IEEJ Outlook 2022

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Challenges and Issues
toward Carbon Neutrality

Growing interests in carbon neutrality
An increasing number of countries announced reaching carbon neutrality(CN) as a target by mid-century. Interest in CN is growing globally.

Climate actions are expected to not only achieve emissions reduction
but should also provide multiple economic benefits.

Given that the world depends on fossil fuels for over 80% of its energy
requirements as of today, achieving CN will not be an easy task. Several
challenges and issues lie ahead.

The net balance between benefits and costs of climate actions can varyacross country, organization, and individual.

Challenges and issues related to CN Positive and negative economic effects of climate actions

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 Disparity caused by climate actions
 Energy security issues growing in complexity
 Supply stability issue caused by restrained upstream investments
 Geopolitical impacts
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Economic benefits of climate actions
Green growth and Green deal
- “Green growth” is a condition where economic
growth and carbon emissions are decoupled (OECD2011; UNEP 2011; World Bank 2012).
- “Green deal” is a government’s policy that aims tosimultaneously achieve economic stimulus,development of a clean energy industry with jobcreation, along with emissions reduction (Friedman2019; European Commission 2021).

Economic benefits of Green deal

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- EU estimates its Green deal will create over
160,000 jobs through the development of a clean
energy market and products until 2030 (EuropeanCommission 2021).
- IEA’s Net Zero scenario is estimated to add 4% to
the world’s GDP and generate 25 million jobs
through the development of clean energy industry
by 2030 (IEA 2021).
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Economic costs of climate actions


Costs associated with negative externalities- Climate change is a typical case of negativeexternalities.
- Addressing negative externalities means toaccount for unrecognized costs that could
eventually raise prices and reduce thetransacted volume of traded goods andservices.

❖ Internalization ofnegative externalities

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

Costs associated with carbon lock-in- Carbon lock-in is the “inertia” caused byconsumer behaviors and existing fossil fuelinfrastructure. It inhibits or delays theadoption of emissions reduction technologies(Seto et al. 2016）- Realizing CN means overcoming the lock-in
effect with significant investments in new
infrastructures, the replacement of existing
facilities while requiring job switching andvocational training.

Supply(Cost includingnegativeexternalities)

Price- An increase in prices may result in leakage ofnational wealth.

Supply(Cost atPrice rises.

market)Unrecognizes cost at market

Current
Optimaltransacted
quantityquantiyreflecting
negative
externalities

DemandQuantity19Balance of positive and negative effects
The net balance between the positive and negative effects can vary foreach country, organization, and individual depending on the following
external and internal factors- External factors: Geographical factors, indigenous resources, renewable energy
resources, etc.

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- Internal factors: Administrative capabilities and leadership of the government,
technological capacity, financial capacity, entrepreneurship, industrial structure,liquidity in labor market, containment of COVID-19, etc.

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Disparity caused by climate actions
Climate actions can widen disparity of various kinds because ofdiffered capacities and resource endowments of each actor.
①

Disparity among developed countries and among developing countries.

②

Disparity between developed and developing countries③

Disparity between resource exporting country and importing country④

Disparity between citizens within same country

Developed
country A

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Developing
country A
Resource
exporter①

Developed
country B④③①Citizen ACitizen BDeveloping
country B
Resource
importer21

Comparison between developed anddeveloping countries
The existing differences are large.
❖ GDP per capita (2019)❖ Energy demand per capita (2019)❖ CO2 emissions per capita (2019)IEEJ Outlook 2022

tonnes CO2 / capita

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❖ Carbon budget and accumulated
emissions

8.3

8

7.1

6
3.3

4

2.4

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OECD

Non-OECD

ASEAN

China

Note: Carbon budget figure are 50% expectation values
Source：IEA, IPCC, Global Carbon Budget 2020; Friedlingstein
et al (2020); IEEJ estimate

22Economic burden for the developing world(in the case of ASEAN)
Seeking for CN in a short period may cause a significant burden forASEAN.
- Average reduction cost for CN in 2050 or 2060 will be around $200/t-CO2.
- Electricity price for CN in 2060 will triple from current levels.

- Additional costs for CN in 2050 and 2060 will be equivalent to 2.9% and 2.5％ ofannual GDP, respectively.
Supports to make a pragmatic roadmap toward CN are needed.

❖ Electricity price in ASEANIEEJ Outlook 2022

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❖ Average CO2 reduction cost in ASEAN

Source：IEEJ; IEA

Note：Figure of IEA Net Zero is based on the estimatedincreased rate of electricity price in the world (+50%)
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Source: IEEJ; IEA

Energy security with increased complexity
Energy security risks growing in significance- The world continues to depend on fossil fuels during the transition to CN.
- Existing resource exporters may reinvent themselves as exporters ofdecarbonized fossil fuels, such as hydrogen and ammonia.
- Electricity supply security becomes far more important while VRE’sintermittency, system reform, cyber attacks remain important critical issues.
- Supply security of critical minerals emerged as a new potential security issue.
❖ Electricity demand in IEA Net Zero scenario

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❖ Hydrogen trade balance asof 2050 in CCE scenario

Source：IEA, Net Zero by 205024

No new upstream investment is needed toachieve CN by 2050?
The “No new upstream investment” conclusion from IEA’s Net-zeroscenario- IEA provided a back-casting scenario to achieve CN in 2050 and implied that
there are no need for new oil and gas field to be approved for development andthat no new coal mines or mine extensions are required.
- IEA did not necessarily recommend no new upstream investments.

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- In the net zero scenario, the crude oil price will fall to $35/bbl in 2030 and$24/bbl in 2050..

Source：IEA

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What if investments in upstream oil stop?
If investment in new oil and gas field development stops, demand will
surpass supply capacity by 2024.
- World oil demand may return to a growing trend in the post-COVID world; the“No new upstream investment” conclusion may bring “chilling effect” onlegitimate investments to meet such growing demand.
❖ World oil demand and supply
capacity if investment stops

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❖ World oil demand and supply capacity
as of 2025 if investment stops

Note: Bio fuels are excluded. Supply capacity is assumed todecline by 4% annually.
Source：IEA; IEEJ estimate

Note: Demand excludes biol fuels.
Sources: IEA, IEEJ estimates

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China’s growing presence in a CN world

China’s presence is likely to expand in a world heading toward CN.
- Its presence will grow in the field of renewable energy, critical minerals, as well
as fossil fuels.

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- A high level of competition with developed countries could lead to international
divisions or conflicts.
❖ Process capacity of fossil fuels❖ Investments in renewable
and critical minerals
power generation in Reference
scenario

Source：IEA, The Role of Critical Minerals in Clean EnergyTransitions

SummaryThe net effect of green deals and investments varies fromcountry to country.

The traditional energy security issues are becoming
multidimensional and complex.

The “no new upstream investment” conclusion cause chillingeffects on the legitimate investments and can destabilize thefuture oil and gas supply.
- .

The transition to CN should proceed in an inclusive mannerwithout forcing disproportionate economic burdens on developing
countries.

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