Is a scramble for energy inevitable?

Q Popular concerns about energy supplies and climate change are hitting new highs. Have these influenced Shell’s latest energy scenarios?

A First of all, it’s important to understand that three hard truths are shaping the future and will lead to important changes to the world’s energy system in coming decades. First, there has been a surge in energy demand as the world’s industrialising giants like China and India enter the energy-intensive phase of growth. Second, the supply of conventional energy from sources like easy-to-access oil and gas fields will soon struggle to keep up with this pace of growth, forcing us to look for other energy options. And third, as energy consumption grows, environmental strains – due partly to energy-related emissions of greenhouse gases thought to cause climate change – are rising too. These realities are the drivers behind our two new scenarios, called Scramble and Blueprints.

Q So, what do the scenarios tell us about how the energy future could evolve?

A Well, the scenarios describe alternative patterns of responses to these challenges over the next four decades. Each represents a different way that society could identify its interests and take action. In Scramble, national governments are the main actors. They react in sequence to the unfolding stresses of tight energy and climate change. At first, they scramble to lock-in secure supplies of energy in competition with other governments: this is a world of energy nationalism and bilateral deals. They aggressively promote local, home-grown energy resources too. The use of biofuels and coal grows rapidly. Fossil fuels provide the bulk of energy for decades to come. Eventually mounting stresses force governments into knee-jerk responses, first to moderate demand and then to address climate concerns. But the lack of early action increases the likelihood of climate stress and economic disruption.

In our Blueprints scenario, governments still play a key role, but other players like cities, industries and civil society exert a greater influence on their behaviour. Coalitions emerge – at local, national and international level – to take early action. A critical mass of parallel responses to the hard truths develops, including efforts to speed up the development of new energy technologies and to use energy more efficiently. Though this scenario foresees a more chaotic world at first, successful initiatives are soon adopted more widely and are eventually harmonised internationally because decision-makers recognise that a patchwork of standards impedes trade and investment. Governments focus on managing energy demand, setting tough efficiency standards for cars, appliances and buildings. And an effective market-based system emerges to establish a price for emissions of carbon dioxide (CO2). These changes channel investment into low-carbon technologies like wind and solar power. From 2020, technology to capture CO2 emissions from large industrial facilities and store them underground – known as carbon capture and storage (CCS) – becomes widely used and electric cars account for a growing proportion of vehicles. Overall, demand for fossil fuels will be lower, but will still account for more than half of all energy use.

Q Fossil fuels play a big role in both scenarios. Yet many people think that alternative energies like wind, solar and tidal power are the future. Won’t some people say these scenarios are too convenient for the oil and gas industry?

A Some will inevitably say that, which highlights the importance of doing this sort of realistic analytical work to explain how the energy system works. Actually, both scenarios show a huge growth in energy efficiency and renewable energies. But there are a lot of time lags in the energy system that limit how fast change can occur. For example, a new car sold today will still be driving somewhere in the world in 15-20 years’ time, and the many coal- and gas-fired power stations being built now will operate for 30, 40, even 50 years. That’s why the actions governments take in the next five years are crucial to how the energy system develops for the next five decades. No matter what governments do, fossil fuels will continue to play a growing role in the energy mix for some time to come, although they will grow less quickly than complementary sources like wind, solar, nuclear etc.

By the way, notice I use the word complementary rather than alternative energy. The alternative label is misleading because it gives people the sense that these other energy sources can somehow replace traditional fossil fuels almost overnight. What you actually see in these scenarios is that people will continue to use traditional forms of energy available today because the whole infrastructure for generating power or heat, for doing your cooking or for travelling is already in place and the time scale for replacing all that is decades not years. The important factor is how fast those complementary sources of energy can be added.

Q So you’re saying important changes will happen?

A Absolutely, they have to. In Scramble, governments adopt a straightforward “business-as-usual” approach for as long as they can. But pressures in the system build up and force change. Blueprints looks at how that path of change could be accelerated, how quickly political developments could combine to introduce the carbon dioxide pricing mechanisms, how quickly we can replace current power generation plants with newer, cleaner technologies, how quickly policies can bring forward the demonstration phase of important technologies like CCS and then deploy these on a large enough scale to have an impact on emissions.

Q In both scenarios, does the world manage to meet future energy demand while also successfully tackling climate change?

A People tend to act in a fearful way in response to the stresses created by the three hard truths. You can see that in the Scramble scenario in particular. However, in both outlooks enough energy is produced and delivered, and economic welfare sustained. That process may be more or less turbulent, but economic growth continues. The real difference between the scenarios is the level of energy efficiency, new technology deployment and climate volatility and environmental stress reached by 2050. In the Scramble outlook, the early focus on finding more energy results in a surge in coal use, a relatively slow improvement in energy efficiency and the delay in adopting market-based carbon pricing necessary to encourage the introduction of renewable energy and emission reductions.  As a result, CO2 emissions continue to rise for longer, the environment suffers more and we will have to adapt to climate change to a greater degree. In Blueprints, change happens more quickly and the result is lower overall greenhouse gas emissions and a more environmentally sustainable energy system.

