The ‘carrot’ needs to be more ‘attractive’ to accelerate energy transition

The conversation surrounding the global energy transition is at a pivotal juncture, with a clear need to expedite the process. The process centers on the delicate balance between the “carrot” and “stick” principle – incentivizing green energy investments while making fossil fuels less attractive through higher costs.

That being said this year experienced record emissions from energy sectors. Despite a significant surge in renewable energy infrastructure, fossil fuels have continued to play a pivotal role in satisfying a substantial portion of the world’s new energy demands, DNV’s Energy Transition Outlook 2023 reveals.

The report further shows that between 2017 and 2022, renewable energy sources fulfilled 51% of the incremental energy requirements, while the remaining 49% – stemming from both original and new energy demands – was still being met by fossil fuels. In essence, renewables have not yet supplanted fossil fuels but rather managed to match the surge in energy demand.

In rather stark terms, DNV points out that the absolute supply of fossil fuels continues to grow, signaling a disheartening setback in the efforts to restrict global warming to the critical 1.5°C target, as laid out in the Paris Agreement.

DNV emphasizes that achieving the Paris Agreement’s objectives necessitates a drastic 50% reduction in CO2 emissions by 2030. However, the report projects that this significant reduction is unlikely to materialize until after 2050, with CO2 emissions estimated to be merely 4% lower than 2023 levels by 2030 and a more substantial 46% decrease by the midpoint of the century.

The global CO2 emissions are expected peak in 2024, emissions from oil in 2025, and natural gas in 2027. However, a significant transformation is required to shift from the current 80% fossil to 52% non-fossil energy by mid-century.

Additionally, DNV predicts that the point of peak oil demand, marking the beginning of a decline in fossil fuel consumption, is anticipated to occur in 2024.

DNV’s CEO, Remi Eriksen, commented that the transition to cleaner energy sources has yet to truly commence, at least in terms of a complete replacement of fossil fuels with clean energy.

“Globally, the energy transition has not started, if, by transition, we mean that clean energy replaces fossil energy in absolute terms. Clearly, the energy transition has begun at a sector, national, and community level, but globally, record emissions from fossil energy are on course to move even higher next year,” Eriksen said during an event hosted by DNV on Wednesday in Paris to mark the launching of its Energy Transition Outlook 2023.

“The energy transition needs to accelerate and the best way to do that is to make the ‘carrot’ in the carrot and stick principle more attractive and make the energy transition more palatable to people,” Carlos Lange, President of Europe at Fortescue Energy said during the event.

Similar to numerous energy conglomerates, Fortescue is venturing into the realm of clean energy. This strategic move is not solely driven by the evident global demand for decarbonization but is equally motivated by the substantial capital expenses and the looming specter of carbon taxes. From a pragmatic perspective, this transition represents a prudent business decision.

DNV reports that the implementation of progressive policies has begun to exert a significant influence, catalyzing the regional transition towards decarbonization and providing momentum on a global scale. Notably, the rollout of comprehensive decarbonization policy initiatives over the past year has acted as a powerful catalyst in this regard.

In the United States, the Inflation Reduction Act has emerged as a key driver of the transition, with a substantial commitment of $240 billion to fund clean energy investments. This funding is a response to a wide-ranging set of incentives introduced within the framework of the IRA, further accelerating the transition to cleaner energy sources.

Across the European Union, the momentum for decarbonization is intensifying. Ambitious policy packages, including the EU Green Deal, REPowerEU, and Fit for 55, are collectively rendering Europe’s net-zero emissions target more achievable and realistic.

Another notable area where green initiatives are taking hold is the shipping industry. In this sector, a swifter transition to eco-friendly practices is on the horizon.

According to the outlook report, shipping is set for a faster transition due to the inclusion in the EU’s emission trading system and the IMO’s ambitious new decarbonization strategy aiming for net zero by 2050.

DNV underscores the potential for advanced economies to propel progress in clean technologies, with a focus on hydrogen and carbon capture and storage (CCS). This competitive drive among leading nations in clean technology development is expected to yield global learning advantages in these critical areas.

In the midst of a world where GDP is set to double by 2050, the maritime industry faces a significant challenge and opportunity in the accelerating demand for cargo transportation.

DNV’s projections suggest that cargo tonne-miles across various ship categories will grow by a substantial 40% from 2022 to 2050. However, this growth will not be uniform, as efficiency improvements and shifts in global trade patterns will lead to reductions in some segments, including a halving of coal transport by 2050 and a 20% decrease in crude oil and oil product transport.

Additionally, the transition to low-emission fuels is expected to increase the cost of transport on keel, potentially altering established transportation routes.

Over the past five years, the maritime sector has witnessed a noteworthy shift in perspective on decarbonization, primarily propelled by the International Maritime Organization’s (IMO) decarbonization strategy introduced in 2018 and revised in 2023. This shift in mindset is indicative of the industry’s growing commitment to addressing the net-zero challenge, which is poised to influence its future trajectory.

At the core of this transformation is the transition in the maritime industry’s fuel composition. The forecast indicates a shift away from the predominantly oil-based fuel mix of today, with the composition by 2050 anticipated to primarily comprise low- and/or zero-carbon fuels, constituting a substantial 84%.

Ammonia is projected to lead the way at 36%, with biofuels at 25% and e-fuels at 19%. Electricity, as discussed earlier, is expected to play a relatively modest role at 4%. This transition in fuel types will be further driven by region-specific decarbonization initiatives.

However, the successful transition to new fuels and the acceleration of decarbonization in the maritime industry hinge on several critical factors. These include the availability of advanced biofuels and renewable hydrogen for e-fuel production, as well as a range of incentives to drive the industry toward cleaner and more sustainable practices.

To expedite this transformation, the maritime industry would likely require incentives such as supportive policies, financial incentives, and investment in research and development.

Governments and international bodies can play a pivotal role in creating a conducive environment for the industry’s transition, potentially offering financial support for the adoption of low-carbon technologies and providing clear regulatory frameworks that encourage and reward sustainability efforts. Additionally, investments in the development and scaling of new, environmentally friendly fuels could be a crucial catalyst for change.

Nevertheless, the crafting of adequate policies and mandates is a challenge of its own as indicated by the recent revision of the CII regulation. As has been the case with numerous regulatory measures, loopholes tend to emerge providing a leeway for unjustified penalization or undesired results thus hampering their implementation and achieving the targeted transition to cleaner solutions and fuels.

Consequently, the industry must also remain attentive to the regulatory measures, often referred to as ‘sticks,’ that are necessary to drive the sector towards a genuine transition, all while preventing owners from succumbing to incentives that might perpetuate polluting practices.

It is equally important to strike the right balance when implementing mechanisms such as carbon taxes, to avoid negative impacts such as evasion and hurting the competitiveness of parties covered by certain regimes. A potential solution would be a global tax mechanism to create a level-playing field for the industry and avoid two-tier systems.

In summary, the maritime industry’s journey toward decarbonization is underway, and its success will be contingent on various incentives and supportive measures to drive this transition, ultimately shaping the future of global cargo transportation.

Knowing how the process is long and challenging, the imperative for action has never been more pronounced.