Wednesday, September 17, 2014
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Two Energy Futures

By 2100, the world’s energy system will be radically different from today’s.  Renewable energy like solar, wind, hydroelectricity, and biofuels will make up a large share of the energy mix, and nuclear energy, too, will have a place. Humans will have found ways of dealing with air pollution and greenhouse gas emissions. New technologies will have reduced the amount of energy needed to power buildings and vehicles.

Indeed, the distant future looks bright, but much depends on how we get there. There are two possible routes. Let’s call the first scenario Scramble . Like an off-road rally through a mountainous desert, it promises excitement and fierce competition. However, the unintended consequence of “more haste” will often be “less speed,” and many will crash along the way.

The alternative scenario can be called Blueprints , which resembles a cautious ride, with some false starts, on a road that is still under construction. Whether we arrive safely at our destination depends on the discipline of the drivers and the ingenuity of all those involved in the construction effort. Technological innovation provides the excitement.

Regardless of which route we choose, the world’s current predicament limits our room to maneuver. We are experiencing a step-change in the growth rate of energy demand due to rising population and economic development. After 2015, easily accessible supplies of oil and gas probably will no longer keep up with demand.

As a result, we will have no choice but to add other sources of energy – renewables, yes, but also more nuclear power and unconventional fossil fuels such as oil sands. Using more energy inevitably means emitting more CO2 at a time when climate change has become a critical global issue.

In the Scramble scenario, nations rush to secure energy resources for themselves, fearing that energy security is a zero-sum game, with clear winners and losers. The use of local coal and homegrown biofuels increases fast. Taking the path of least resistance, policymakers pay little attention to curbing energy consumption – until supplies run short. Likewise, despite much rhetoric, greenhouse gas emissions are not seriously addressed until major shocks trigger political reactions. Since these responses are overdue, they are severe and lead to energy price spikes and volatility.

The Blueprints scenario is less painful, even if the start is more disorderly. Numerous coalitions emerge to take on the challenges of economic development, energy security, and environmental pollution through cross-border cooperation. Much innovation occurs at the local level, as major cities develop links with industry to reduce local emissions. National governments introduce efficiency standards, taxes, and other policy instruments to improve the environmental performance of buildings, vehicles, and transport fuels.

Moreover, as calls for harmonization increase, policies converge across the globe. Cap-and-trade mechanisms that put a price on industrial CO2 emissions gain international acceptance. Rising CO2 prices in turn accelerate innovation, spawning breakthroughs. A growing number of cars are powered by electricity and hydrogen, while industrial facilities are fitted with technology to capture CO2 and store it underground.

Against the backdrop of these two equally plausible scenarios, we will know only in a few years whether December’s Bali declaration on climate change was just rhetoric or the start of a global effort to counter it. Much will depend on how attitudes evolve in China, the European Union, India, and the United States.

Shell traditionally uses its scenarios to prepare for the future without expressing a preference for one over another. But, faced with the need to manage climate risk for our investors and our descendants, we believe the Blueprints outcomes provide the best balance between economy, energy, and environment. For a second opinion, we appealed to climate change calculations made at the Massachusetts Institute of Technology. These calculations indicate that a Blueprints world with CO2 capture and storage results in the least amount of climate change, provided emissions of other major manmade greenhouse gases are similarly reduced.

But the Blueprints scenario will be realized only if policymakers agree on a global approach to emissions trading and actively promote energy efficiency and new technology in four sectors: heat and power generation, industry, transport, and buildings.

This will require hard work, and time is short. For example, Blueprints assumes CO2 is captured at 90% of all coal- and gas-fired power plants in developed countries by 2050, plus at least 50% of those in non-OECD countries. Today, none capture CO2. Because CO2 capture and storage adds costs and yields no revenues, government support is needed to make it happen quickly on a scale large enough to affect global emissions. At the least, companies should earn carbon credits for the CO2 they capture and store.

Blueprints will not be easy. But it offers the world the best chance of reaching a sustainable energy future unscathed, so we should explore this route with the same ingenuity and persistence that put humans on the moon and created the digital age.

The world faces a long voyage before it reaches a low-carbon energy system. Companies can suggest possible routes to get there, but governments are in the driver’s seat. And governments will determine whether we should prepare for bitter competition or a true team effort.

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