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April 11, 2022

Measuring the fossil fuel industry’s transition to a net-zero energy economy

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Even before the war in Ukraine and the energy crisis it provoked, the fossil fuel industry was, from the point of view of achieving net-zero CO2 emissions by 2050, considered to be a sunset industry. Now, Russia’s invasion has spurred new urgency in Europe around the need to reduce dependence on fossil fuels. More than ever, we need greater visibility on how the major producers will chart a course to a cleaner, more secure and resilient energy economy and what will happen to their legacy fossil fuel assets along the way.

In a new blog and accompanying discussion paper, 2° Investing Initiative experts Nicholas Dodd, Ned Dunne and George Harris analyze the industry from an energy transition perspective, taking a fresh look at the prospects for the upstream oil and gas sector to make the transition to a net-zero energy economy and what new metrics may be needed by the financial sector to measure and track their progress.

Read the blog here.

Read the discussion paper here.

Currently, 2DII’s Paris Agreement Capital Transition Assessment (PACTA) tool measures whether fossil fuel producers are phasing down or closing production at the same rate as a chosen climate scenario. But recent research suggests that just measuring production phase down won’t be enough. Other factors have now come into focus, such as whether alignment might mean that production assets have simply been divested and sold, and to what extent companies are diversifying into clean energy production and distribution.

We need new metrics that provide symmetric, decision-useful information for banks and investors to drive the transition — and understand whether phase down and clean energy investment is happening in the real economy. 

With this in mind, we tried to get a snapshot of the industry from an energy transition perspective, focusing on 3 key questions related to upstream oil and gas production:

  1. What are the prospects for the net zero targets and commitments of upstream oil and gas producers to be translated into real change and investment?
  2. How do the current production plans of these producers square up with their public commitments to net zero targets and to a managed transition?
  3. What metrics may be needed to measure and track meaningful progress made by producers, as well as to select those with the best prospects for the future?

To answer these questions, we conducted alignment measurements for a cross section of upstream producers, cross checking our findings with recent sectoral analysis by Carbon Tracker Initiative and the Transition Pathway Initiative.  We also reviewed selected scientific and commercial literature to broaden our understanding of the challenges and dilemmas facing the sector.

We came up with three main conclusions that already signal where further work is likely to be needed on useful metrics:

  1. Keep an eye on what’s happening short term. Long-term commitments to net zero and scope 3 emissions reductions need to be backed up by evidence that real change and investment has been initiated.
  2. Ensure that the phase down is a real part of transition. Attention is needed on final investment decisions for new production that are incompatible with climate scenarios and also on how alignment is being achieved in practice.
  3. Identifying the potential winners and losers. Understanding and reporting on credible signs of transition, in terms of both actions and the leveraging of capabilities, will become increasingly important in conditioning finance and investment.

For each of these conclusions initial suggestions for possible metrics have been made which we intend to evaluate in more depth. To do this, we have just started a new study which will take place during 2022. This study will evaluate and test the options for metrics with stakeholders and banks, so that next year we can then make available through PACTA for Banks an improved set of metrics.

Questions or want to get involved? Contact the PACTA team at transitionmonitor at 2degrees-investing.org!

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