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Companies producing, supplying, and consuming fossil fuels
anywhere in the world—but especially in Asia—will find it
challenging to reach net-zero carbon goals by midcentury unless
they can find a way to manage their Scope 3 GHG emissions,
according to IHS Markit analysts.
Scope 3 emissions are GHG emissions generated indirectly across
the entire value chain of creating an end product, beginning with
sourcing the raw materials, and continuing through manufacturing,
transporting, and using the product.
For the energy sector, Scope 3 emissions are a "big deal"
because they include emissions released by the use of sold products
such as combustion of aviation fuel in aircrafts or gasoline in car
engines, Nick Lowes, vice president of IHS Markit's Energy
Transition & Cleantech Consulting arm, said during the 17 June
"Climate Readiness and the
Journey to Net Zero by 2050" webinar.
Because the pathway to reaching net-zero carbon goals in
alignment with the 2015 Paris Agreement remains unclear, the task
of reporting and limiting Scope 3 emissions becomes "very, very
difficult," but not impossible, Lowes said.
The reason, he said, is the trajectory a petroleum product can
take varies, and trying to track the GHGs emitted can become
incredibly complex, especially as there is no standard method for
defining these emissions from a standard barrel of oil.
Managing Scope 3
There is growing recognition though that a low-carbon economy is
not possible without managing Scope 3 emissions from
the energy sector, according to IHS Markit Global Head of Strategic
Governance Advisory and ESG Integration Christine Chow, who
organized the webinar.
Global oil and natural gas companies are now under pressure from recent
court rulings and shareholders to report their Scope 3 emissions,
which until recently were under wraps.
After the seminar, Chow recalled that a climate change
resolution backed by the Church of England Pensions Board and
Church Commissioners was rejected by a 95% majority at Shell's 2018
annual general meeting.
"I remembered it being the turning point. When investors began
to seek not only disclosure, but active management and reduction of
emissions, even for Scope 3. At the time, it was deemed a demanding
ask, it still is, but it is more widely recognized as needed. Fast
forward to 2021, the Dutch court ruling and
shareholders' support for Shell to report Scope 3 emissions shows
that norms are shifting fast," Chow said.
The experts participating in the webinar agreed that
collaboration across the key GHG emitting sectors—energy,
transportation, and agriculture—is one way of tackling GHG
emissions across the entire value chain.
During the webinar, Lowes cited the example of burning biofuels
instead of diesel or gasoline as one way for tackling Scope 3
emissions because it would involve collaboration and partnerships
among the agriculture, transport, and energy sectors. However, some
critics have argued that using nature-based solutions like
investing in carbon offset projects may be a better way of
collaboration and GHG reduction.
IHS Markit data show Scope 3 emissions in 2019 accounted for an
average of 75% of total GHG emissions from the electric utility
sector, and about 88% from the oil and gas sector. These figures do
not do not account for the fact though that some double counting of
GHGs may be involved. That is because GHGs released by combustion
of aviation fuel, a fossil fuel product, may be deemed Scope 1 for
the airlines, but also may be considered Scope 3 for the oil
producer or refiner that manufactured the end product.
Not fully aligned with Paris Treaty
It therefore came as no surprise when Lowes displayed a graphic
that showed that not a single oil and gas company is fully aligned
with the Paris Agreement goal to reduce emissions enough to limit
the increase in temperatures compared with pre-industrial levels to
2 degrees Celsius, let alone to 1.5 degrees Celsius. The power
sector is faring better as wind and solar energies have allowed it
to meet its net-zero goals, he added.
TotalEnergies, a global oil and gas producer, is among seven
companies that have agreed to report Scope 3 emissions, but only
for its products in Europe where clear protocols and targets are in
place for tracking and monitoring emissions and the product
itself.
Although France-based TotalEnergies has oil and gas investments
in Asia as well as North America, the company has chosen Europe
because Lowes said it has provided clear decarbonization policies
under the EU's Green Deal, which aims for a 55% reduction in GHG
emissions by 2030 compared with 1990 levels. The EU deal includes a
90% reduction in transport sector emissions by 2050, with European
authorities working to release a 2030 climate and energy framework
package in July.
