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ENERGY DARWINISM II
Why a Low Carbon Future Doesn’t Have to Cost the Earth

Citi GPS: Global Perspectives & Solutions
August 2015
Jason Channell

Elizabeth Curmi

Phuc Nguyen

Elaine Prior

Alastair R Syme

Heath R Jansen

Ebrahim Rahbari

Edward L Morse

Seth M Kleihman

Tim Kruger

Citi is one of the world’s largest financial institutions, operating in all major established and emerging markets. Across these world markets, our employees
conduct an ongoing multi-disciplinary global conversation – accessing information, analyzing data, developing insights, and formulating advice for our clients.
As our premier thought-leadership product, Citi GPS is designed to help our clients navigate the global economy’s most demanding challenges, identify future
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investments or a solicitation to buy or sell any financial instrument. For more information on Citi GPS, please visit www.citi.com/citigps.

Citi GPS: Global Perspectives & Solutions

Jason Channell
Global Head of Alternative Energy andCleantech ResearchAugust 2015

Elizabeth Curmi
Thematic Analyst+44-20-7986-6818 | elizabeth.curmi@citi.com+44-20-7986-8661 | jason.channell@citi.com

Phuc Nguyen
Global Alternative Energy Team

Elaine Prior
ESG & SRI Analyst+44-20-7986-9852 | duy.phuc.nguyen@citi.com+61-2-8225-4891 | elaine.prior@citi.com

Alastair R Syme
Global Head of Oil & Gas Research

Heath R Jansen
Global Head of Metals & Mining Research+44-20-7986-4030 | alastair.syme@citi.com+971-4-509-9558 | heath.jansen@citi.com

Ebrahim Rahbari
Global Economist

Edward L Morse
Global Head of Commodities Research+1-212-816-5081 | ebrahim.rahbari@citi.com+1-212-723-3871 | ed.morse@citi.com

Seth M Kleinman
Head of Energy Strategy

Tim Kruger
James Martin Fellow, Oxford Geoengineering
Programme, Oxford Martin School,
University or Oxford+44-20-7986-4556 | seth.kleinman@citi.com

Contributor

Professor Cameron Hepburn,Director, Economics of Sustainability
The Intstitute for New Economic Thinking at the Oxford Martin School
University of Oxford

August 2015

Citi GPS: Global Perspectives & Solutions

ENERGY DARWINISM II
Why a Low Carbon Future Doesn’t Have to Cost the Earth
As Thomas Edison presciently pointed out to Henry Ford and Harvey Firestone in1931, “We are like tenant farmers chopping down the fence around our house forfuel when we should be using nature’s inexhaustible sources of energy - sun, wind
and tide. I’d put my money on the sun and solar energy. What a source of power! I
hope we don’t have to wait until oil and coal run out before we tackle that.”
While fossil reserves aren’t running out, our ability to burn them without limit may
be, due to the fact that atmospheric concentrations of CO2 and equivalents are
rapidly approaching the so-called 'carbon budget' – the level that if we go beyond islikely to lead to global warming in excess of the important 2oC level.
It is this that makes the United Nations COP21 meeting in Paris in December 2015
so important; it represents the first real opportunity to reach a legally binding
agreement to tackle emissions, given that all parties, including the big emitters, arecoming to the table with positive intentions, against a backdrop of an improving
global economy.
We live though in an energy hungry world. Global GDP is set to treble by 2060, with
two thirds of that growth coming from emerging markets which display significantly
greater energy and carbon intensity per unit of GDP than developed markets.
Feeding that energy demand and facilitating growth while minimizing emissions willtake brave and coordinated decisions on the part of policymakers.
In this report, we examine the likely costs of inaction in terms of the potential
liabilities from climate change to see whether we can afford not to act. We also
examine whether the world can afford to act, by comparing the incremental costs offollowing a low carbon path to global GDP. Overall, we find that the incremental
costs of action are limited (and indeed ultimately lead to savings), offer reasonable
returns on investment, and should not have too detrimental an effect on global
growth. Nevertheless, our energy choices will have a profound impact on countries,
industries and companies, and we examine the implications of a low carbon futurein terms of the stranded assets that are likely to result. Finally, we examine thesolutions that financial markets and institutions can offer to facilitate this transition toa lower carbon world.
We are not climate scientists, nor are we trying to take sides in the global warming
debate, rather we are trying to take an objective look at the economics of the
discussion, to assess the incremental costs and impacts of mitigating the effects ofemissions, to see if there is a 'solution' which offers global opportunities without
penalizing global growth, whether we can afford it (or indeed we can afford not to),and how we could make it happen.
We believe that that solution does exist. The incremental costs of following a low
carbon path are in context limited and seem affordable, the 'return' on thatinvestment is acceptable and moreover the likely avoided liabilities are enormous.
Given that all things being equal cleaner air has to be preferable to pollution, a verystrong "Why would you not?" argument begins to develop.
With the global economy improving post-crisis, interest rates low, the large emitterscoming to the table, investment capital keen, and public opinion broadly supportive,
Paris offers a generational opportunity; one that we believe should be firmly
grasped with both hands.

© 2021 Citigroup3

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Hold for 2-page spread© 2021 Citigroup

August 2015

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Citi GPS: Global Perspectives & Solutions

Hold for 2-page Spread© 2021 Citigroup5

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Contents
Introduction
Overview
An Introduction to Climate Change
Highlights
Introduction
Why Now? The UN COP21 Meeting in Paris
What are Greenhouse Gas Emissions?
Energy-Related CO2 Emissions
Future Emissions and the Carbon Budget

10
11
12
16
18
20

Action vs. Inaction: Counting the Cost of our Energy Choices

23

Highlights
Our Energy Choices
An Energy Hungry Planet
The Choice of Energy Path
Geoengineering

23
23
24
26
28

Adaption: The Costs of Inaction

29

Highlights
Introduction
The Cost of ‘Inaction’ on Global GDP
Climate Economics- Integrated Assessment Models
Economic Damages in Different Regions
Co-Benefits from Reducing Emissions
Non-Market Impacts and Tipping Points, a Point of Caution

29
29
30
30
35
36
37

Mitigation: The Costs of Action

38

Highlights
Different Types of Action
Assessing the Incremental Cost of Action
The IEA Scenarios and Where We Differ
Impact on Emissions
Deriving a Return on Investment
Investment in Power Generation
Levelized Cost of Electricity: A Different Measure of Cost
Why Renewable Energy Could be a Viable Solution
The Disadvantages of an LCOE Approach
Assessing the Global Spend on Energy Over the Next Quarter
Century© 2021 Citigroup

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9
10

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39
39
39
41
41
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44
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51

Drivers of Change (1): The Power Market Transformation

55

Highlights
Citi’s Trajectory into a Carbon-Light Electricity Mix
Where Are We Different From the IEA?
$1.1 Trillion: The Cost of Overhauling the Power Market
Impact of Power Transformation on CO2
Implications of Citi Scenarios
Carbon Pricing: The Cost of Action or the Cost of Avoided
Liabilities?
Fossil Fuels
Global Power Market Outlook 2020: Updating the Energy
Darwinism Curves
Carbon Pricing: Game Changer for Coal?

55
56
57
60
62
64
66
68
70
72

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Drivers of Change (2): Energy Efficiency
Highlights
Transport-Related Emissions
Are Emissions and Fuel Targets Propelling the Car of the
Future? Which Technologies are Estimated to Grow?
Non-Conventional Technologies: Can these Technologies Grow
in the Near Future?
Will a Low Oil Price have an Effect on Energy Efficiency
Investment in Transport?
What Does This All Mean for Future CO2 Emissions from theTransport Sector?

74
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75
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78
80
81

Implications (1): Stranded assets

82

Highlights
Introduction
The Risk for Fossil Fuel Producers
Oil & Gas: Carbon-Stranded, or Economically Stranded?
Not All Barrels are Equal
Non-Sanctioned Winners and Losers
Coal: Survival, Extinction, or Both?
Is Time Running Out for the Coal Industry?
CCS Status
Technical Progress, But a Lack of Policy Drivers
CCS Costs
CCS Conclusions
Implications of Paris COP21 for Stranded Assets
How Might Assets Become Stranded?
Types of Stranded Assets
Potential Implications for Companies

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83
85
86
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87
90
91
92
93
94
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94
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Implications (2): Can We Afford It?

98

Highlights
Who Pays?
The Distribution of Effects© 2021 Citigroup

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98
102
104

Making it Happen: Funding a Low Carbon Future

105

Highlights
Introduction
Historic Investment Levels
Financing Renewable Energy Investment
Financing Energy Efficiency Investment
Regulatory Considerations
Financial Instruments
Green Bonds
Yieldco’s
Covered Bonds
Other Financial Instruments
Research and Development
The Green Climate Fund

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106
109
110
112
113
113
115
116
116
117
117

Conclusions
References
Author Biographies

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122

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Introduction
Citi forecasts that the sums of money to be spent on energy (both capital
expenditure and fuel) over the next quarter century will be unimaginably large, ataround $200 trillion. The energy industry is faced with choices, and in this report, weoutline two scenarios: 1) a business as usual or 'Inaction' on climate change
scenario, and 2) a different energy mix that offers a lower carbon alternative. We
find that out to 2040 the levels of spend are remarkably similar; indeed the 'Action'
scenario actually results in an undiscounted saving of $1.8 trillion over the period,
as while we spend more on renewables and energy efficiency in the early years, thesavings in fuel costs in later years offset earlier investment.
If the scientists are correct, the potential liabilities of not acting are equally vast. The
cumulative 'lost' GDP from the impacts of climate change could be significant, with acentral case of 0.7%-2.5% of GDP to 2060, equating to $44 trillion on an
undiscounted basis. If we derive a risk-adjusted return on the extra capital
investment in following a low carbon path, and compare it to the avoided costs ofclimate change, we see returns at the low point of between 1% and 4%, rising to
between 3% and 10% in later years.
So can we afford to act? Examining the extra spend required in our 'Action' scenario
in the context of global GDP, we find that on an annual basis we only have to spend
around 0.1% of GDP more on energy, and that on a cumulative basis at its worst
point, the extra investment only amounts to around 1% of global GDP. Moreover,against a backdrop of secular stagnation, that extra investment may actually help toboost growth.
These changes in energy mix inevitably have significant implications in terms ofwhich fossil fuel assets will be burnt, and which not. Some studies suggest that
globally a third of oil reserves, half of gas reserves and >80% of coal reserves
would have to remain unused before 2050 for us to have a chance of staying below
the 2oC limit. We examine the issue of unburnable carbon and stranded assets, inparticular in which countries, industries and companies they are located, and findthat at current prices, around $100 trillion of assets could be 'carbon stranded', if notalready economically so. The clear loser stands to be the coal industry, though we
examine the economics and potential offered by carbon capture and storage.
So how do we make this investment happen? Almost all of the growth in energy
demand is forecast to come from emerging markets, while most of the newinvestment in developed markets will be into energy efficiency, both of which
represent challenges to investment. While Development Finance Institutions have todate provided much of the investment in emerging markets, these now findthemselves effectively 'maxed out'.
There is a clear need for the investment, balanced by enormous investor appetite
for these types of investments; the missing link has been the lack of, and quality of
the investment vehicles available. Hence financial markets must innovate tofacilitate investment via the creation of new instruments, vehicles and markets. We
see the greatest opportunity in the credit markets, yet the challenge will be to raise
the quality of the instruments available to investment grade via credit quality
enhancement, securitization and other methods. We examine the potential solutions
that financial markets can offer, and highlight the enormous opportunity that thispresents.

© 2021 Citigroup

August 2015

Citi GPS: Global Perspectives & Solutions

Overview
This report examines the threats and opportunities presented by climate change,
looks at its implications and how to mobilize the finance to tackle it.
 Introduction to Climate Change: The report begins with an overview of climatechange, emissions levels and what the forthcoming United Nations meeting in
Paris in December 2015 is attempting to achieve (and why).
 The costs of inaction and action: We examine the costs of inaction in terms of

GDP potentially lost due to climate change, and compare this with the potential
costs of action in terms of mitigating climate change.
 Drivers of change: The next chapters examine the drivers of this mitigation

strategy, namely the transformation of the power market, and lower energy use
via increased investment in energy efficiency.
 Implications of change: We then examine the implications of that investment tohelp prevent climate change, in terms of its effect on global GDP, but also theeffect of the energy mix shift in creating stranded assets in certain industries.
 Making it happen: Finally, we examine the methods and instruments throughwhich financial markets, financial institutions, regulators and policy makers canenable the capital to flow to address this important issue.
Figure 1. Structure of the Report

Source: Citi Research© 2021 Citigroup9

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An Introduction to Climate Change
Highlights
 The UN COP21 meeting will be held in Paris in December 2015 with the aim ofreaching a global legally binding agreement designed to keep global temperature
increases to below 2°C, a level designed to avoid the worst effects of climatechange Prior to the meeting, countries must submit their pledges and plans to reduce

emissions which can then be aggregated and compared to the so-called 'carbon
budget' – the amount of greenhouse gases (GHG) we can still emit before
temperatures are committed to rising above 2°C. This then forms a starting point
for negotiations in how the world can go further, given that these aggregatedpledges are likely to be above the ‘carbon budget’.
 So far a total of 21 countries and the EU have submitted their pledges to reduce

GHG emissions. These countries represent over 56% of total GHG emissions
that are currently emitted.
 Another objective of the COP21 meeting is the mobilization of $100 billion peryear from developed countries to developing countries. It is not yet quite clear
how such funds will be mobilized, however an initial capital of $10.2 billion has
been pledged by 33 countries through the Green Climate Fund.
 There are three key ways to tackle climate change, namely adaptation, mitigationand geoengineering. We focus mainly on mitigation in this report as it represents
shorter term action and is more easily quantifiable.
 The energy sector contributes two thirds of greenhouse gas emissions with CO2emissions representing 90% of the total energy-related emissions. The rest of thegreenhouse gas emissions are attributed to agriculture, land use and forestry
sector and other industrial processes.
 Coal represented 43% of annual CO2 emissions in 2013, followed by oil (38%)

and gas (18%). The electricity sector was responsible for emitting 42% of energyrelated CO2 emissions.
 In 2013, China was responsible for emitting over 27% of total energy-related CO2

emissions, followed by the US (14%) and the EU (9%). Cumulative CO2
emissions show a different picture with the US being the largest emitter followed
closely by the EU.
 To limit temperature increase to 2°C would require CO2 emissions (not including

CH4 and N2O) to be limited to approximately 3,010GT CO2. We have alreadyemitted more than 60% of this total ‘carbon budget’, leaving little room to expand
CO2 emissions if we are serious about limiting the temperature increase to 2°C.
 If it wasn’t for land and ocean 'carbon sinks', annual carbon dioxide

concentrations would be accumulating in the atmosphere at a much higher rate.

