Turning net zero ambitions into a step-by-step plan: IEA analysis shows what the pathway could look like
Moves toward tightening global alignment on a fossil-free future received a wake-up call with the May release of a detailed net-zero scenario developed by the International Energy Agency (IEA). The report imagines the scale of transformation required for the energy sector to transition to net-zero greenhouse gas emissions (GHG) over the next 30 years.
According to the energy policy advisors, current international commitments to reduce global energy-related emissions do not go far enough to limit warming to 1.5°C. The IEA scenario worked backward from publicly-stated government goals to evaluate what would need to be implemented to match requirements to slow the effects of climate change.
While it’s far from certain what new actions policymakers may take from the IEA’s roadmap to Net Zero by 2050*, it’s likely the report will underpin rising pressure on governments to implement more aggressive GHG reduction policies to support their stated goals. The roadmap is a constructive reconciliation of the actions and capital required to realize the ambitions of many stakeholders, and the United Nations’ COP26 climate conference this fall is a likely backdrop for such announcements.
* Source: IEA (2021) Net Zero by 2050 - A Roadmap for the Global Energy Sector. All rights reserved.
What you need to know about the IEA report
For US businesses assessing President Biden’s proposal to accelerate US GHG reductions, the IEA findings should serve to sharpen understanding about what it will take to achieve net zero, even as the report’s assertions generate debate about feasibility.
The analysis could form a baseline view, or an anchor point, in corporate conversations around climate risk and investment needed to capture opportunities in a low-carbon economy. Given the relevance of the energy industry to the US economy as well as to any serious carbon-reduction strategy, the report’s core findings are likely to spark refreshed discussions across industries.
Highlights in the IEA report
The IEA scenario sets out a sharp drawdown in global fossil fuel supply, starting this year, with no new approvals for oil and gas field development or coal mines. The goal is to reach a target of close to 90% of electricity generation by 2050 from renewable sources, largely wind and solar, but including nuclear. To put that goal in perspective, US renewable sources, including wind and solar, represented about 8% of US energy consumption in 2020.
This is twinned with a call to ramp up decarbonization investment to $5 trillion a year by 2030.
- The IEA scenario and related goals are more aggressive than the Paris Agreement goals. PwC’s analysis on energy-related CO2 emissions shows that global decarbonization in 2019 was below the rate needed to deliver the Paris goals, even among the G20 economies that achieved the highest rates of emissions reductions relative to their economic growth, namely Germany, South Korea, the US and the UK.
At the same time, the analysis makes clear that a pathway to net-zero emissions is technically possible, although it would require an ambitious, large-scale transformation of global energy systems and economies. That alone is significant and calls for serious dialogue among all stakeholders. In the US, electricity and transportation accounted for over half of GHG emissions in 2019, with agriculture at 10% and industry at 23%, according to the Environmental Protection Agency.
The IEA acknowledges that its scenario relies heavily in later years on achieving reductions from technologies that are still in prototype development or not yet capable to deliver at scale, such as carbon capture. There’s also further investment needed for existing technologies. In a separate report, the IEA said investment plans and supply for many critical minerals are short of what’s needed to support an accelerated deployment of solar panels, wind turbines and electric vehicles. Thus, the IEA calls on governments to ramp up and reprioritize R&D spending on clean energy technologies, such as advanced batteries and direct air carbon capture and storage.
Behavioral changes to improve energy efficiency and substantive adjustments in adjacent industries are also factored into the IEA analysis. By 2035, for instance, the report envisions no sales of new internal combustion engine passenger cars with all new vehicle sales being electric.
What you need to know about decarbonization
The IEA report adds to the growing number of industry leaders, lenders and investor groups that are taking climate change more seriously. It’s also clear that the pendulum is swinging toward more regulatory action on climate risk. In its most recent executive order on climate policy, issued May 20, the Biden administration directed the Department of Treasury to analyze climate risks that impact the stability of the US financial system. It further asked for recommendations on how climate-related financial risk can be mitigated, including through new or revised regulatory standards.
We’re seeing the most prepared companies integrating decarbonization building blocks into their operational and financial strategies. Many leading companies are ramping up development of lower-carbon products and solutions. In all, half of Fortune 500 companies now have made either net zero or deep carbon reduction commitments.
Businesses can take proactive steps now
Adopt a position on the effect of an orderly transition to a low-carbon economy
There are potential short-term impacts (e.g., to demand scenarios and product development) as well as potential substantive change over the long run. PwC believes real decarbonization heralds a business model shift. Companies may also want to consider the potential negative ramifications of a less-than-orderly or poorly coordinated transition as well.
Consider the narrative you’re sharing on climate risk and how that might change
How might your approach and diligence of disclosures around climate risk and/or emissions change as data and reporting get more regulated and standardized? Shareholder proposals related to environmental impact are on the rise in number and level of support. Moreover, the SEC has recently commented on the increased disparity between public statements from registrants and what’s included in their regulatory filings, with increased attention on the quality and adequacy of disclosure. The time is right to review the quality of publicly disclosed information and to consider the adequacy maturity of the processes and controls underlying this important data.
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