Q You describe both scenarios as plausible, but isn’t Blueprints exceptionally challenging to achieve - a best-case scenario that is unlikely to happen?

A These scenarios explore the boundaries of what is plausible. Blueprints is a realistic scenario but is aggressive about the pace of possible change. It is not utopian because it doesn’t rely on a sudden outbreak of global altruism. It looks realistically at how people begin to recognise their new financial and political interests, takes examples of how they respond and looks at how those leading developments might spread and harmonise. The result is a plausible but challenging outlook that says by 2012-2015 you have a critical mass of economic sectors in a critical mass of countries applying CO2 pricing. You also have CCS demonstrated and ready to apply on a large scale from 2020 onwards, so that by 2050 you have 90% of fossil fuel power stations in countries belonging to the Organisation for Economic Cooperation and Development (OECD) – affluent industrialised nations – equipped with CCS and about 50% of power stations in emerging non-OECD economies. Electric vehicles become significantly more common from 2020 onwards and by 2050, 40% of passenger miles are powered by electricity. Blueprints is not driven simply by people wanting to do good for the planet, but by commercial, political and economic realities as well.

Q Normally Shell doesn’t express a preference between its scenarios. Why this time advocate the approach described in Blueprints over the one laid out in Scramble?

A First of all, the scenarios are as objective as we can make them. They have been formulated using the best expertise we can tap into, both from inside and outside the company. They help improve our own decision-making as we face an uncertain future. We position ourselves to be successful in both of them. Then the next step is to ask ourselves, standing back, from a number of different points of view, do we prefer one type of outcome over the other – not necessarily in every detail, but overall? And the more sustainable nature of the world described in Blueprints is clearly preferable to that of Scramble. In Blueprints, CO2 emissions are lower overall and, thanks to early action, the climate, energy and economic stresses are spread out over a longer period of time. There is less volatility and technology development is accelerated. From a business and investment perspective, in the long term Blueprints offers Shell a better world overall to do business in. So, uniquely, Shell has come forward and is calling for the type of actions and responses to the challenges ahead described in Blueprints.

Now, having said that, I don’t think climate scientists would consider the Blueprints world ideal. We are working with climatologists to model what the impact of the scenario would be on the environment. This is a challenging task. Energy-related emissions account for about two-thirds of all greenhouse gas emissions. Land use and other things also need to be taken into account. These are difficult things to model or predict. That work is under way and still to be confirmed. It looks like the scenario points towards long-term levels of CO2 in the atmosphere stabilising at around 550 parts per million – a level at which scientists think climate volatility is likely to increase. But it will likely avoid more extreme climate change. In that sense, less adaptation to the impact of greenhouse gas emissions will be needed in the second part of the century in the Blueprints scenario than Scramble.

Q Should we forego economic growth in order to deal with the environmental impact of climate change?

A We have assumed that modest economic growth continues and have taken prudent mid-range assumptions from major institutions like the World Bank. There are people who argue that we may have to sacrifice economic growth to deal with global warming. But the three hard truths need to be addressed and resolved together. The real driver in the surge in energy demand is that economic development is pulling millions of people out of poverty. People are buying their first fridges and cars and taking their first flights. Economic development is improving welfare. That is a reality and a social good, which has implications for the energy system. The political likelihood and consequences of trying to block economic growth and welfare in emerging parts of the world seems outlandish and unrealistic. It won’t happen. Politically it can’t happen.

Q The Blueprints scenario talks a lot about what governments need to do. With $100-plus oil and record profits, shouldn’t energy companies play a bigger role in solving this problem?

A Partnership is at the heart of what’s needed. Governments and industry need to work together to resolve the tensions created by the three hard truths. No one industry, company or government can move this forward alone. There are several things that companies like ours can and will do and there are several things that governments at various levels – local, national, international – must do. I think some people can get confused, in the complexity of our world, about the roles of different parts of society. Industry is like the legs and hands of society. We get things done, we move things forward, but our limbs act incoherently unless they are well-directed by the brain. Government is the brain, where collective decisions are being made. Faced with the stresses and complexity of the energy system, industry needs the right frameworks to channel efforts, investments, and to chart a course for the future. These frameworks should create a level playing field for competition between companies so that people can do things as efficiently as possible. That’s why governments must set the framework that will allow industry to take action. These things go firmly hand-in-hand together.

Q So Shell isn’t saying governments have to solve these challenges?

A No. It’s about creating the frameworks to enable effective change. For example, policies are needed to help bring forward technology like CCS. Governments and industry must work together, not only to build early demonstration plants but also to develop the permitting and the liability systems required to enable this technology. They will also have to work out the market mechanisms that will be required to allow companies to make money from CCS, so that it is widely used. These are things the public sector and industry need to co-operate on.

Recognising the turbulence of the period we’re entering into, one of the most important things for a company like Shell to do – in an industry at the centre of a lot of these developments – is to come forward and give our views about the tough issues. This is part of what we’re trying to do with the scenarios: to help others understand the nature of the changes ahead so that together we can anticipate and respond to pressures, rather than being forced into knee-jerk responses at a too-late stage in the future. A better understanding of the energy system is in everybody’s interests, not just ours.

* Jeremy Bentham spoke to James Schofield

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