© 2021 Citigroup

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Citi GPS: Global Perspectives & Solutions

Introduction
Over the years, scientists have become increasingly confident that humans are reshaping the Earth’s climate. Scientifically, much of what was needed to start
worrying about global warming or climate change was known in the late 1950’s,
although society generally didn’t become concerned about the topic until the 1980’s.
From the late 1980’s, the regulation of climate change started gathering steam andscientists through the use of super computer models were able to start studying theclimate in more detail. In 1988, the Intergovernmental Panel on Climate Change(IPCC) was created and charged with assessing the science of climate change,
bringing together climate change scientists, social scientists, engineers and otherexperts to discuss the new science on this critical topic.
One purpose of the IPCC was to determine whether formal diplomatic talks would
need to be undertaken to discuss the issue of greenhouse gas emissions. The
conclusion was obviously a ‘yes’ and a new treaty called the United Nations
Framework Convention on Climate Change (UNFCCC) was signed in Rio in 1992,
by 108 heads of state (Victor D.G., 2011)1. The objective of the treaty was to‘stabilize greenhouse gas concentrations in the atmosphere at a level that would
prevent dangerous anthropogenic interference with the climate system’ (UNFCCC).
Since then, the parties of the convention have met annually from 1995 in the
Conferences of the Parties (COP) to assess the progress in dealing with climatechange. The Kyoto Protocol was signed in 1997 at one such meeting, which afterironing out all the details finally came in force in 2005.
Parties in Cancun agreed to limit
temperature increase to 2°C

The Cancun agreement in 2010 stemmed from another COP meeting, and statedthat in order to limit the damage from climate change, global temperature rise
should be limited to 2°C from pre-Industrial average levels. The COP process has
been successful in bringing together countries and in mobilizing scientists, nongovernmental organizations (NGO’s) and others to discuss climate change.
However the process has been slow and has also been criticized for not being able
to form a legally binding agreement accepted by all to reduce greenhouse gas
emissions over time.
The 2°C Temperature Goal
The 2°C temperature limit first surfaced during a 1977 paper on Economic Growthand Climate Change written by William Nordhaus and has since become aninternational standard. The Cancun agreement formally recognized that parties
should take action to limit temperature increase to below 2°C thereby hopefully
avoiding some of the worst implications of climate change. They recognized that toachieve this goal, greenhouse gas emissions would need to be cut, which in turnhas encouraged economists, scientists and engineers to identify policy scenariosthat can meet this temperature increase. Thomas Stocker (the co-chair of the IPCC)
has stated that, “The power of the 2°C is that it is pragmatic, simple andstraightforward to understand and communicate all important elements whenscience is brought to policymakers”.

1 David G. Victor, 2011, Global Warming Gridlock, Cambridge University Press, UK© 2021 Citigroup

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Why Now? The UN COP21 Meeting in Paris
From 30th November to the 11th December 2015, heads of representatives of states
will once again gather, this time in Paris for the COP21 meeting. The aim of thismeeting is:

COP21 provides the best opportunity to date
to reach a binding international agreement
on climate change

1.

To set up a new binding international agreement, applicable to all countries,
with the aim of keeping global warming to 2°C, and2.

To mobilize funds to allow developing countries to both adapt to and mitigate
climate change impacts.

The aim is to have such an agreement in force by 2020. The difficulty of reaching a
global climate agreement is due to the fact that climate change is considered a
global negative externality which requires costs to be borne today, whilst thebenefits would be reaped (though not explicitly felt, given that is an avoidance of an
outcome) in the future.
There have been several COP meetings held before which have failed to reach aninternational legal binding agreement on the reduction of greenhouse gas
emissions. The Kyoto Protocol that was signed in 1997 and came into force in 2005,
was the closest to reaching such an objective, but still fell short of the mark. The
protocol required ‘Annex 1’ countries (OECD countries plus countries witheconomies in transition) to reduce emissions by an average of 5% from 1990 levels
over the five year period from 2008 to 2012 (Nordhaus, 2013) 2. Developing
countries were exempt from such targets and were only responsible for reporting
their emissions over time. The protocol was an ambitious attempt to harmonize thepolicies in different countries, however countries did not find it economicallyattractive. During negotiations the US had agreed to reduce its GHG emissions,however back home the government stated that this was unachievable andabandoned the treaty completely.

The Kyoto agreement came closest, but was
still flawed

There was also another problem with the treaty in that at the time of signing, thecountries that agreed to the treaty emitted two thirds of the total greenhouse gas
emissions; however this barely covered one-fifth of what was emitted in 2012.
During the interim period, emissions grew far more rapidly in non-covered countries
particularly in developing countries such as China (Victor D.G, 2011)3. The meetingin Copenhagen in December 2009 aimed to establish a replacement of the Kyoto
Protocol, given that the limits agreed in Kyoto expired at the end of 2012. The
meeting failed to achieve a binding agreement on GHG reductions amongst country
participants, though they did create the Cancun agreement which recognized thescientific view of limiting temperature increase to 2°C as stated in the introduction
above.

2 Nordhaus, 2013, The Climate Casino: Risk Uncertainty and Economics for a Warming

World, Yale University Press
3 Victor, D.G. (2011)© 2021 Citigroup

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Citi GPS: Global Perspectives & Solutions

The Clean Development Mechanisms (CDM) – Article 12 of Kyoto Protocol
Three market based mechanisms (international emissions trading and two offset
programmes – Joint Implementation (JI) and Clean Development Mechanism(CDM)) were created to help developed countries meet their emission targets under
the Kyoto Protocol more cost-effectively.4. While there have been only a few projects
under JI, a lot of work has gone into the CDM. CDM allows companies and Annex I
countries (i.e. OECD members plus countries with economies in transition) to buy
Certified Emission Reduction credits (CERs) from CDM projects in developing
countries instead of reducing their own emissions. This work, driven primarily by thedemand for low cost emissions reduction credits under from the EU Emissions
Trading System (EU-ETS) and other countries that have ratified the Kyoto Protocol,
created a global market for GHG emissions offsets. The mechanism allows
investment to be targeted at the most cost-efficient emissions reductions first,
wherever in the world they may be located.
According to the CDM Policy dialogue, over the past decade CDM has mobilized
more than $215 billion in investments in developing countries and helped reduce 1
billion tonnes of GHG emissions.5 However, it has also been criticized for allowing
countries/companies to obtain millions of dollars in CERs for projects that theywould have done anyway without the CDM in place. There has also been a problem
between the balancing of supply and demand of CERs, which has decreased theprice of credits over time. The uncertainty around a global agreement (thecommitments under the Kyoto Protocol have expired) and the lack of demand forsuch credits have crippled the Clean Development Mechanism over time, although
an agreement at the COP21 meeting in Paris could revive the CDM.
COP21 in Paris will be the first time
countries including the big emitters havecome together with positive momentum
towards reducing GHG emissions

The (future) damage caused by climate change and the cost of preventing it increaseover time (with even some potential points of no return), and hence time is a factor tobe considered. The reason COP21 is so important is that it will be the first time that all
parties (in particular some of the big emitters) have come to the table with generally
positively aligned intentions, against a backdrop of an improving global economy.

21 countries and the EU have submitted
pledges (INDCs) to the UNFCCC to reduce
GHG emissions below a baseline level

Before the COP21 meeting, each country must publish their intended contribution to
the global climate effort, a so–called 'INDC' (Intended National Determined
Contribution); a new development in international climate negotiations. Shortly
before the meeting, the UNFCCC secretariat will publish a summary of thesecontributions, to give a possible indication of the cumulative effect of all thesenational efforts. Twenty-one countries and the European Union (collectively
covering over 56% of global greenhouse gas emissions) have submitted their
INDC’s at the time of writing this report, as shown in Figure 2. The EU’s pledge to
cut GHG emissions by 40% in 2030 compared to its 1990 level would see theregion becoming one of the world’s least carbon intensive economies, whilst theUnited States pledge would also deliver a major reduction in GHG emissions of 26 28% by 2025 relative to its 2005 levels. China, the largest absolute emitter of GHG
emissions has echoed the statement that it made in 2014 by pledging to achieve apeak in CO2 emissions by around 2030, an important change in direction given how
its emissions have increased over recent years. It has also stated that it would cut
its CO2 emissions per unit of GDP by 60-65% from 2005 levels by 2030 and will
increase its non-fossil fuel sources to about 20% by the same date.
4 Gillenwater M, Seres S, (2011), The Clean Development Mechanism, A review of thefirst international offset program, Prepared for the Pew Centre on Global Climate
Change.
5 CDM Policy Dialogue (2012) Climate Change, Carbon Markets and the CDM, A call toaction© 2021 Citigroup

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Approaches are likely to be country-specific,
rather than a single global carbon market

August 2015

We believe that a single global carbon market is not likely to be the outcome from
COP21, rather that countries will select their own approaches to meeting their
INDCs. These might involve market mechanisms such as carbon pricing or energy
efficiency incentives, removal of fossil fuel subsidies, various types of regulatory
constraints, or some combination of these approaches. Supranational mechanisms
such as the CDM (Clean Development Mechanism) or JI (Joint Implementation)
might allow trading or interchangeability between these schemes.
For example, in its own INDC submission, the US points to measures to reduce
emissions including regulations to cut pollution from new and existing power plants,
vehicle fuel economy standards, standards to address methane emissions fromlandfills and the oil & gas sector, constraints on hydro fluorocarbons and codes
relating to buildings, appliances and equipment.

Mobilization of Funds$100bn per annum must be mobilized fromdeveloped to developing countries© 2021 Citigroup

A commitment was agreed at the Copenhagen COP meeting that developed nations(from private and public, bilateral and multilateral sources) would jointly provide$100 billion per year (from 2020) to help developing nations address climatechange. A key objective of the COP21 meeting will be the mobilization of thesefunds, via financing, technology and capacity building. Some of this money will passthrough the Green Climate Fund, which has received an initial capital of $10.2
billion from 33 governments last year (as of April 2015, 42.5% were contributions
that were actually signed, the rest are pledged contributions). The purpose of thefund is to promote the shift towards low-emission and climate-resilient development
pathways by providing support to developing countries to limit their greenhouse gas
emissions and to adapt to climate change. The majority of the funds in the Green
Climate Fund should be counted as part of the $100 billion that has been pledged,
however only a certain non-predetermined part of the $100 billion will pass throughthe Green Climate Fund.

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Citi GPS: Global Perspectives & Solutions

Figure 2. INDC Submitted by Countries/Regions
Country/
RegionINDC Pledge

Andorra37% reduction in GHG emissions by 2030 from a BAU scenario.
Liechtenstein 40% reduction in GHG emissions by 2030 from 1990 levels.
Gabon
50% reduction by 2025 compared to BAU scenario.
RussiaLimiting GHG emissions to 70-75% of 1990 levels by the year2030.
US26-28% reduction by 2025 compared to 2005 levels.
MexicoUnconditionally reduce 25% of GHG and short lived climate
pollutants emissions below 2013 levels. This could further
increase to 40% subject to a global agreement.
Norway40% reduction by 2030 compared to 1990 levels.
EU
Binding target of at least a 40% reduction by 2030 compared to1990 levels.
Switzerland To reduce GHG emissions by 50% by 2030 compared to 1990
levels, corresponding to an average reduction of emissions by
35% over the period 2021-2030.
CanadaTo reduce GHG emissions by 30% below 2005 levels by 2030.

Emissions% World
Mechanisms Proposed(Base Year)GHG
MT CO2e
Emission
Not applicable Not available
Not applicable Not available Possibility to achieve emissions reductions abroad.
Not applicable
0.02%
Base year 1990
4.8%
This is subject to absorbing capacity of forests.
6135 (2005)
663 in 2012(2013 figures are
not available)
52 (1990)
5640 (1990)

12.2%
1.6%

Domestic legislation.
National Climate change policy.

0.06%
8.6%

Collective delivery within the EU.
Binding legislation.

53.3 (1990)

0.1%~730 (2005)

1.8%

Switzerland will achieve its targets mainly domesticallyand will partly use carbon credits from international
mechanisms.
Legislative instruments which includes transportation,
electricity and renewable fuels regulations which
encourage phasing out of coal-fired generation andstringent GHG emission standards for heavy duty
vehicles.
The implementation is contingent upon gaining access to
new sources of finance and enhanced support. Meetingthe conditional target would require $45 billion in
investment of which $35 billion is conditional uponinternational support such as the Green Climate Fund.
The full implementation of Ethiopia INDC is contingent
upon a multi-lateral agreement being reached among
Parties that enables Ethiopia to get international support.
The introduction of a climate change strategy with anaction plan that should be finalized in 2017 which willfurther define the activities, methods and implementation
deadlines.
Continue to participate in EU Emissions Trading Scheme(ETS) and to determine a target for emissions outside
the EU-ETS scheme.

MoroccoTwo targets are proposed: an unconditional target of 13% GHG
reduction and a conditional target of an additional 19% GHG
reductions compared to a BAU emissions scenario in 2030.

~90(2010)

0.15%

Ethiopia

To limit its net GHG emissions in 2030 to 145 MT CO2e or lower.
This means that Ethiopia is planning to reduce its GHG
emissions by 64% from the BAU scenario in 2030.
To reduce GHG emissions by 9.8% below 1990 emissions levelby 2030.

Not applicable0.30%

Not applicable-0.04%(0.1% w/out
LUCF)

Not available

0.01%

China

Iceland aims to be part of a collective delivery by European
countries to reach a target of 40% reduction in GHG emissions
by 2030 compared to 1990 levels. A precise commitment has yet
to be determined and is dependent on an agreement with the EU.
Aims to (1) achieve a peaking of CO2 emissions by 2030, making
best efforts to peak earlier; (2) to lower CO2 emissions per unit of
GDP by 60-65% from 2005 level; (3) to increase the share of
non-fossil fuels in primary energy to 20% and (4) to increase theforest stock volume by 4.5 billion cubic meters on the 2005 level.

Not applicable

22.5%

Republic of
Korea

To reduce GHG emissions by 37% from a BAU scenario by
2030.

850.6 (BAU)

1.4%

New Zealand To reduce GHG emissions to 30% below 2005 levels by 2030.

Not available

0.1%

Singapore

To reduce GHG emissions by 36% from 2005 levels by 2030.

40.9 (2005)

0.12%

Japan

To reduce GHG emissions by 26% by 2030 compared to 2013
levels (25.4% reduction from its 2005 levels).

~1380 (2013)

2.5%

MarshallIslands

To reduce GHG emissions to 32% below 2010 levels by 2025.

Not available<0.00001%

Kenya

To abate GHG emissions by 30% by 2030 relative to a BAU
scenario.

143 (BAU)

0.15%

MonacoTo reduce GHG emissions by 30% and 50% by 2020 and 2030
respectively from 1990 levels.

Not available

N/A

SerbiaIceland

Implementing of national strategies on climate change
including the National Program on Climate Change(2014-2020) and to improve regional climate change
policies. They will also implement measures to control
total coal consumption, develop nuclear, scale up
renewables and control emissions from other industry
such as iron, steel etc. and from building and transport
sectors.
Partly use carbon credits from international market
mechanisms and nationwide Emissions Trading
Schemes.
Rests on the assumption that rules agreed by the Parties
will allow for unrestricted access to global carbon
markets.
Domestic efforts but will study the potential ofinternational market mechanisms.
They provide detailed measures on how to reduce
emissions in different sectors through efficiency
improvements, better technology, energy saving
standards, renewable resources, better forest
management etc.
They identify several areas where action would be taken
including efficiency improvements, electric vehicles etc.
These actions depend on availability of finance andtechnology support.
Promotion of energy and resource efficiency,
improvement of tree cover and deployment of clean
energy technologies etc. This is subject to available
finance, investment, technology and capacity building.
Implementation of domestic measures and possible
participation in international mechanisms.

