1.7% reduction in carbon intensity, on a par with other developed countries. Carbon intensity grew significantly in 2011 (6.7%), reversing the decarbonisation seen in 2010 (of 10.9%). Heavy rainfall in Australia boosted hydro generation and also disrupted mining operations in Queensland and impacted on the level of coal stocks at power stations. A return to normality in 2011 saw Australia’s carbon intensity increase correspondingly, a large part of this due to the timing of the re-stocking of coal2.

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Emerging economies

In China and India, the reduction in carbon intensity seen in the last decade appears to have stalled. In both countries strong GDP growth was closely coupled with rapid emissions growth, despite commitments at Durban to significantly reduce carbon intensity by 2020 (40-45% for China and 20-25% for India respectively, relative to 2005 levels). Meanwhile Indonesia has managed to hold energy emissions broadly stable as its economy grew, with the resulting energy-related carbon intensity falling by 5.2% in 2011. Emissions from deforestation and land use change, which account for a large proportion of Indonesia’s emissions, grew significantly in the last few years (see Box 1).

Production vs. consumption data

In line with the approach adopted by the UNFCCC3, the LCEI measures the source of carbon emissions, i.e. where emissions are produced, rather than ‘consumed’. But it is important to remember that it is consumption that drives emissions and, indeed, many of the other sustainability challenges the world faces. Many developed countries are increasingly outsourcing their manufacturing needs abroad, so on a consumption basis would report higher emissions. The emission levels of those emerging economies that provide a manufacturing base for the rest of the world would be adjusted downwards, if exports were fully accounted for.

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The low carbon challenge - Too much carbon, too little time

In the period leading up to the Copenhagen UN summit on climate change in 2009, major economies came forward and pledged carbon reduction targets for 2020. Analyses of those pledges suggest that they are collectively insufficient to meet a 2°C target. Even more worryingly, with eight years to go, it is questionable whether several of these pledges can be met.

Our calculations show the scale of the challenge, from now to 2020, for some of the largest developed economies. In some respects the economic downturn may make these absolute pledges less challenging1; but at the same time economic pressures may make it much harder to finance the necessary transition towards a low carbon economy

The challenge isn’t necessarily easier for emerging economies – pledges to reduce carbon intensity mean curbing emissions at the same time as promoting rapid economic growth (see Figure 4). China and India are expected to nearly double the size of their economies by the end of the decade, but emissions must level off soon for them to meet their targets. The majority of any new energy demand will have to be met from renewable energy or nuclear and not fossil fuel generation (unless this can be fitted with CCS). Russia and Brazil expect slower economic growth, but their emissions pledges imply a more drastic cut in carbon intensity than either Chinaor India…

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The Shale Gas Dilemma

The boom of shale gas in the United States that has helped pushed down emissions there has sparked a debate on the use of gas as a transition fuel to a low carbon economy. The development and widespread deployment of fracking technology in the US has lowered the price of natural gas and resulted in a fall in greenhouse gas emissions as it displaces coal in power generation (although some analysts have raised questions around the lifecycle emissions of shale gas). Despite concerns about the possible environmental impacts of fracking, a world-wide hunt for unconventional gas reserves had already begun – China, India, Canada, Mexico, Australia, Russia and Saudi Arabia are all known to have significant reserves.

Gas may buy some time much needed by the global climate system and help limit emissions growth – displacing coal with gas in power generation roughly halves carbon emissions. But low gas prices may also reduce the incentive for investment in lower-carbon nuclear power and renewable energy. Large scale renewables and low carbon technology such as CCS and nuclear will require significant amounts of political will, finance and time.

Our analysis suggests that at current rates of consumption, replacing 10% of global oil and coal consumption with gas could deliver a savings of around 1 GtCO2e per year, or 3% of global energy emissions. A shift to gas away from oil and coal can provide temporary respite, a necessary but not sufficient move to the low carbon challenge. At the same time, an over-reliance on gas, particularly in emerging economies expecting high energy demand growth, could lock in the dependence on fossil fuel. Avoiding lock-in will require discipline in governments that encourage gas generation, to ensure that incentives are not diverted away from renewable energy. To avoid stranding new gas generation assets, new investments should be CCS-ready, with at least space to retrofit CO2 separation equipment and an agreed CO2 transport solution and storage site.

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Increasing Degrees of Risk

We estimate that the world economy now needs to reduce its carbon intensity by 5.1% every year to 2050 to have a fair chance of limiting warming to 2°C above pre-industrial levels. Even to have a reasonable prospect of getting to a 4°C scenario would imply nearly quadrupling the current rate of decarbonisation.

The decarbonisation rate required for a 2°C world has not been achieved in a single year since World War 2. The closest the world came to that rate of decarbonisation was during the severe recessions of the late 1970s/early 1980s (4.9% in 1981) and the late 1990s (4.2% in 1999). The expected reduction in emissions resulting from the current economic slowdown has not materialised, partly because of sustained growth in emerging markets. The observed relationship between economic growth and CO2 emissions is also asymmetric – emissions tend to grow proportionally with economic growth, but fall by less than the rate of economic decline.

Regardless of the outcomes at the UN climate change summit in Doha this year, one thing is clear. Governments and businesses can no longer assume that a 2°C warming world is the default scenario. Any investment in long-term assets or infrastructure, particularly in coastal or low-lying regions, needs to address more pessimistic scenarios. Sectors dependent on food, water, energy or ecosystem services need to scrutinise the resilience and viability of their supply chains. More carbon intensive sectors need to anticipate more invasive regulation and the possibility of stranded assets. And governments’ support for vulnerable communities needs to consider more drastic actions.

The only way to avoid the pessimistic scenarios will be radical transformations in the ways the global economy currently functions: rapid uptake of renewable energy, sharp falls in fossil fuel use or massive deployment of CCS, removal of industrial emissions and halting deforestation. This suggests a need for much more ambition and urgency on climate policy, at both the national and international level. Either way, business-as-usual is not an option.

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