Apart from rebranding itself as a company
focused on clean renewable energy, the French company also is being
eyed as a business model for a transition to a low-carbon economy
because it is not only tackling Scope 3 emissions, but it also is
developing sensors to monitor and track GHGs released during
transportation of its petroleum-based products.
The task of reporting Scope 3 emissions becomes even more
daunting in Asian countries that are net consumers of energy to
fuel economic growth, said Gauri Jauhar, executive director of IHS
Markit Energy Transition & Clean Tech Consulting, who also
participated in the webinar.
According to the US Energy Information Administration, India was
the third-largest consumer of crude oil and petroleum products
after the US and China in 2019. The gap between Indian oil demand
and supply is widening. Demand for crude oil in 2019 reached 4.9
million b/d, compared with less than 1 million b/d of total
domestic production, the EIA said.
Meanwhile, China remains the world's top crude oil importer,
surpassing the US in 2017, with annual crude oil imports in 2019
increasing to an average of 10.1 million b/d, an increase of
900,000 b/d from the 2018 average.
The EIA said China's net imports increased in part because its
production has remained essentially flat since 2012, ranging
between 4.8 million b/d and 5.2 million b/d. The agency also
attributed the rise to an increase in refining storage capacity as
well as to a jump in China's consumption of petroleum and other
liquids, which grew 0.5 million b/d in 2019 to 14.5 million
b/d.
In these countries, "there is a level of carbon lock-in" that
Jauhar said can only be overcome through major changes in the
transportation and industrial systems, which is likely to prove to
be more difficult than the power sector.
Until that transformation takes place through clear policy
drivers, the price of oil remaining above $70/b matters more than
the price of carbon exceeding $60/mt, Jauhar said.
This is despite the fact that Asian countries are responsible
for bringing down the cost of installing renewables to affordable
levels globally to the point where China and India are considered
sinks for capital investment in renewables, Jauhar said.
Agricultural GHGs
Beyond the transportation and energy sectors is the agriculture
sector, which was responsible for nearly 12% of global GHG
emissions in 2018 after excluding land use and forestry data,
according to the World Resources Institute's ClimateWatch online
platform.
If no steps are taken, GHG emissions from the agriculture sector
are mostly likely to increase in the next two decades because
population growth will demand more food that in turn will compel
farmers to increase cultivation of lands and livestock numbers,
according to Edward Oliver, executive director for IHS Markit's
agribusiness division.
Curbing emissions from this sector may prove challenging because
the "substitutability" of technologies is "not quite there,"
Oliver, said. In the energy sector, renewable fuels can replace
fossil fuels, or in the automotive sector, electric vehicles can
replace internal combustion engines, he said, but "the same is not
true for agriculture at least without impacting production volumes
and/or food choices for the consumer significantly."
However, investing in carbon offsets and sequestering carbon
dioxide in soils are two ways farmers can reduce their carbon
footprint, according to Oliver. Carbon sequestration in soils
involves rotating crops in fields, reduced or targeted tillage to
reduce fossil fuel use while using farm equipment, and planting
cover crops such as clover and small grains.
Investors who have tapped into clean energy technologies and
solutions also are eyeing nature-based solutions to protect,
sustainably manage, and restore ecosystems to halt climate change
and resulting biodiversity loss that global warming is causing,
according to Chow.
Nature-based solutions involve planting the right kind of
vegetation, restoring wetlands, and building resilience against
climate effects like flooding, and using the soil as a sink for
storing carbon dioxide.
With the Nature Action 100 collaborative investor initiative kicking off this month, Chow
said: "I am expecting investors' engagement on environmental issues
to take a broader perspective, connecting climate to land use,
species extinction, and even recommend biodiversity due diligence
before investing in a project."
Climate and Sustainability News has been renamed Net-Zero
Business Daily™ in order to better reflect our focus on the
business and financial impacts of the global transition to a
lower-carbon and, eventually, net-zero carbon global economy. Each
day, IHS Markit will bring you accurate and detailed information on
recent developments, as well as far-sighted analysis on the
challenges that lie ahead.
Posted 22 June 2021 by Amena Saiyid, Senior Climate and Energy Research Analyst