Note: BAU = Business as Usual and LUCF = Land Use Change and Forestry, % of World GHG emissions is including LUCF and based on 2012 levels
Source: UNFCC, Citi Research© 2021 Citigroup

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August 2015

What are Greenhouse Gas Emissions?
Anthropogenic GHG emissions include CO2,
CH4, N2O and F-Gas; these gases cause a
gradual heating of the Earth

Science appears to show that that Earth’s climate is rapidly changing, as a result of
an increased concentration of greenhouse gases caused by the combustion offuels, deforestation and other human activities. These gases create a ‘greenhouseeffect’ trapping some of the sun’s energy and warming the climate in the process.
The Earth has a delicate balance between the radiation it receives from space andthe radiation it reflects back into space; the exchange of this radiation is known as
the 'greenhouse effect'. It is this equilibrium that makes the Earth habitable, andwithout this equilibrium the Earth would either be too cold or too hot to live in.
According to scientists, anthropogenic greenhouse gas emissions such as carbon
dioxide (CO2), Methane (CH4), Nitrous Oxide (N2O) and Fluorinated gases (F-Gas)
act like a blanket, absorbing the sun's radiation and preventing it from escaping
back into space. The net effect is a gradual heating of the Earth, a process which
has been termed ‘global warming’.
Carbon dioxide is emitted through the burning of fossil fuels and through a change
in land-use such as deforestation. Land can also remove CO2 from the atmospherethrough reforestation, improvements in soil and other activities. Agriculturalactivities, waste management and the extraction and mining of fossil fuels
contribute to CH4 emissions. F-gases are emitted through industrial processes,
refrigeration and the use of a variety of consumer products. Black carbon also
contributes to the warming of the atmosphere though it is not a gas, rather anaerosol or a solid particle (EPA). According to the IPCC’s Fifth Assessment report,
concentrations of CO2, CH4 and N2O have exceeded pre-Industrial average levels
by about 40%, 150% and 20%, respectively.

Carbon dioxide (CO2) makes up 76% of all
GHG emissions

CO2 makes up the majority of the greenhouse gas (65% from fossil fuels and otherindustrial processes and 11% from agriculture, forestry and other land use),followed by methane (16%) and nitrous oxide (6.2%). The effect of each gas onclimate change depends on three main factors:
1.

The concentration or abundance of the gas found in the atmosphere2.

How long it stays in the atmosphere, and3.

How strongly it impacts global temperatures, as some gases are more effective
at warming the planet than others.

For each greenhouse gas, a global warming potential has been calculated,reflecting a combination of the second and third factors above by the US
Environment Protection Agency6, to allow a comparison of the contribution of eachgas.

6 US EPA, Overview of Greenhouse Gases

www.epa.gov/climatechange/ghgemissions/gases.html© 2021 Citigroup

August 2015

Citi GPS: Global Perspectives & Solutions

Figure 3. Total Annual Anthropogenic GHG Emissions By Groups of Gases, 1970-2010

Source: : IPCC (2014)

Global Warming Potential
Global Warming Potential (GWP) was developed to allow comparisons of the global
warming impacts of different gases. It is a measure of how much energy theemissions of one tonne of a gas will absorb over a given period of time (usually 100
years), relative to the emissions of one tonne of carbon dioxide. The larger the
GWP, the more that gas warms the Earth compared to CO2 over the given time
period.7 It provides a common unit of measure, which allows scientists to compile
national greenhouse gas inventories and compare emissions-reduction
opportunities across sectors and gases. Based on GWP calculations, 1 tonne ofmethane is approximately 28-34 times more effective at warming the atmospherethan carbon dioxide, whilst one tonne of nitrous oxide is 265-298 times more
effective at warming the atmosphere than carbon dioxide. However carbon dioxide
is the largest anthropogenic greenhouse gas (~76% in 2010) and remains in theatmosphere for a very long time, whilst methane (~16% in 2010) and nitrous oxide(~6% in 2010) emitted today will remain in the atmosphere for a decade and 100
years respectively.

7 US EPA, Understanding Global Warming Potentials

www.epa.gov/climatechange/ghgemissions/gwps.html© 2021 Citigroup

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Citi GPS: Global Perspectives & Solutions

August 2015

Figure 4. Carbon Dioxide Equivalents for Different GHGs

In terms of CO2 equivalent

N2O
CH4

CO2
1 t ofCO2

24-28 tof CO2269-298 t
of CO2

Source: Citi Research

Energy-Related CO2 Emissions
2/3 of all GHG emissions are emitted by theenergy sector

The energy sector contributes two thirds of greenhouse gas emissions, the rest
being attributed to land use and forestry and other industrial processes. 90% of theenergy-related emissions are CO2 from fossil fuel combustion, with methane fromoil and gas extraction, transformation and distribution accounting for just under
10%. The remainder are nitrous oxide emissions from energy transformation,industry, transport and buildings.

The Energy sector is responsible for 73% of
cumulative CO2 emissions

Since CO2 emissions accumulate in the atmosphere over time, it is important to lookat both cumulative and annual emissions. Figure 5 shows the cumulative CO2
emissions from 1870 to 2013 from both energy and land use. The energy sector
contributed 73% of these emissions, with the rest being attributed to a change inland use and agricultural practices. Figure 6 shows the annual CO2 emissions fromenergy and land use from 1959 to 2013 together with the carbon sinks, i.e. natural‘reservoirs’ which remove carbon from the atmosphere. Annual CO2 emissions fromfossil fuels (and cement) increased from an estimated 6GT in 1950 to 36GT of CO2
in 2013. According to the International Energy Agency (IEA), CO2 emissions stalled
in 2014, unchanged from 2013, despite the global economy increasing by
approximately 3% in the same year; potentially marking an important delinking (orthe start of one) between CO2 and GDP.
The oceans, land and atmosphere are the three main sinks for carbon dioxide andas we emit more carbon dioxide each year, each of the three sinks absorb morecarbon. If it wasn’t for land and ocean sinks, annual carbon dioxide concentrations
would be accumulating in the atmosphere at a higher rate. Although we tend to
focus on growing atmospheric carbon concentrations, ocean acidification (theongoing decrease in the pH of the Earth's oceans caused by the uptake of carbon
dioxide from the atmosphere) also has potentially serious ramifications.

© 2021 Citigroup

August 2015

Figure 5. Cumulative CO2 Emissions from Energy and Land Use

Figure 6. Annual CO2 Emissions from Energy and Land Use and Carbon
Sinks

2500

50

2000
1500

1000

Annual CO 2 Emissions and Sinks GT CO2

Cumulative emissions GT CO2

19

Citi GPS: Global Perspectives & Solutions

40
30
20
10

0
1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011
-10

500

-20

0
1870

-30

1890

1910

1930

1950

1970

1990

2010

-40

Fossil Fuels & Cement

Land use-50

Land Sink
Atmosphere
Fossil fuel & cement CO2 emissions

Source: Bodel et al. (2013), Houghton et al. (2012), Citi Research

Ocean Sink
Adj
Land use CO2 Emissions

Source: Bodel et al. (2013), Houghton et al. (2012), Tans and Dlugokenckys, Le Quéréet al. (2013), Citi Research

Energy-Related CO2 Emissions by Fuel and Sector
The electricity and heat sector was thelargest emitter of energy-related CO2
emissions

Although coal only represents 30% of total primary energy supply, it accounted for
43% of energy-related CO2 emissions in 2013 due to its heavy carbon content perunit of energy released. Compared to gas, coal is on average nearly twice asemission intensive. Oil and gas contributed 33% and 18% of emissions respectively
in 2013 (Figure 7). Figure 8 shows that the electricity and heat sector was
responsible for 42% of energy-related CO2 emissions, followed by the transport
sector (23%) and industrial sector (20%). Over 40% of the generation of electricity
and heat worldwide relies on coal; in fact countries such as Australia, China andIndia produce over two thirds of their electricity and heat through the combustion ofcoal. However, as renewables are becoming cheaper, they could replace some of
the coal consumption in future years.8

Figure 7. Annual Energy-Related CO2 Emissions by Fuel Type (includes
cement)Figure 8. % of Annual Energy-Related Emissions by Sector

40
35

9%

30
Flaring

GT CO225

Industry

Cement

20

Gas
Oil

15

42%
34 GT CO2

23%

Coal
5

20%

0
1959 1965 1971 1977 1983 1989 1995 2001 2007 2013

Source: Boden et al. (2013), Houghton et al. (2012), Citi Research

Transport
Residential

10

Source: IEA (2014), Citi Research

8 BP Energy Outlook. 2035. www.bp.com/energyoulook© 2021 Citigroup

Electricity and heat

6%

Other

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Citi GPS: Global Perspectives & Solutions

August 2015

Energy-Related CO2 Emissions by Country
In 2013 China was the largest emitter ofCO2, however on a cumulative basis the US
has been the largest CO2 emitter

In 2013, China was responsible for emitting over 27% of total energy-related CO2
emissions, followed by the US (14%) and the EU (9%). Figure 9 below shows thedramatic increase in China’s energy-related CO2 emissions between 2002 and2013. Cumulative CO2 emissions from 1959 to 2013 (Figure 10), show a different
picture, with the US responsible for emitting 22% of total emissions, followed by theEU (19%) and then China (14%). China in its INDC has pledged to peak its CO2
emissions by around 2030, and intends to increase the share of non-fossil fuels inprimary energy consumption to around 20% by 2030. An indirect benefit of reducing
emissions is a reduction in air pollution (a major issue in China's cities) especiallyfrom coal-fired plants, which is driving China to close inefficient coal plants andincrease its share of nuclear and renewables.

Figure 9. Annual Energy-Related Emissions by Country (incl. cement)

Figure 10. Cumulative Energy-Related Emissions by Country

40

1400
1200

30

ROW

25

Japan

20

Russia

India

5

1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013

0

Source: Boden et al. (2013), Houghton et al. (2012), Citi Research

Russia

600

India

US

400

China

EU28

200

US

China

10

Japan

800

EU

0

1959
1963
1967
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011

15

ROW

1000
GT CO2GT CO235

Source: Boden et al. (2013), Houghton et al. (2012), Citi Research

Future Emissions and the ‘Carbon Budget’
Climate scientists use a vast array of monitoring data to create models that
reproduce the mechanisms of the climate system. To calculate how human activities
could affect the climate, scientists take into account greenhouse gas
concentrations, pollution and changes in land use in their models. These
concentrations and changes depend on future social and economic development
including things such as economic growth, technological change, population growth,
innovation etc. Scenarios are therefore used to explore these issues in more detail.
The IPCC in their last report identified four new scenario’s called Representative
Concentration Pathways (RCP's). These four RCPs include one mitigation scenario(RCP 2.6), two stabilization scenarios (RCP 4.5 and 6), and one scenario with very
high greenhouse gas emissions (RCP8.5). Figure 11 and Figure 12 show theannual and cumulative CO2 emissions respectively under these RCP scenarios.

© 2021 Citigroup

August 201521

Citi GPS: Global Perspectives & Solutions

Figure 11. Annual CO2 emissions under RCP scenarios

Figure 12. Cumulative CO2 emissions under RCP scenarios

Source: Clarke et al. (2014)

Source: IPCC, 2013

The Carbon Budget
We have already emitted over 60% of thetotal ‘carbon budget’, and therefore we havelittle room to expand if we want to limit
warming to 2°C.

The RCP 2.6 scenario creates a pathway designed to offer a 50% chance of limiting
global temperature increases to 2°C. To reach this target, greenhouse gas emission
concentrations in the atmosphere would need to stabilize to about 445 to 490 ppm
CO2 equivalent. Ultimately this means that global cumulative CO2 emissions would
need to be limited to approximately 3,010GT CO2 (IPCC, 2014), the so-called'carbon budget'. Figure 13 and Figure 14 below show that we have already emitted
more than 60% of the total ‘carbon budget’, leaving little room to expand CO2
emissions if we are serious in wanting to limit temperature increases to 2°C.

Figure 13. Cumulative CO2 Emissions from 1870 to 2013 in Comparison
with the ‘Carbon Budget’

Figure 14. Global ‘Carbon Budget’
3500

3000

3000

Cumulative emissions GTCO2

3500

2500

2000

2000

GTCO2

2500

1500

1500

CO2 remaining
budget1000

Cumulative CO2
emissions

1000
500

500
0
1870

1890

1910

1930

1950

Fossil Fuels & Cement

1970
Land Use

Source: Boden et al. (2013), Houghton et al. (2012), Citi Research© 2021 Citigroup

1990

2010

0
>33%
>50%
>66%
Chance of reaching 2 ° C

Source: IPCC (2013)

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Citi GPS: Global Perspectives & Solutions

August 2015

What Happens if We Don’t Meet the ‘Carbon Budget’?
While the impacts of climate change are very difficult to define with any certainty,
key negative impacts include: A reduction in crop productivity which would have an impact on global foodproduction.
 A reduction or increase in the availability of water resources (e.g. floods anddrought).
 Sea-level rises which could affect coastal cities.
 Potentially the extinction of certain species.

This list is far from exhaustive, and it is perhaps more sobering to consider it interms of associated human consequences, for example famine, drought, associatedhealth issues, mortality rates and mass population displacement to name but a few.
The aim of the COP21 meeting in Paris is to finalize a legal binding agreement
between all countries to reduce greenhouse gas emissions over time, thereby
increasing the chance of limiting temperature increases to 2°C. The ‘carbon budget’aims to provide an simple metric which world leaders could agree to, and against
which aggregated INDC's could be compared.

© 2021 Citigroup

August 2015

Citi GPS: Global Perspectives & Solutions

Action vs. Inaction: Counting theCost of our Energy Choices
Highlights
 Almost one fifth of the world's population still lack of access to power, with 40%

lacking access to clean cooking facilities. Global GDP is expected to treble by
2060, with two thirds of that growth coming from non-OECD countries. This GDP
growth and increasing wealth levels will require vast amounts of energy.
 Emerging markets show significantly higher levels of energy intensity (units ofenergy used per unit of GDP) as they industrialize, and higher carbon intensity
i.e. they emit more carbon per unit of GDP (and per capita), as they tend to use
the cheapest, most readily available forms of power, which are often the 'dirtiest'.
 With most of the global GDP growth coming from emerging markets, a

disproportionate amount of energy will be required, resulting in disproportionately
higher emissions.
 Given the potential impact of emissions, the world is faced with an energy choice– either Action (mitigation or geoengineering) or Inaction (adaption) on climatechange. These are examined in greater in detail in the chapters that follow.
 The likely total spend on energy (capex and fuel) over the next 25 years is

actually remarkably similar on both an Action and Inaction scenarios — Citi’s‘Action’ scenario implies a total spend on energy of $190.2 trillion while our‘Inaction’ scenario is actually marginally larger at $192 trillion.
 While in the Action scenario we spend considerably more on renewables(reducing in cost over time) and energy efficiency (effectively negative energy
usage), the resulting lower use of fossil fuels lowers the total cost in later years.

Our Energy Choices
The world is faced with difficult, but enormously important choices about its energy
future. Global primary energy demand is likely to grow by more than 30% over the
next 20 years and how we adapt that demand given its linkage with GDP, and how
we feed that hunger for energy will have enormous consequences for countries,
economies, industries, and the world as a whole. While there are countless smaller
decisions that will follow with either path, the choice can essentially be broken down
into two paths:
We compare two scenarios – Inaction andAction and examine the effect these choices
could have on global GDP and investment
opportunities© 2021 Citigroup1.

Inaction – We allow macroeconomics to drive demand for energy by ignoring
the implications for emissions and feeding energy demand based purely on(often short term) economics and the immediate availability of fuel. To meet
rapidly growing energy demand, this scenario will result in an enormous'energy bill' for the world, and alongside this we must also consider the
potential financial implications of climate change.

2.

Action – We mold our energy future driven by a blend of emissions,
economics, avoided costs and the implications of climate change. This requires
an assessment of how much 'extra' we will spend on transforming the global
energy mix to a low carbon energy complex, and what the other associatedcosts will be in terms of lost global GDP, stranded assets etc., offset against the
avoided costs of climate change.

23

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Citi GPS: Global Perspectives & Solutions

August 2015

An Energy Hungry Planet
The IEA estimates that currently 1.3 billion people or 18% of the world's population
do not have access to electricity, and 2.6 billion people (40%) lack access to clean
cooking facilities. As wealth levels increase and the global economy develops,
global energy demand is set to balloon over the coming decades, and the backdropof its impact on the climate makes the choice of how that energy is generated, andindeed how much of it we use versus how much we save, of critical importance.
As Figure 15 shows, global GDP is set to increase from around $80 trillion today toaround $260 trillion by 2060 (at current prices) — a threefold increase. Two thirds ofthat growth is scheduled to come from non-OECD economies.
Figure 15. Global GDP Growth Projections 2010-2060 by OECD and
Non-OECD Grouping (Current Pricing)

Figure 16. Energy Intensity Reduces Over Time as Nations Become
More Wealthy

300

250
1990
2012

OECD

250

Energy Intensity (toe per $mn of GDP)GDP ($trn 2015 PPP)

Non-OECD
200

150

100

50

200

150

100

50

Source: OECD, Citi Research

2060

2055

2050

2045

2040

2035

2030

2025

2020

2015

0
0
OECD

OECD Americas

OECD Europe OECD Asia Oceania United statesJapan

Source: OECD, IEA, Citi ResearchThis GDP growth will require enormous quantities of energy, which is particularly
pertinent when we consider that emerging economies show significantly greaterlevels of energy intensity, i.e. the amount of energy used per unit of GDP generated.
The good news, as Figure 17 and Figure 18 show, is that as nations become
wealthier, i.e. GDP per capita increases, energy intensity reduces mainly as thesenations move towards a more service-based economy and become less focused on
manufacturing, but also as efficiency increases.

© 2021 Citigroup

August 201525

Citi GPS: Global Perspectives & Solutions

Figure 17. Energy Intensity Reduces with Increasing GDP Per Capita

Figure 18. Energy Consumption Per Capita Reduces as Wealth
Increases

0.35

9United States
8

Energy consumption (mtoe per capita)

Energy intensity (mtoe/$bn GDP)

0.30

0.25

0.20

0.15

0.10

7
6

OECD

4

Germany
Japan

3
China

2

non-OECD

10.05

1.3b people

South Korea

5

5.9b people

India
0
0

0.00
0

10000

20000
30000
40000
GDP per capita ($, 2005 PPP)

50000

5000

10000

15000

Source: OECD, IEA, Citi Research

20000

25000

30000

35000

40000

45000

50000

GDP/capita (constant 2005 US$)

60000

Source: OECD, BP, Citi Research

2/3rds of economic growth will come fromemerging markets, which show higher levelsof energy and carbon intensity per unit ofGDP

Although a reduction in energy intensity is good news, the fact is that two thirds ofglobal economic growth will come from emerging markets, which will require
disproportionate amounts of energy to achieve that growth.
To add fuel to the fire, so to speak, emerging economies are often so power hungry
trying to keep up with growth that there is a natural tendency to go for the cheapest,
most quickly deployable forms of energy available (i.e. coal) which are often the‘dirtiest’ in terms of emissions. This is not true across the board, as somedeveloping economies have high proportions of hydropower (Brazil), while otherdeveloped nations which are blessed with significant fossil natural resources remain
relatively high emitters (see Figure 20). However, this general truism combined withthe higher levels of emerging market energy intensity mean that developing markets
emit significantly larger quantities of CO2 per unit of GDP generated than developed
economies, as shown in Figure 19.

Figure 19. Carbon Intensity vs GDP Per Capita; Carbon Intensity
Reduces with Increasing Wealth Levels

Figure 20. Emerging Markets Typically Use ‘Dirtier’ Fuels, though 2012
Trend is Skewed by Japan in the Wake of Fukushima
Carbon per unit of primary energy used (Kg/$ GDP)

0.80

Carbon intensity (Kg/$ GDP)

0.70
0.60
0.50
0.40
0.30
0.20

0.10
0.00

2.90

2.70

Japan
OECD Asia Oceania

2.50

2.30

2.10

1.90

1.70
Brazil

1.50
0

10000

20000

Source: OECD, IEA, Citi Research© 2021 Citigroup

30000
40000
GDP per capita ($)

50000

60000

0

10000

20000

Source: OECD, IEA. Citi Research

30000
40000
GDP per capita ($)

50000

60000

26

Citi GPS: Global Perspectives & Solutions

August 2015

More limited GDP growth with lower energy and carbon intensity in developed
markets, combined with faster GDP growth and greater energy and carbon intensity
in emerging markets, means that under current scenarios, carbon emissions would
rise significantly in the coming decades, with effectively all of the growth inemissions coming from emerging or developing markets, as shown in Figure 21.
Figure 21. CO2 Emissions by Country/Region Under 'Business as Usual' Scenario
50000

CO2 emissions (Mt CO2 per year)

45000
40000
35000
30000
25000
20000
15000
10000

5000
0
2012
United States
Japan
India
OECD

2020
OECD Europe
Russia
China

2030
2040
OECD Asia Oceania
BrazilOther

Source: IEA, Citi Research

The Choice of Energy Path
There are three ways to reduce GHG
emissions — adaption, geoengineering andmitigation, or a combination of the three. We
concentrate on mitigation efforts to reduceenergy-related emissions

The good news is that although close, we are not yet committed to the path of muchhigher emissions. There are three main ways that we can deal with the threat ofclimate change9:
 Geoengineering: Consists of a wide range of proposed methods of cooling theplanet – some involve reflecting a portion of the sun’s radiation back into spaceand others involve removing carbon dioxide from the atmosphere. It is anextremely complex subject and it is unclear if any of the proposed techniques aretechnically feasible, environmentally sound and socially acceptable. Given theinfancy of this field, we have not examined this approach in detail, though would
note that this is an area worthy of exploration potentially as part of our suggested
increase in global R&D (discussed in chapter ‘Making It Happen’).
 Adaptation: Involves learning to cope with a warmer world rather than trying toprevent it. It is effectively a 'business as usual' approach, the costs and effects ofwhich are examined in the chapters 'The Cost of Inaction' and under our Citi
'Inaction' scenario. Costs are likely to be significant, not just in terms of lost GDP,
population displacement, agriculture etc., but in terms of the enormous
investments required in infrastructure such as flood defenses. It is this latter areaof costs — i.e. the costs of learning to live with a warmer climate — which are
traditionally referred to as the costs of adaptation.

9 Nordhaus (2013).

© 2021 Citigroup

August 2015

Citi GPS: Global Perspectives & Solutions

 Mitigation: Consists of action to reduce greenhouse gas emissions. In this report

we concentrate on mitigation and the investment required in the energy sector for
it to play its part in limiting warming to below 2°C relative to pre-Industrial levels,
largely as this is easier to quantify with an associated greater level of certainty(though even this is still highly speculative).
Significant efforts to mitigate climate change can reduce the need for adaptationand the need for geoengineering, but one should not dismiss these otherapproaches completely, as global warming results from the accumulation of past
long-lived GHG emissions, and therefore just reducing current GHG emissions
might not be enough to reach a 2°C temperature increase limit. These approaches
are therefore not mutually exclusive strategies, rather having synergies that can be
exploited to enhance their cost-effectiveness.
We examine each of these options in turn over the following chapters© 2021 Citigroup

27

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Citi GPS: Global Perspectives & Solutions

Dr. Tim Kruger
James Martin Fellow
Oxford Martin Geoengineering Programme
Oxford Martin School, University of Oxford

August 2015

Geoengineering
Mitigation is not enough. In order to achieve the climate policy goal of restricting therise in global mean temperatures to less than 2°C above pre-Industrial levels will
require some form of geoengineering.
Geoengineering is an umbrella term that covers a wide range of proposed
techniques to counter climate change by deliberate large-scale interventions in the
Earth’s system. There are two main classes of techniques – Solar Radiation
Management (SRM) and Greenhouse Gas Removal (GGR).
SRM involves reflecting a small proportion of the sun’s radiation back into space.
This could be achieved by introducing droplets of sulphuric acid into the upper
atmosphere, which would act as tiny mirrors, or by brightening clouds. Suchtechniques could be fast-acting, cooling the planet quickly and could be cheap to
deploy (compared to conventional mitigation), but the governance challenges of
deploying such a technique would be immense and it would provide only atemporary fix. If you cease SRM, the temperature would bounce back up to where it
would have been previously and if the level of greenhouse gases in the atmosphereis still increasing that bounce back would be extremely rapid and harmful. This socalled Termination Effect could in fact be terminal.
GGR involves removing CO2 and other greenhouse gases from the atmosphere andstoring them away so that they no longer affect the climate. This could be achievedby planting more forests or by developing machines that extract CO2 from theatmosphere. All such techniques are likely to be expensive, but could provide apermanent fix. The governance challenges vary depending on technique, but in themain are likely to be less onerous than those associated with SRM.
You may not like the sound of geoengineering, but it is already assumed in the
climate models that avoid dangerous climate change. The IPCC’s RCP2.6 scenario
is the only one that caps temperature rises below 2°C, but this is achieved only by
assuming that emissions turn negative in the second half of this century – that GGR
techniques will be deployed at a multi-billion tonne per year scale. There is a central
incoherence in policymakers’ efforts to avoid dangerous climate change — no suchtechniques exist and there is inadequate funding for research or incentives forindustry to invest in developing such techniques. They seem to be willing the ends
without providing the means.

© 2021 Citigroup

August 2015

Citi GPS: Global Perspectives & Solutions

Adaption: The Costs of Inaction
Highlights
 While the cost of adaption traditionally refers to the cost of living with climatechange, such as increased spend on flood defenses, here we examine theadditional costs to the world in terms of its impact on GDP.
 Climate change will have an impact on global GDP, and hence there is effectively

a cost of inaction. Climate scientists use so-called “Integrated Assessment
Models” (IAM’s) to estimate these impacts and costs.
 These IAM’s produce a wide range of expected impacts, the range of estimates

being between 0.7% to 2.5% of GDP for a temperature increase of 2.5°C whichis expected to be reached in 2060
 The cumulative losses to global GDP from climate change impacts (‘Inaction’)from 2015 to 2060 are estimated at $2 trillion to $72 trillion depending on the
discount rate and scenario used. Lower discount rates encourage early action.
 If emissions continue to rise and therefore temperature continues to increase

after 2060, the negative effect on GDP losses could become more than 3% of
GDP with estimates ranging from 1.5% to almost 5%.
 Under an ‘Inaction’ scenario, the world would be locked to a high-emissions

infrastructure and the damages could continue for more than a century.
 The highest impacts of GDP are foreseen in South and South East Asia, Africa

and the Middle East.
 The estimated damages could be larger as these economic studies only measure

those impacts that are quantifiable and largely concentrate on market or nearmarket sectors. Other impacts such as tipping points, weather related events orcatastrophic risks are not included in the studies.

Introduction
While 'global warming' is a general description of the potential effects, scientists
believe that the biggest effects from climate change will actually be changes inrainfall patterns, ocean currents, growing seasons and everything else that depends
on climate10. The impacts of climate change differ between one region and the next,
with some regions likely to experience more frequent droughts, whilst others
experience an increase in rainfall and potentially flooding. This could affect theavailability and affordability of food and water, significantly impact poverty levels,
health, mortality rates, and ultimately drive sizeable population displacement with all
its associated implications.
Accordingly if the scientists are correct, the impacts of climate change could besignificant, and would affect all of us. In economic terms, while little would remain
unaffected, the sectors most obviously impacted by climate change include theenergy, water, agriculture/food/fishery, and health sectors, not forgetting theinsurance sector and banking/financial markets generally.

10 Victor (2011)© 2021 Citigroup

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The Cost of ‘Inaction’ on Global GDP
There have been several studies that have estimated the impact climate change
could have on the global economy. Integrated Assessment Models (IAMs) aremostly used to calculate these damages as described in the box below. It is
important to note that these welfare studies use different methods and different
assumptions, which makes comparing them particularly difficult.
Professor Cameron Hepburn
Director, Economics of Sustainability
The Institute for New Economic Thinking at
the Oxford Martin School, University of
OxfordClimate Economics - Integrated Assessment
ModelsShould climate action be more or less ambitious? What are the various advantages
and disadvantages of different policy interventions? Who can, should and will pay?
How ought the inherent risk and ambiguity be evaluated? What is the so-calledsocial cost of carbon?
A standard and influential tool used by economists to answer these questions is theIntegrated Assessment Model (IAM). There are different types of IAMs, but thetypes most commonly used by economists start with a baseline economic scenariothat incorporates an assumed level of emissions. The models then consider thecosts and benefits, at the margin, of reducing emissions to limit the damages thatmight result from climate change. In other words, the marginal costs of abating atonne of carbon dioxide emissions are estimated and compared with estimates ofthe marginal social damage inflicted by that tonne. The latter is also referred to as
the ‘social cost of carbon’ (SCC).
Policymakers are naturally interested in a single point estimate for the SCC thatthey can apply in government policy. However, there is a real risk that such a single
point estimate is misleading. There is so much uncertainty that any single point
estimate implies a false precision, as discussed below. Moreover, any estimate ofsocial costs requires making choices that are ethically contentious, also discussed
below under point two. Finally, the models used almost inevitably omit key
considerations, implying that the point estimates may themselves be biased, as
noted in section 3.
Nevertheless, such numbers are estimated and used. For instance, the UnitedStates Office of Management and Budget (OMB) and the EPA have conducted ajoint analysis of the appropriate social cost of carbon for use in government policy,
deriving a value of $37/t CO2 (as of June 2015). This commentary considers thethree key points to bear in mind when interpreting and using SCC estimates.
1. Scientific uncertainty about specific climate impacts
While the relationship between carbon dioxide emissions and increases in global
mean temperatures are now fairly well understood, the uncertainty over the specificimpacts in specific places at specific times remains substantial. Economists have,primarily for convenience, proxied the relationship between aggregate damages andtemperature with a simple damages function. This expresses the fraction of GDP
lost in a given year due to the relevant increase in temperature. Damages are often
assumed, for convenience, to be a quadratic function of temperature increase. So it
is assumed that damages increase smoothly as temperatures rise, with no abrupt
shifts. There are, of course, other possible damages functions, and the evidence
from the physical sciences suggests that functions with thresholds and triggers arefar from ruled out.

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Analysis of IAMs suggests that the carbon price can vary quite strongly on thespecific response of ecosystems to temperature rises. As just one example,
modelling by Ceronsky et al with FUND, a fairly standard IAM, suggests that if thethermohaline circulation (THC) were to shut down, the corresponding social cost ofcarbon (SCC) could increase to as much as $1,000/t CO2. In short, the applicablesocial cost of carbon is very difficult to pin down because of the wide array of risks
that could occur from our meddling with the climate system.
2. Value judgments cannot be avoided
Even if we were able to isolate and eliminate all scientific uncertainties in the chainof linkages between emissions, concentrations, temperatures and economic
impacts, it would remain impossible to specify a single ‘correct’ estimate for thesocial cost of carbon. This is because a range of unavoidable social value
judgments must be made in order to derive any estimate. These value judgments
arise in a range of areas, but the four most contentious and important relate tovaluing: Impacts on future people: The weight placed on impacts in the distant future,compared to impacts today, is reflected in the discount rate. This was one of themost contested parameters following the publication of the Stern Review, whichused lower discount rates than previous studies, and in part for that reason
concluded that the social cost of carbon was substantially higher.
 Risk preferences: Value judgments about risk preference are important too,given the risks involved in allowing the Earth’s climate to heat. Higher aversion torisk tends to imply a higher social cost of carbon.
 Inequality preferences: It is expected that the impacts of climate change will fall

more harshly upon the poor than the rich. How to value these effects strongly
depends upon the assumed aversion to inequality.
 Human lives: Because climate change is expected to lead to a large number ofdeaths, the monetary valuation of a human life, if used, comprises a significant
uncertainty in the overall estimate of the social cost of carbon.
These various value judgments have been debated at length by the economists andphilosophers who work on the integrated assessment modelling of climate change.
Now is not the place to rehearse those arguments in detail. However, it is worth
noting that the use of market prices and market data – such as using market
interest rates for government bonds as a proxy for the social discount rate – does
not avoid these philosophical questions. The very decision to use the market is itselfa (contested) philosophical choice.
3. Omission bias may lead to misleadingly low estimates
Finally, just as important as the scientific uncertainty and the inevitably of value
judgments in SCC estimates is the concern that estimates emerging from economic
IAMs may be systematically biased. The main source of concern is that, bydefinition, IAMs only model the effects that they are capable of modelling. The
implication is that a wide range of impacts that are uncertain or difficult to quantify
are omitted. It is likely that many of these impacts carry negative consequences.
Indeed, some of the omitted impacts may involve very significant negative
consequences, including ecosystem collapse or extreme events such as thecatastrophic risks of irreversible melting of the Greenland ice sheet with theresulting sea level rise. Other consequences – such as cultural and biodiversity loss
– are simply very difficult to quantify and are hence just omitted. While it is also
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likely that some omitted climate impacts are positive, it is highly probable that onbalance such omitted impacts are strongly negative, leading to SCC estimates thatare systematically too low and corresponding policy on climate change to be too
weak. Indeed, the United Nations’ IPCC assessment reports themselves accept that
their own estimates should be viewed as being conservative, consistent with theprevailing culture of scientific enquiry.

Conclusion
Some scholars have concluded that given these limitations, IAMs are damaging or,at best, useless. It should certainly be openly and loudly acknowledged that
estimates of the social cost of carbon are highly uncertain, subjective and potentiallybiased. Estimates should be accompanied with a corresponding warning of theseweaknesses and advice to take any particular estimate with a grain of salt.
But not having models is not a solution either. Ignoring the intellectual challenges
that are intrinsic to the economics of climate change does not make them vanish.
Instead, economists need to do better, with much more transparent models – where
value judgments and uncertainties are clear and can be played around with bypolicymakers and the general public – and where wide ranges are employed tocommunicate the sensitivities involved.
Along with transparency, a new generation of IAMs could focus our attention in more
useful directions, away from short-term marginal changes and instead towards systemic,transformational change. This, rather than devising policy to balance central estimates ofthe social cost of carbon and central estimates of abatement costs, it may be better toseek interventions aimed at two objectives: (i) reducing the probabilities of very bad
outcomes to very low levels, even if this involves relatively high cost; and (ii) increasing
the probabilities of a positive transformational ‘surprise’ – for instance a cost
breakthrough in clean technology – that could deliver very large social gains.
Determining a central estimate of the SCC does not prevent thinking abouttransformational change. However, an exclusive focus on the mean SCC tends todirect policy towards a set of interventions involving marginal, incremental changes
to the existing system. Given the risks, and the potential benefits of a transition,
incremental change is clearly far from enough. Instead, IAMs ought to help decision
makers to consider major disruptive change. Far from being ‘in the tails of the
distribution’, disruptive changes to our natural ecosystems and to our industrial
ecosystems are now almost inevitable.

Generating an Aggregated View of IAM’s
Of the many studies that have been written estimating the impact climate change
could have on the global economy, one of the best known is ‘The Economics of
Climate Change’ written by Lord Stern in 2006 which famously became known as
the Stern Review. The main conclusion from the report was that that if we don’t act
now the overall costs and risks of climate change would be equivalent to losing atleast 5% of global GDP each year ‘now and forever’ or 11% when one includes arough estimate for other externalities such health and environmental effects that do
not have market prices. Some of the impacts of climate change include access towater, food, health and the use of land and the environment. For example, a decline
in crop yields especially in places like Africa could have a profound effect on future
food production; ocean acidification as a direct result of increasing CO 2 emissions
could impact marine ecosystems with possible effects on fisheries, whilst rising sea
levels could result in millions of people being flooded each year due to an increaseof warming of 3 or 4°C. Small islands in the Pacific and Caribbean and large coastal
cities such as Shanghai could all be affected by sea-level rise.
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Climate economists agree that an increasein temperature would have a negative effecton global GDP

Stern has been criticized by academics amongst other things for his use of a low
discount rate (average 1.4%) — a topic which is much discussed in climate change
economics. Other studies have also been undertaken to assess the aggregate
damages from climate change for different levels of warming. The majority of thesestudies agree in principle that an increase in temperature would have an impact on
the global economy ranging from 0.9 to 2.5% of global GDP loss for a temperature
increase of 2.5°C. This loss increases to 6.4% for a temperature increase of over
5°C (refer to Figure 22 below). These costs are not one-time but are rather incurredyear after year because of permanent damage caused by increased climate change
Figure 22. Aggregate Estimated Potential Climate Change Damages to Global GDP
4
Tol 2002

2

Mendelsohn et al. 2000
Maddison 2003
Bosello 2012
Hope 2006
Nordhaus 2006
Rehdanz and Maddison,OECD
Nordhaus 1994b2005
Tol 1995
Nordhaus 2013
Nordhaus 2008
Plambeck and Hope 1996
Nordhaus 1994a0-2% of GDP-4-6
Roson and van der
Mensbrugghe 2012
-8

-10

-12

Maddison and Rehdanz
2011

-14
0

1

2

3
Temperature (°C)

4

5

6

Source: Arent et al. 201411Citi Research

Global GDP losses from climate change
inaction are estimated from 0.7% to 2.5% in
2060.

The OECD estimates that global GDP losses from climate change inaction range
from between 0.7% to 2.5% in 2060 as shown in Figure 23 below. These
calculations are well within the estimates of other studies as described above. The
losses are calculated for only for a number of related sectors such as agriculture
and health. Other climate change impacts such as water stress or extreme weather
events which are not included in this analysis would also have large economic
impacts.

11 Arent, D.J., R.S.J. Tol, E. Faust, J.P. Hella, S. Kumar, K.M. Strzepek, F.L. Tóth, andD. Yan, 2014: Key economic sectors and services – supplementary material. In: Climate
Change 2014: Impacts, Adaptation, and Vulnerability.Part A: Global and Sectoral
Aspects. Contribution of Working Group II to the Fifth Assessment Report oftheIntergovernmental Panel on Climate Change [Field, C.B., V.R. Barros, D.J. Dokken,
K.J. Mach, M.D. Mastrandrea,T.E. Bilir, M. Chatterjee, K.L. Ebi, Y.O. Estrada, R.C.
Genova, B. Girma, E.S. Kissel, A.N. Levy, S. MacCracken,P.R. Mastrandrea, and L.L.
White (eds.)]. Available from www.ipcc-wg2.gov/AR5 and www.ipcc.ch.

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Assumptions of Climate Change Damage Estimations
In its scenario, the OECD assumes a 2.9% average global growth rate of GDP.
Global greenhouse gas (GHG) emissions (excluding emissions from land use, land
use change and forestry) are projected to rise from roughly 45 GT CO2e in 2010 tojust over 100 GT CO2e in 2060. Concentrations of carbon in the atmosphere (CO2
only) rise from 390 ppm to 590 ppm in the same time frame. In its central projection
scenario, it calculates that a 2°C temperature increase is reached in 2055, and theassociated global GDP annual loss amounts to 1.1%. Temperature increases tomore than 2.5°C by 2060. The model calculates the economic impacts from sealevel rise, health, ecosystems, crop yields, tourism flows, energy demand andfisheries but does not include economic damages from extreme weather events orcatastrophic risks.
Figure 23. Climate Change Impact on GDP
%

0.0
-0.5
-1.0
-1.5

Likely uncertainty range equilibrium
climate sensitivity-2.0

Central projection

-2.5
-3.0
2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
Source: Braconier et al, (2014)12

It is also important to note that the damages to GDP calculated above only refer to
global GDP losses up to 2060, however GDP losses may reach 5% if greenhousegas emissions continue rising after this period. Also the economic damages fromclimate change inaction do not take into account non-market impacts, tipping points
and other catastrophic events (discussed in more detail at the end of the chapter).
The damages and costs relate to an increase or reduction of greenhouse gas
emissions from the energy-sector which represent approximately two thirds ofcurrent emissions. The damages and costs from greenhouse gas related tochanges in land use and land cover and from other sectors are not included here.
What is important is that emissions between now and 2060 (under an ‘Inaction’scenario) would commit the world to a high-emissions infrastructure and thedamages would continue for more than a century.

12 Braconier H, Nicoletti G, Westmore B, (2014), ‘Policy Challenges for the next 50

years’, OECD Economic Policy Paper, July 2014, No. 9, Paris© 2021 Citigroup

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Putting a Value on the Lost GDP
The use of discount rate plays a very
important part in estimating future liabilities.

In the context of global GDP which is currently around $80 trillion and expected tomore than triple by 2060, the sums of money potentially at stake are hard tocomprehend, especially as they are annual and cumulative. Figure 24 shows thecost of liabilities or damages to global GDP from inaction to climate change which
differ according to the discount rate that is being applied and the uncertainty level.
The use of discount rate in climate change economics has been debated and there
are very different views on what is the best discount rate to use (see 'The
Discounting Debate' below).
Figure 24. The 3 Scenarios of the Potential Costs of Climate Change, Showing the Significant
Effect that Different Discounting Rates Have
Discount Rate
0%
1%
3%
5%
7%

Low
$ Trillion
-20
-14
-7
-4
-2

NPV of 'Lost' GDP
Central$ Trillion
-44
-31
-16
-8
-5

Upper
$ Trillion
-72
-50
-25
-13
-7

Source: Citi Research

The Discounting Debate
The rate at which future benefits and costs are discounted relative to current values
often determines whether a project passes the benefit-cost test. This is especiallytrue of projects with long term horizons, such as those to reduce greenhouse gas
emissions. Whether the benefits of climate policies (which can last for centuries)
outweigh the costs (many of which are borne today) is especially sensitive to therate at which future benefits are discounted. Economists traditionally advocate thatthe discount rate should be primarily determined by the cost of capital; however
others hold that it is unethical to discount the welfare of future generations andtherefore a lower discount rate should be used to calculate the present value of
future climate damages. Figure 24 shows the climate damages based on different
discount rates − a low discount rate encourages early action primarily because
future damages count for so much. Which is the correct discount rate to use isdifficult to determine, and there is also a debate on whether the liabilities vs. cost of
avoidance should be discounted at different rates, or whether we should a discountrate that reflects the actual market opportunities that societies face.

Economic Damages in Different Regions
South and South East Asia, Africa and the
Middle East could experience the largest
impacts on climate change© 2021 Citigroup

The extent of the economic damages from climate change is likely to differ
substantially between different regions and different sectors. The highest impacts of
GDP are foreseen in South and South East Asia, Africa and the Middle East,
whereas countries in the upper Northern hemisphere such as Russia may be able
to reap some economic benefits from climate change (Figure 25). One of theconclusions of the OECD studies described above was that climate impacts, to alarge extent, are concentrated in vulnerable and high-populated regions. However it
is important to look at the diagram below with some caution as economies do not
operate in insolation, and the climate change impacts in one region could affect theeconomies in other regions. Impacts could also differ within one country or region.
For example, even though the impact on the average national GDP would not be
felt much in OECD Europe countries, it does not mean that these countries would

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not see any negative impacts. The relative gain in GDP for OECD Pacific countries
occurs because the major economies in South and South East Asia would observe
large losses in agriculture production. However extreme droughts are likely tohappen in Australia which could negatively affect the OECD Pacific region’s
average GDP. Also some countries would be able to adapt more clearly to some ofthese impacts, by for example importing more food, however other regions would
lose their competitive advantage in certain areas to other regions. Annual GDP isalso an imperfect measure of the total economic costs of climate change as it does
not include the wider-impacts on well-being.
Figure 25. Regional Economic (GDP) Impact of Climate Change to 2060 (Central Projection)%
1

Rest of Europe and Asia
Middle East & North Africa
OECD Europe
South & South-East Asia
World

Latin America
OECD America
OECD Pacific
Sub-Saharan Africa

2010

2040

0

-1
-2
-3
-4
-5
-6
2000

2020

2030

2050

2060

2070

Source: Bracconier et al. (2014)

Co-Benefits from Reducing Emissions
There are also several co-benefits in
reducing emissions including improving air
quality standards, increasing energy security
and reducing water use© 2021 Citigroup

There are also co-benefits from reducing greenhouse gas emissions which should
be calculated when taking into consideration the liabilities and costs of avoiding ofclimate change. Reducing emissions can decrease fossil fuel imports for certain
countries and therefore enhance energy security. Fossil fuel importers would spend
less in our ‘Action’ scenario than in the ‘Inaction’ scenario (described in detail later).
Reducing GHG emissions can also help improve air quality standards in many
cities. In 2010, the cost of the health impact of air pollution (which is partly attributed
to electricity generation and transport) in China and India was estimated at $1.4
trillion and $0.5 trillion respectively. Renewable resources such as solar and windneed little or no water resources when compared to fossil fuel power generation
which needs water for cooling purposes. This could make a huge difference towater scarce countries that rely on freshwater for cooling in power generation.

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Non-Market Impacts and Tipping Points, a Point of
CautionThe loss to GDP maybe even higher if
tipping points and non-market impacts areincluded in the analysis

Integrated assessment models used to estimate climate damages of inaction only
measure those impacts that are quantifiable and largely concentrate on market ornear market sectors such as agriculture, health etc.13 However these studies omit
other impacts which are difficult to measure such as tipping points, catastrophic
risks and extreme weather events.14 According to the IPCC ‘no estimate iscomplete’, however most experts believe that excluded impacts such as non-market
effects are on balance all negative. These economic impacts are difficult to estimate
and lie well outside the conventional market place, however they could have asubstantial impact on a regional economy. For example, according to the World
Bank, the economic damages and losses due to the floods in Thailand in 2011 wasestimated at $46 billion, not to mention the enormous loss of life. It is not knownwith any certainty whether this event was triggered by climate change, but thisshows the regional impacts an increase in catastrophic weather events could haveon a region. Large tipping points on the other hand can occur when small climatechanges trigger a large impact and can pose a systematic risk, such as the meltingof the Greenland ice sheets. These risks increase with temperature rise and can
induce shocks to both climate and the economic systems.

Is GDP the right measure to use?

There is also a discussion on whether annual GDP loss from climate change
damage is the right metric to use. GDP measures only the flow of production,
income and expenditure and does not include the stock of assets or wealth. As aresult it does not record the deterioration in a country’s natural resources which
could ultimately be affected by climate change. Clearly including these risks would
increase the potential financial costs from climate change (see Citi GPS: THE
PUBLIC WEALTH OF NATIONS for more information).

13 Nordhaus (2013)14 Delink et al. (2014)© 2021 Citigroup

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Mitigation: The Costs of Action
Highlights
 Action to mitigate climate change inherently involves a cost. Hence we need tobe either incentivized into taking a low carbon path, or penalized for not doing so.
Action can take differing forms, most notably either legislation to force change, or
via the creation of economic instruments such as putting a ‘price’ on carbon.
 If we compare the difference in cost between adopting a low carbon future andbusiness as usual, we can derive a cost of mitigation. There are many differing
methods of doing so, with some such as the IEA’s long standing approach
focusing purely on capital investment, while other approaches such as the onethat we have adopted look at the total spend on energy thereby capturing fuelcosts. Both approaches have their advantages and disadvantages, and we
examine these, and highlight where our scenarios differ from those of the IEA.
 Over the next few chapters we examine the implications of Citi’s ‘Action’ scenario

which goes down a low carbon route, with a focus on the electricity sector as thelargest current emitter and fastest growing area of energy usage globally. We
examine the potential costs of transforming the energy mix in electricity
production and its impact on emissions, and link this to an implied cost of carbon
purely for the electricity sector, discussing how that might vary over time.
 What is perhaps most surprising is that looking at the potential total spend onenergy over the next quarter century, on an undiscounted basis the cost offollowing a low carbon route at $190.2 trillion is actually cheaper than our‘Inaction’ scenario at $192 trillion. This, as we examine in this chapter, is due tothe rapidly falling costs of renewables, which combined with lower fuel usage
from energy efficiency investments actually result in significantly lower long termfuel bill. Yes, we have to invest more in the early years, but we potentially savelater, not to mention the liabilities of climate change that we potentially avoid.
 A low carbon route essentially involves investing more heavily in low emissions

technologies such as renewables, investing less in fossil fuels, in particular coalin power and oil in transport, and investing significantly more in energy efficiency
to reduce overall energy usage. We examine the implications of carbon for the
integrated energy cost curves first derived in the original Energy Darwinism
report, and in particular examine the implications of this potential mix-shift interms of stranded assets.
 By comparing the cost of mitigation to the avoided 'liabilities' of climate change,

we can derive a simple 'return on investment'. On a risk adjusted basis this
implies a return of 1-4% at the low point in 2021, rising to between 3% and 10%
by 2035. While not spectacular returns, against current low yields (and given thepotential consequences), it represents a relatively attractive option.
 With a limited differential in the total bill of Action vs Inaction (in fact a saving on

an undiscounted basis), potentially enormous liabilities avoided and the simple
fact that cleaner air must be preferable to pollution, a very strong "Why would you
not?" argument regarding action on climate change begins to form.

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Different Types of Action
A simple reason why atmospheric concentrations of greenhouse gases has grown isthat they have been put there as a result of our using historically the cheapest, easiest,
or most readily available solutions to a requirement, such as energy. To look at it anotherway, adopting a lower carbon path is (at least superficially) more expensive, otherwise
all things being equal we would logically have gone for a cleaner option.
Accordingly, to change our behavior entails a cost, and hence will require someform of mechanism to offset that cost, either involving incentives or penalties. There
are two main ways to encourage a move to a low carbon economy:1.

To enact legislation to force change: an example of this is the new US
legislation which aims to cut carbon emissions from power plants by 30% or the
US Corporate Average Fuel Economy (CAFE) which encourages fuel efficiency
improvements in the transport sector.

2.

To develop economic instruments: that provide an incentive (or avoided
penalty) to switch to low carbon technologies and fuel such as quotas, carbon
pricing and tradable permits. Carbon pricing is one such economic instrument
which will effectively put a price on GHG emissions both to provide an incentive
to reduce them and also to minimize the costs of abatement by efficiently
allocating capital to the most cost effective abatement options first. It also
prices the externalities of GHG emissions encouraging a move to low carbon
fuels if carbon is adequately priced.

The next two chapters examine both of those mechanisms, in the form of deriving a
cost of carbon for the power sector, and an examination of the effects of legislation
relating to energy efficiency, mainly in the transportation market.

Assessing the Incremental Cost of Action
There are many different approaches to estimating the cost of action to mitigate
climate change, each with their own benefits and pitfalls. There are equally as many
global integrated energy models which are used by the investment community,
corporates and governments, which highlight differing energy mixes going forwards.
Of the numerous global energy investment scenarios available, perhaps the mostcomprehensive is that put forward by the IEA. We examine this scenario, before
moving on to discuss the benefits and limitations of this approach, and to highlight
where our own ‘Action’ and ‘Inaction’ scenarios differ in their approach and findings.

The IEA Scenarios and Where We Differ$53 trillion capex investment is needed toinvest to have a chance of limiting
temperature increase© 2021 Citigroup

The IEA bases its analysis on capital investment using its own integrated global
climate and emissions model which it has been publishing and refining for morethan 20 years; accordingly it is worthy of significant respect. The IEA estimates thatthe total capex investment required for energy (and efficiency) from 2014 to 2035 is$48 trillion in its central energy scenario (the so-called 'New Policies Scenario' or
NPS scenario), increasing to $53 trillion for a 50% chance of meeting a 2°C
temperature increase target (the '450 scenario'), as shown in Figure 26. The ‘450
scenario’ is so called as it lays out a scenario which would limit greenhouse gas
concentrations to 450ppm, the level generally accepted that would give the world a
50% chance of limiting climate change to 2°C or less. The IEA’s ‘New Policies
Scenario’ lays out an energy mix where current and signaled emission reduction
commitments are enacted, and replaced on expiry; this is effectively the IEA’s basecase. The ‘Current Policies Scenario’ assumes that as current policies expire, they
are not replaced or extended.

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Figure 26. Cumulative Investment Required Under the IEA’s NPS and
450 Scenarios

Energy Scenarios

Figure 27. Delta in Investment by Energy Segment between the IEA’s
450 and NPS Scenarios

Upstream&Transport
Power

450

August 2015

Energy Efficiency

Power

EnergyEfficiency

NPS

Upstream & Transport

0

20
40
US$ Trillion-660

Source: IEA (2014a), Citi Research

-4

-2

0
US$ Trillions

2

4

6

Source: IEA (2014a), Citi Research

As Figure 26 and Figure 27 demonstrate, the energy sector’s transition in the IEA's‘450 scenario’ requires not only more capital investment but a notably different
allocation of capital. Investment in power generation and energy efficiency in the'450 scenario' increases by $2.9 trillion and $5.5 trillion respectively, whilst
investment in upstream, transport and refining of fossil fuels decreases by $4.2
trillion when compared to the NPS scenario. Much of the incremental investment in
power generation is allocated to the deployment of renewables, whilst over $3
trillion of the incremental investment in energy efficiency is allocated to the transport
sector.
In terms of fuel mix, Figure 28 and Figure 29 below present the primary energy
demand and changes therein from 2011 in 2035 under the IEA's three scenarios.
Figure 28. Primary Energy Demand Under Three Scenarios

Figure 29. Change in Primary Energy Demand from 2011 (in 2035)
2000

18000

16000

NPS
CPS
450

14000

12000
10000
2011

2020

2035

Primary Energy Demand (MTOE)

Primary Energy Demand(MTOE)

20000

1500
1000
500

NPS

CPS
0

450

-500

-1000
-1500

Source: IEA (2013)

Source: IEA (2013), Citi Research

As one can see from the diagram above, the ‘450 scenario’ reduces the primarydemand for fossil fuels and increases the demand for nuclear, bioenergy and otherrenewables.

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Citi GPS: Global Perspectives & Solutions

Impact on Emissions
In meeting the ‘450 scenario’, energy-related emissions would need to peak by
2020 and decline to around 22GT in 2035 as shown in Figure 30 below. The
cumulative emission gap between the NPS and the ‘450 scenario’ is around 156GT
of CO2. The largest reduction in emissions occurs in power generation followed by
the transport and industry sectors (IEA, 2014).
Figure 30. CO2 Emissions in Different Energy Scenarios

45

CO2 emissions (GT)

40
35
30

NPS
Current
450

25
20

15
10

2011

2020

2035

Source: Citi Research

Deriving a Return on Investment
One of the advantages of examining purely capex alongside the potential damagesof climate change, is that one can derive a ‘return’ on that investment in terms of
avoided costs in a way that a holistic energy spend approach cannot.
Figure 32 shows the NPV of the energy capex spend of going down a low carbon
route with a 50% chance of limiting temperature increase to 2°C (the IEA’s ‘450
scenario’) and the energy capex spend for a scenario which increases temperatureby over 3°C (the NPS scenario).
Figure 31. The 3 Scenarios of Potential Cost of Climate Change inTerms of NPV Lost to GDP, at Different Discount Rates

Discount Rate
0%
1%
3%
5%
7%
Source: Citi Research© 2021 Citigroup

NPV of 'Lost' GDP
Low
Central$ Trillion$ Trillion
-20
-44
-14
-31
-7
-16
-4
-8
-2
-5

Upper
$ Trillion
-72
-50
-25
-13
-7

Figure 32. NPV of the Differential Cost Between the IEA’s NPS(Business as Usual) and 450 (Low Carbon) Scenarios, Using Different
Discount Rates

Discount Rate
0%
1%
3%
5%
7%
Source: Citi Research, IEA

NPS$ trillion
48
44
36
31
27

450
$ trillion
53
48
40
34
29

Difference$ trillion
4.8
4.2
3.4
2.7
2.3

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August 2015

Figure 31 and Figure 32 demonstrate that at low ‘societal’ discount rates, climatechange damage costs outweigh the incremental cost of adopting a low carbon path.
It is notable that it is only with relative high discounting rates on the damages thatthe cost would seem hard to justify. Given the inter-generational debate we seesome merit in using a much lower 'social' discount rate than might be applied tousual investment decisions. Conversely, when comparing the potential costs andbenefits of Action, it would seem disingenuous to not discount the liabilities (in termsof potentially avoided costs), but to then compare this to a discounted cost of Action.
In this section we compare the incremental cost of following a low carbon path withthe estimated value of reduced damages in the future. It is also useful to look atthese investment choices in terms of returns as one would any normal investment
choice. Figure 33 and Figure 34 show the implied return in terms of avoided
liabilities of inaction, with reference to the incremental undiscounted cost of Action($4.8 trillion). The numerator used in the calculation is the incremental ‘saved’ GDP
in each year, thereby giving an implied annual ‘return’ on that incremental
investment figure. Figure 34 then takes these implied returns and halves them; thiswould seem appropriate given that the IEA's ‘450 scenario’ is derived to offer a 50%
chance of avoiding a temperature increase of more than 2°C, i.e. the return iseffectively risk adjusted.
Figure 33. Implied Return of Incremental Avoided Costs on Annual
Spend

Figure 34. Risk-Adjusted Return of Incremental Avoided Costs on
Annual Spend, to Reflect 50% Chance of Avoiding Climate Change

25%

25%
Higher returns

High
20%

Low
20%

CentralCentral

Low

High

15%

15%

Higher returns

Low returns
10%

10%
Low returns

5%

0%
2020

5%

2022

2024

2026

2028

2030

Source: Citi Research
As avoided losses increase, the returns
increase to between 3-8%

© 2021 Citigroup

2032

2034

2036

2038

2040

0%
2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

Source: Citi Research

As the figures show, while the risk adjusted returns are limited at lows of 1-4%
depending on the scenario, as the avoided losses increase, those returns increase
dramatically to between 3-10%. While still not enormous, in the context of current
yields, and certainly in the context of the potential implications of inaction (and thatlater remedies are significantly more expensive), the low carbon route begins tolook relatively compelling. Given that there is a reasonable (though not spectacular)
return, and on the basis that simplistically cleaner air must be preferable topollution, the “Why would you not?” argument again comes to the fore — anargument which becomes progressively harder to ignore over time. Coupled withthe fact the total spend is similar under both action and inaction, yet the potential
liabilities of inaction are enormous, it is hard to argue against a path of action.
Admittedly some industries will suffer, others will benefit, and the effects will be felt
differently around the world; the challenge therefore is to get policymakers to thinkholistically and to act accordingly, and to allow the funds to flow in the right
directions (as examined in the final chapter of this report, "Making it Happen").

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Investment in Power Generation
Out of all greenhouse gas emissions (measured in CO2 equivalents for comparative
purposes) energy-related CO2e emissions made up the majority of greenhouse gas
emissions estimated at 65% in 2010. Of those emissions, 90% were from the
combustion of fossil fuels.
Figure 35. Cumulative CO2 Emissions from Energy and Land Use

Figure 36. Percentage of Annual Energy-Related Emissions by Sector(2010)

Cumulative emissions GT CO2

2500

2000

9%

Electricity and heat

6%
1500

Industry
42%
34 GT CO2

1000

23%

Residential

500

0
1870

Transport

1890

1910

1930

1950

Fossil Fuels & Cement

1970

1990

2010

20%

Other

Land use

Source: Boden et al. (2013), Houghton et al. (2012), Citi Research

Source: IEA (2014), Citi Research

Of those energy related emissions, by far the largest part (42% in 2013) were fromthe power sector, itself the largest single greenhouse gas emitter in the climatechange debate. Transport was responsible for a further 23%, meaning thatcombined with power, they accounted for two thirds of emissions from energy, whichitself was two thirds of total emissions.
We focus on the electricity sector in detail as
it is the largest emitter

While we recognize that the electricity market is only part of the puzzle to combat
climate change, given that it is the largest single greenhouse gas emitter in the
climate change debate, policy action in the power market would make potentiallythe most meaningful impact to greenhouse gas emissions, if designed andimplemented appropriately. Hence we have focused our attention in this report on
the costs associated with transforming the electricity market, what impact thesetransformations have on the ‘carbon budget’ and the dynamics of thistransformation.
We have constructed two energy scenarios which form the basis of the analysis in
this report:
 Citi's ‘Inaction’ scenario: An energy mix out to 2040 which is essentially abusiness as usual scenario, which assumes the current energy mix remains
relatively constant and that there is no investment in energy efficiency. While
there obviously is current investment into energy efficiency we are trying toassess the incremental amount which is being spent on following a low carbon
future to examine the ‘affordability’ of preventing climate change, and hence a‘zero’ baseline is necessary.

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 Citi’s ‘Action’ scenario: In constructing this scenario to 2040 we have focused

the bulk of our analysis on the power sector, as the largest single emitter in theenergy segment, (an approach which is outlined in more detail in the next
chapter). We assume significantly greater levels of renewable deployment thanthe IEA’s ‘450 scenario’ and that costs reduce faster. Moreover, our approach toassessing costs differs materially. Efficiency, largely in transport, is also
examined in a separate chapter. In our assumptions for the transport andindustry segments of energy we have adapted the IEA’s assumptions, applying
assumptions of our own and altering time frames. Having focused on the power
sector in this report, both of these areas we intend to be subject of more detailed
follow-on reports.

Levelized Cost of Electricity: A Different Measure of Cost
Given the existing rigor of the IEA’s capex-based approach, we have chosen to
adopt a slightly different approach to assessing the overall likely costs of energy to
the global economy.
We take into consideration not only capex
spending but also include the overall
avoided fuel costs of moving to a low carbon
future.

Instead of estimating the capital cost requirements to enable a transition in the
global energy market (which has already been done) we focus our Citi analysis on
the overall costs of energy procurement. In the power sector where we focus ouranalysis, we therefore use a levelized cost of electricity (LCOE) approach which
captures both the fuel and capital costs over the useful life of an asset. Effectively
the LCOE answers the question: “At what price does a certain power plant have tosell electricity to break even for a plant operator?”
Examining just capex spend in the energy transformation runs the risk of missing
the avoided cost in terms of future reduced fuel demand. While this is arguably
partially captured by lower required upstream capex in fossil fuels, we believe that
adopting an LCOE approach to the electricity sector therefore provides a more
holistic view. No approach is perfect however; an LCOE approach has its own
drawbacks in terms of assumptions on commodity prices, regional differentials etc.,
but we believe it can complement capex-based analysis if used in conjunction, andmore it allows different types of analysis such as comparing the total amounts‘spent’ on energy to be compared to for example GDP levels. The benefits andpitfalls of both approaches are examined later.
Why is LCOE Useful to Compare Different Technologies?
Different technologies have different cost profiles. While renewable energy costs
more to build relative to a unit of energy produced, this ignores the fact that once
built, renewables plants incur limited costs compared to fossil fuels, as they
consume no fuel. The useful life of a coal-fired plant is about 40 years whilst for asolar photovoltaic (solar PV) plant it is 25 years. This makes the usefulness a dollarof capex spent on a coal-fired plant difficult to compare to a dollar spent on a solar
PV plant.
As the levelized cost of electricity captures all costs of electricity generation over the
lifetime for each technology it is widely used to compare cost competitiveness ofdifferent fuel types.

© 2021 Citigroup

August 2015

Citi GPS: Global Perspectives & Solutions

Figure 37. Levelized Cost of Electricity

Source: Citi Research

The Benefits of an LCOE Approach (1): The Difference in Cost
Breakdown
Capex makes up the majority of the costs forrenewables, whilst for gas 80% of the costs
relate to fuel© 2021 Citigroup

The cost composition between different technologies can vary quite markedly. For
renewable energy, upfront capital expenditure on equipment makes up the majority
of costs: around 60%. As renewable energy projects are generally levered withdebt, financing costs also play an important part in the cost equation. On the other
hand, coal and gas-fired plants are more sensitive to fuel costs. This is particularly
extreme for a gas-fired plant, for which fuel costs make up over 80% of its levelized
cost of generation. Variations in gas price can therefore cause large swings in thecompetitiveness of gas-fired plants. For coal-fired plants the economics are lessbiased towards fuel cost while on the other hand upfront construction costs make up
25% of total cost of electricity produced. Figure 38 shows a full cost breakdown of
all technologies considered.

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Citi GPS: Global Perspectives & Solutions

August 2015

Figure 38. Levelized Cost of Electricity Breakdown for Different Generating Types

Coal

Gas
Capex
Fuel
Financing
Opex

Wind

Tax

Solar

0%

20%

40%
60%
LCOE composition

80%

100%

Source: Citi Research

As Figure 38 highlights, capex as a proportion of the overall cost of a unit ofelectricity generated by different technologies varies dramatically, from around 10%
for a combined cycle gas turbine (CCGT), up to around 60% for both wind andsolar; conversely, fuel makes up over 80% of gas LCOE, versus zero for wind andsolar.
Accordingly, examining capex on a standalone basis runs the risk of overstating thecost of renewables, and understating the total cost of conventional generation
technologies. This is particularly true if any form of discounting is used, as the bulkof the costs for renewables are upfront, whereas for gas they would be backloaded.

The Benefits of an LCOE Approach (2): The Pace of Change
Given the rapid increase in the pace of substitution in energy markets over the last
two years, the main focus of the original Citi GPS: ENERGY DARWINISM report
was to show how dangerous assumptions on capex can be when the pace ofchange in an industry is so rapid, and the rate of evolution so fast.
One of the key theories from the original energy Darwin report was highlighting
these differing rates of cost evolution of different generation technologies. Solar inparticular was exhibiting learning rates in excess of 20% (i.e. the cost of a panel
would fall by >20% for every doubling of installed capacity), wind at 7.4%, gas was
evolving via the shale revolution in the US, while nuclear was becoming more
expensive, and liquefied natural gas (LNG) had also increased in cost by around
10% per annum over the last decade.
Hence the report highlighted the lack of certainty over returns on many investments
at the upper end of the cost curves in the energy industry over the next five years,
let alone their total lives, which could be anywhere up to 40 years. This effect has
become even more prevalent even more quickly than we anticipated, withsignificant quantities of stranded assets across the whole breadth of energy© 2021 Citigroup

August 2015

47

Citi GPS: Global Perspectives & Solutionsindustry, from coal mines, gas fields, to power generation facilities. Accordingly,
understanding those rates of change and the risk of stranded assets (and whether
assets will actually be built, thereby affecting capex spend, given the lack of
certainty over returns) becomes ever more important. As before, we are not trying to
say that LCOE is ‘better’ than a capex based approach, rather each has its own
advantages, and an LCOE approach highlights certain aspects that could be missed
in a capex only approach; examining LCOE in conjunction with capex-based
approaches should therefore add to the debate.

Renewable Energy’s ‘Technology’ Characteristics
Learning rates for renewables should
continue making the technologies ever morecompetitive, and ultimately cheaper thanconventional, as is the case in manymarkets alreadyWe expect installation costs for wind turbines and solar modules to continue todecline rapidly. Admittedly past declines in the solar PV space will be more difficult
to replicate as there were many one-offs such as the manufacturing move to China
and margin compression across the value chain. We estimate that going forward
learning rates in solar PV modules will be up to 19% whilst onshore wind turbine
learning rates are likely to hover around 7%. We find it useful to convert theselearning rates (which express cost reductions for every doubling of installedcapacity), into year on year reductions. For solar PV modules the year on year
reduction would amount to 2% whilst for onshore wind this number is 1%.

Figure 39. Solar Learning Rate 19%
100

Solar module price in $/W

2008

1989

32%

10

Figure 40. Wind Learning Rate 6.7%

In 1976 solar
module ASP
at $74.5/W

2013

2015

Subsidy boom

10%

7%
In 1984 windturbine costat $2.5/W

Discovery phase39%

Normalisation

1
19%

Austerity

0.1
1

10

Source: BNEF, Citi Research© 2021 Citigroup

100
1000
10000
Cumulative installation base in MW

2015:$0.69/W 2020:$0.53/W
1000001000000

2020: 0.95$/W

Source: BNEF, Citi Research

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August 2015

Why Renewable Energy Could be a Viable Solution
Renewable energy will become much morecompetitive in the future

In the initial years, the cost of procurement from carbon-light sources such as
renewable energy is costly (solar at ~$90-180/MWh, wind at $60-80/MWh, versus
coal at $60-70/MWh and gas at $50-100/MWh). Solar PV in particular is more
expensive than conventional fuels in most parts of the world (with exceptions inregions with abundant sunshine such as Latin America and the Middle East).
However, as component costs and financing of renewable projects decline,
renewable energy becomes more competitive – for onshore wind, parity is reachedearlier than for solar PV. Beyond that point there is a financial advantage ininstalling renewable energy and we should think of installing renewable energy as abenefit rather than a cost to society. Figure 41 shows our estimates of the global
cost of power by various fuel-types.
Figure 41. Cost of Energy from Renewables Expected to Fall Drastically Over the Next Years

200.0

LCOE in $/MWh

150.0

100.0

Solar

Gas
50.0

Coal
Wind

2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040

0.0

Source: Citi ResearchThis is one of the key benefits of examining total spend on an LCOE basis, as it
demonstrates well the shifting relative economics of different generation
technologies. Most important is this point that as renewables become ‘cheaper’ thanconventional, there is effectively a net saving to using them.

© 2021 Citigroup

August 2015

Citi GPS: Global Perspectives & Solutions

The Disadvantages of an LCOE Approach
The disadvantages to using LCOE, or conversely the advantages of using a purely
capex-focused approach are as follows: The main argument against the use of LCOE and total costs is that it requires

significant assumptions on commodity prices, which are of course extremely
difficult to forecast with any accuracy particularly over a 25 year time horizon.
However, one could counter that those prices will have an equally large impact
on the returns that the upstream capex will generate – by assuming that fuelcosts are adequately captured by upstream capex therefore assumes that an
adequate return will be earned on that investment, and therefore it could beargued makes just as large indirect assumptions on future commodity prices as
an LCOE approach does. This highlights once again the work contained in theoriginal Energy Darwinism report, that the pace of change in energy markets
makes returns on investment highly uncertain for many forms of energy assets,
particularly conventional.
 It can be argued that a purely capex-based approach does incorporate fuel costs,

in that they are effectively captured in the upstream investment into coal mines,
oil and gas fields etc., the fuel ‘costs’ essentially providing a return on the capital
investment. However, once again this assumes that load factors, fuel costs andselling prices will be adequate, and hence once again assumes in many ways
just as many assumptions as an LCOE approach does.
 The costs of both conventional and renewable energy vary significantly byregion. The economics of gas-fired plant are most sensitive to gas prices, inwhich there is a large discrepancy between regions as shown in Figure 42. In the
US the shale gas boom has drastically driven down gas prices and the oil pricedrop has now brought gas prices down to below $3/MMBtu. However, in otherregions, gas prices are still higher due the lack of availability, such as Europe
where gas trades at $7-8/MMBtu, and in Japan with gas prices up to $15/MMBtu.
These price discrepancies across regions have a large impact on the economic
viability of gas-fired plants vs renewables. The economics of renewable energy
also vary significantly around the world. In particular the cost of solar PV
electricity is very sensitive to insolation levels (sunshine hours), which varies
drastically across regions as highlighted in Figure 43.

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Figure 42. Gas Economics Heavily Depend on Gas Price

August 2015

Figure 43. Solar PV Cost of Electricity Generation Across Different
Regions – Citi Projections for 2015
200
180

Cost of solar PV in $/MWh$15/MMBtu$8/MMBtu

160
140
120

100
80
60
40
20

$3/MMBtu

0

0

20

40

60
80
LCOE in $/MWh

100

120

140

Source: Citi Research

Source: Citi Research

Capex vs. LCOE Conclusions
So, both a purely capex-based approach and an LCOE approach have benefits andlimitations. By choosing to use an LCOE approach we are not saying it is better –merely different, and it does highlight some of the benefits of following a low carbon
path. In reality of course neither approach is perfect, and while there are argumentsthat there are ‘less’ assumptions in adopting a capex-based approach, this has
been done very effectively by institutions such as the IEA, and to replicate it here
might add limited additional value to the debate. What adopting an LCOE andholistic approach alongside the capex-based work does emphasize is the rapidly
reducing costs of alternative energy, and in particular the ultimate savings via lower
spend on commodities used in a lower carbon path.
Figure 44. The Advantages and Disadvantages of a Capex-Based Approach and LCOE
Advantages of capex/ disadvantages of LCOE

Advantages of LCOE/disadvantages of capex

Less apparent assumptions on fuel costs vs. LCOE

Total costs of generation vary widely by technology
between upfront capex and fuel cost
Does not penalize up front cost nature of renewables if
discounting is used
Highlights effects of fuel savings via renewables

Less regional variation in costs vs. LCOE
Avoids transportation cost assumptions

Intermittency of renewables and associated grid costs Highlights relative speeds of changes in costs ofis not captured in LCOE (unless associated T&D etc. differing generation technologies
spend is adjusted)
Source: Citi Research© 2021 Citigroup

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Citi GPS: Global Perspectives & Solutions

Assessing the Global Spend on Energy Over the Next
Quarter Century
As discussed, while other methods assess the investment required in energy tofollow a low carbon path, we have adopted a slightly different approach, looking at
the potential total energy spend under differing energy mix assumptions. The
holistic approach provides an additional perspective that can be used alongside apurely capex-focused approach, allowing us to examine its significance in different
ways such as allowing us to assess the total amount spent on energy supply in ayear relative to the size of the global economy, as well as gaining a perspective into
the quantity of stranded assets potentially ‘created’ by following a low carbon path.
Applying the LCOE assumptions to our adapted global power model produces thetotal spend scenarios outlined in Figure 45. To be clear, this chart shows not just thecapital investment required in power, but incorporates the cost of fuel used. For
other areas of use it incorporates energy usage at current Citi commodity forecast
prices and then held flat from 2018 onwards to 2040. In terms of assumptions wehave not made any assumptions on long term commodity prices beyond 2018, but
simply assumed that these prices remain flat over the life of the analysis. Clearlychanges in commodity prices (discussed in a later section) would have a material
impact on relative costs and savings, though we would note that the low nature ofsome commodities such as oil reduces investment therein, as well as potential
savings from not using that fuel (i.e. following a low carbon path).
The detailed analysis of the costs of the impact of climate change, and increased
investment in both the power market and energy efficiency is provided in dedicatedchapters later in this report. However, at this stage we provide a summary of thoseholistic costs of capex and fuel spend to the global economy over the next quarter
century, as shown in Figure 45.

© 2021 Citigroup

51

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© 2021 Citigroup

Figure 45. Estimated Spend on Energy Globally, 2015-40 Under Citi’s ‘Action’ and ‘Inaction’ Scenarios, vs. Potential ‘Costs’ of Climate Change
Power$67.5trn

Transport$38.5trn
Action$190.2trn

Coal$11.4trn
Oil$33.5trnGas$10.2trn

Biofuels$3.7trn

Renewables$6.8trnOther$1.2trn

Nuclear$11.8trn
Buildings/Industry$7.9trn

Energy Efficiency$19.4trn

Transport$11.5trnOil$24.2trnWind$4.3trnHydro$11.0trn
Other$8.0trn
T&D$8.1trnGas$14.9trn
Other$19.8trn

Power$74.7trn

Inaction$192.0trn

Transport$47.4trn

Other$69.8trn

Coal$23.0trnOil$44.8trnGas$13.6trn

Biofuels$1.8trn

Renewables$1.8trnOther$0.8trn

Nuclear$9.6trn

Coal$6.7rnOil$26.5trn

NPV of damages by scenario ($trn)
Low
Medium
High

0%
1%
3%
5%
7%

20.5
14.4
7.3
3.9
2.2

44.3
31.0
15.7
8.3
4.7

72.0
50.3
25.4
13.4
7.4

Gas
$17.0trn

Hydro$11.0trn
Other$7.1trn
T&D$8.6trnOther$19.6trn

Note: Pricing assumptions from 2018 onwards for illustration purpose only: Coal at $74/mt, Gas at $6.95/mmbtu and Oil at $80.80/bbl
Source: Citi ResearchWind$1.5trn

14 August 2015

Discount
Rate

Solar
$0.3trn

Citi GPS: Global Perspectives & Solutions

Other$64.9trn

Coal$6.0trnSolar$2.6trn

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Citi GPS: Global Perspectives & Solutions

Figure 46. Changes in Total Energy Spend Between our ‘Action’ and ‘Inaction’ Scenarios.

Source: Citi Research

Figure 47. Difference in Total Investment Between our ‘Action’ and ‘Inaction’ Scenarios, 2015-2040.

Source: Citi Research© 2021 Citigroup

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Figure 45 shows the total spend and split therein of energy spending over the next
25 years under both our 'Action' and 'Inaction' scenarios. While electricity (the main
focus of this report examined in more detail in a later section) is calculated on an
LCOE basis, other areas such as transport are calculated using the expectedvolumes used, multiplied by current forecast prices, with prices held constantbeyond 2018 (i.e. no assumptions are made regarding changes to prices). Clearly
this latter point is important – if commodity prices such as oil had not plummeted inrecent months, the total spend figures would be considerably higher.
Figure 48. Energy Spend in ‘Action’ and ‘Inaction’ Scenarios by
Segment, 2015-40

Figure 49. Change in Energy Spend in ‘Action’ and ‘Inaction’ Scenarios
by Segment, 2015-40

80

25
ActionDifference in energy spend 2015-40 ($trn)

Total energy spend 2015-40 ($trn)

70
Inaction

60
50
40
30
20
10
0

20

15
10
5
0
-5
-10
-15

Power

Transport

Energy efficiency

Source: Citi Research

The difference in spending between the‘Inaction’ and ‘Action’ scenario is marginal

Other

Power

Transport

Energy efficiency

Other

Source: Citi Research

While not perfect, this approach is designed to capture how much we will 'spend' onenergy over the next quarter century. The key point to take is that the difference intotal spend is marginal between the two scenarios, mainly because although wespend significantly more on renewables and energy efficiency in the 'Action'
scenario, this is offset by reduced spend on fossil fuels (as renewables don’t use'fuel', and energy efficiency is effectively negative fuel use). However, if we go down
the route of ‘Inaction’ and do not invest into a low carbon economy, we could
potentially face some negative impacts such as changes to rainfall patterns, a
reduction in crop production, an increase in sea level rise etc., the estimated costsof which are highlighted in the box on Figure 45. Whilst these could ultimately affectthe livelihoods of many people, they will also have a negative effect on global GDP.
This is addressed in more detail in other chapters.
This approach also makes it easier to compare the costs of energy to global GDP interms of energy acting as a brake or accelerator for global growth in a way thatanalyzing purely capex perhaps doesn’t. It also gives a sense of the value of theassets which remain ‘unused’, i.e. becoming stranded under a low carbon scenario.
Admittedly this approach would vary dramatically depending on pricing
assumptions, but as we discussed in a later chapter, it highlights the decreasing
proportion of total energy costs which are in fact fuel.

© 2021 Citigroup

August 2015

Citi GPS: Global Perspectives & Solutions

Drivers of Change (1): The Power
Market Transformation
Highlights
 The power market is the single largest carbon emitter in the energy market andcurrently emits 12.6GT CO2e in 2015. This number is projected to double by2040 in the absence of investments into abatement measures such as renewableenergy (mainly solar PV and onshore wind) and energy efficiency to reduce
electricity consumption.
 Coal is the single largest carbon emitter in the power market and makes up 41%of the fuel mix given its low cost, yet emits we estimate 73% of the total
emissions from power generation.
 In this chapter we examine in detail our Citi ‘Action’ and ‘Inaction’ scenarios witha particular focus on the power sector as the largest single emitter. In particular
we focus on where our scenarios differ from others such as those from the IEA;
in summary we assume faster cost reductions and a greater penetration ofrenewables. While most examinations of cost focus purely on upfront capex, wehave chosen to adopt a different approach, namely ‘LCOE’, which captures boththe upfront investment costs and operating costs (including fuel) thereafter.
 In summary we find that the incremental cost of following a low carbon route in

the power sector (our so-called Citi ‘Action’ scenario) is only around $1.1 trillion
out to 2040. While costs are more expensive in early years, as renewable
technologies become cheaper in later years due to their impressive learning
rates, we effectively save money via the lower fuel usage in conventional plants,
as well as reduced overall consumption via investment in energy efficiency.
 As a result, carbon emissions in the order of 200GT CO2e can be avoided

between 2015 and 2040. A third of the avoided carbon can be attributed toenergy efficiency investments and the other two thirds can be attributed torenewable energy investments.
 We examine the implications of these incremental costs for a potential price ofcarbon, how it might vary around the world, and then incorporate a cost of carbon
into the original ‘Energy Darwinism’ integrated global energy cost curves to
examine the implications for stranded assets. Unsurprisingly, coal is the biggest
loser, while the key beneficiaries are renewables given their limited lifetime
emissions.
 We also highlight the potential that energy storage offers, in terms of offsetting

the intermittency of renewables, as well as its wide reaching implications forenergy markets overall.

© 2021 Citigroup

55

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Citi GPS: Global Perspectives & Solutions

August 2015

Citi’s Trajectory into a Carbon-Light Electricity Mix
In order to make a cost and impact assessment, we look at the Citi ‘Action’ and‘Inaction’ scenarios and assess the investment requirements and the impact on
carbon emissions under both scenarios:
Citi ‘Action’ scenario: This scenario reflects a transition to a carbon-light electricity
mix and investments in (1) renewable energy and (2) energy efficiency to mitigate
CO2 emissions. In this scenario we assume an electricity generation CAGR of 1.6%
between 2015 and 2040 – a lower rate than our ‘Inaction’ scenario due to energy
efficiency investments. Further our Citi ‘Action’ scenario assumes renewable energy
penetration increases to 34% by 2040 from 6% in 2012.
Citi ‘Inaction’ scenario: This scenario reflects no change in our current carbonheavy electricity mix. In this scenario renewables investment will pick up but will
only stay at 6% penetration by 2040. Fossil fuels will make up two thirds of ourelectricity mix with coal continuing to take the largest market share with 40%.
Further this scenario assumes a higher electricity generation CAGR of 2.4%
between 2015 and 2040 due to zero investments into energy efficiency.

Power consumption will grow at a lower rate
in our ‘action’ scenario; fossil fuels would
decline from 65% to 28% of the power
marketIn our ‘Action’ scenario where investments are triggered, we estimate power
consumption to grow at a slower rate than in our inaction scenario due toinvestments into energy efficiency. In 2040 we estimate this gap to widen to 20%
between both of our scenarios (Figure 50).
For the electricity mix we have assumed that in our status quo scenario theelectricity mix stays constant over time weighted towards fossil fuels – coal 40%,gas 22% and renewables 6%. In our Citi ‘Action’ scenario we have assumed thatthe fossil fuel share declines from currently over 64% to 28% whilst solar PV andonshore wind energy could make up to 22% of the electricity mix in our Citi ‘Action’scenario (Figure 51).

Figure 50. Annual Electricity Production for Both Citi Scenarios

Figure 51. Carbon-Light Scenario Sees Fossil Fuel Share to Decline
from 64% in 2015 to 28% in 2040

50,00040,00045,00035,000Electricity generation in TWh

Electricity production in TWh

40,00035,00030,00025,00020,00015,00010,0005,000

30,00025,00020,00015,00010,000
5,000

2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040

0

Carbon light

Source: Citi Research© 2021 Citigroup0

Carbon heavy

Source: Citi Research

Other
Nuclear
Coal
Gas
Hydro
Solar
Wind

August 2015

57

Citi GPS: Global Perspectives & Solutions

Where Are We Different From the IEA?
The key difference between our forecasts and the IEA’s is the assumed penetrationof renewable energy in the electricity mix. In our Citi ‘Action’ scenario we haveassumed a higher rate of penetration for solar PV and onshore wind installations(Figure 53 and Figure 54). In particular, our forecasts for solar PV deviatesignificantly from the IEA’s.

Solar PV would increase at 53GW per
annum from 2013-2020

Figure 52. Fuel Mix for Electricity Generation by 2020
2020
FossilRenewables
Nuclear
Hydro
Total
Source: Citi Research

Citi Action
58.3%
12.4%
12.3%
17.0%
100%

Citi Inaction
67.4%
5.8%
10.7%
16.0%
100%

IEA 450
60.3%
10.3%
12.3%
17.0%
100%

IEA CPS
64.1%
9.0%
11.3%
15.6%
100%

Our granular country by country solar PV forecasts show an average installation
rate of 53GW per annum 2013-2020. This compares to 33-34GW installations by
the IEA (lower bound New Policy scenario, upper bound 450 scenario), as seen in
Figure 53. These differentials are also clear in our wind assumptions (Figure 54).
Figure 53. Citi Solar PV Installations

Figure 54. Citi Onshore Wind Installations

80.0

70.0

70.0

60.0
Citi average installations
Citi average installations

Wind onshore installations in GW

Solar PV installations in GW

60.0

50.0

40.0

30.0

IEA band

20.0

50.0
IEA band

40.0

30.0

20.0

10.0

10.0

0.0

0.0
2013

2014

2015

Source: IEA (2014), Citi Research

2016

2017

2018

2019

2020

2013

2014

2015

2016

2017

2018

2019

2020

Source: IEA (2014) Citi Research

Our bottom-up assumptions for both wind and solar by country are shown in Figure
55 and Figure 56.

© 2021 Citigroup

58

Citi GPS: Global Perspectives & Solutions

August 2015

Figure 55. Citi Solar PV Forecasts
Annual Demand (MW)

2007A

2008A

2009A

2010A

2013A

2014A

2015E

2016E

2017E

2018E

2019E

2020E

Europe
Italy
Germany
Spain
France
UK
ROE

2,362
70
1,400
600
50
0
242

4,835
338
1,600
2,500
100
0
297

6,763
719
4,500
100
100
0
1,344

12,014 21,478 15,236 10,572
2,321 9,446 3,564 1,364
7,392 7,485 7,600 3,304
275
372
275
143
707
1,671 1,022
649
115
784
725
1,082
1,204 1,720 2,050 4,030

6,985
395
1,901
22
926
2,273
1,468

7,836
533
1616
25
1019
2955
1688

7,066
720
1777
29
1120
1477
1941

8,240
756
1866
33
1233
2216
2136

8,762
794
1960
38
1294
2327
2349

9,204
833
2058
44
1359
2443
2467

9,669
875
2160
51
1427
2565
2590

North America
USA
Canada

200
200
0

350
350
0

400
350
50

1,129
984
145

1,961
1,712
249

3,568
3,300
268

5,056
4,621
435

6,908
6,312
596

9,177
8,521
656

12,212
11,504
708

6,840
6,097
743

7,182
6,402
781

7,542
6,722
820

7,919
7,058
861

South America
Chile
Rest of Latam

3
0
3

3
0
3

7
0
7

5
0
5

11
0
11

95
2
93

103
13
90

614
483
131

1,297
773
524

1,752
966
786

2,103
531
1572

2,314
584
1729

2,545
643
1902

2,799
707
2092

Asia
Japan
China
Korea
India
Other Asia

390
300
40
50
0
0

630
300
30
300
0
0

840
500
200
100
20
20

1,953
900
450
148
95
360

5,272
1,155
3,240
157
300
420

8,832
2,000
5,000
252
980
600

22,117 25,357 29,067 30,635 30,678 32,524 34,119 35,564
7,092 10,253 9,000 8,000 6,000 6,060 6,121 6,182
12,920 13,000 16,000 17,600 18,480 19,404 20,374 21,393
361
480
490
499
509
520
530
541
968
815
2,000 2,800 3,780 4,536 4,990 5,239
776
809
1,578 1,735 1,909 2,004 2,104 2,210

Asia Pac
Australia

20
20

20
20

100
100

387
387

774
774

1115
1,115

861
861

921
921

939
939

958
958

977
977

997
997

1017
1017

1037
1037

South Africa

0

0

0

0

2

7

177

901

1,126

1,408

1,760

2,112

2,534

3,041

ROW

100

100

150

1,942

2,606

2,200

1,392

3,315

4,973

6,216

10,567 11,095 11,650 12,232

Total

3,075

5,938

8,260

17,430 32,104 31,053 40,278 45,001 54,415 60,246 61,165 64,985 68,610 72,261

Source: Citi Research© 2021 Citigroup

2011A

2012A

August 2015

59

Citi GPS: Global Perspectives & Solutions

Figure 56. Citi Onshore Wind Forecasts
Annual installations (MW)2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 A 2014 A 2015 F 2016 F 2017 F 2018 F 2019 F 2020 F

Asia
China
India
Japan
Rest of Asia

5,226
3,304
1,575
229
118

8,391
6,110
1,810
342
129

15,451 21,468 20,963 15,645 18,212 26,006 31,414 29,215 30,297 31,919 32,425 33,000
13,785 18,928 17,631 12,960 16,088 23,196 28,000 25,000 25,000 26,000 26,000 26,000
1,271 2,139 3,019 2,337 1,729 2,315 2,778 3,334 3,667 4,034 4,235 4,447
205
249
202
78
47
130
260
494
1,235 1,482 1,778 2,134
190
152
111
270
348
365
376
387
395
403
411
419

EuropeGermany
Spain
Denmark
Italy
FranceUK
Portugal
Netherlands
SwedenPolandTurkeyRest of Europe

8,662
1,667
3,522
3
603
888
427
434
210
217
123
568

8,601
1,656
1,544
38
1,010
950
568
712
478
260
268
311
806

10,730 10,176 10,396 12,774 11,660 12,857 10,184 10,516 11,050 11,581 12,120 12,737
1,874 1,414 1,880 2,199 2,980 5,279 2,500 2,500 2,500 2,500 2,500 2,500
2,471 1,463 1,051 1,110
175
28
50
50
50
50
50
50
302
284
207
206
610
105
100
100
100
100
100
100
1,113
948
1,081 1,240
434
108
111
115
116
117
118
119
1,170 1,396
837
816
631
1,042 1,250 1,438 1,582 1,740 1,827 1,918
1,271 1,003 1,308 2,093 1,882 1,736 1,500 1,620 1,750 1,890 2,041 2,204
673
171
673
150
195
184
190
195
197
199
201
203
- 10
54
3
119
302
141
145
150
151
153
154
156
512
603
736
847
724
1,050
890
600
550
490
460
450
181
455
436
880
894
444
488
537
591
650
715
787
343
528
477
506
647
804
965
1,158 1,389 1,598 1,837 2,113
830
1,857 1,707 2,608 2,186 1,936 1,994 2,054 2,074 2,095 2,116 2,137

North America
US
CanadaMexico

5,630
5,244
386
-

8,767
8,244
523
-

11,083
10,018
950
115

6,218
5,212
689
317

7,938
6,631
1,257
50

14,985
13,078
939
968

3,063
1,084
1,599
380

7,359
4,854
1,871
634

9,851
7,000
2,058
793

10,392
8,000
1,441
951

6,559
4,000
1,513
1,046

7,087
4,400
1,588
1,098

7,629
4,840
1,636
1,153

8,220
5,324
1,685
1,211

Latam
BrazilChile
Rest of Latam

30
10
18
2

121
94
27

538
265
148
125

372
321
4
47

804
504
300

1,249
1,077
33
139

1,234
953
130
151

3,750
2,472
506
772

3,691
2,596
300
795

3,889
2,725
345
819

4,102
2,862
397
844

4,330
3,005
456
869

4,575
3,155
525
895

4,838
3,313
603
922

Pacific Region
Australia
Rest

158
7
151

485
482
3

578
406
172

295
278
17

345
236
109

358
358
-

655
655
-

567
567
-

600
600
-

600
600
-

200
200
-

200
200
-

200
200
-

200
200
-

Africa and Middle East
Ethopia
Egypt
MoroccoSouth Africa
Rest

160
80
60
20

98
55
10
33

230
65
119
46

199
120
33
46

5
5
-

95
81
14

90
90
-

934
300
560
74

926
300
616
10

988
300
678
10

1,055
300
745
10

1,130
300
820
10

1,212
300
902
10

1,302
300
992
10

Total

19,866 26,463 38,610 38,728 40,451 45,106 34,914 51,473 56,665 55,600 53,263 56,246 58,160 60,298

Source: Citi Research© 2021 Citigroup

60

Citi GPS: Global Perspectives & Solutions

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$1.1 Trillion: The Cost of Overhauling the Power Market
Figure 57 and Figure 58 show the split of total investment in the power market
under the two different Citi scenarios. As the charts show, the difference in the total
bill between 2015 and 2040 is $6.9 trillion, with ‘Action’ being less costly, though ofcourse this ignores the increased investment in energy efficiency which more thanoffsets this saving.
Figure 57. Total Spend on Electricity Using an LCOE Approach in Citi’s‘Inaction’ Scenario. (Total spend = $66.1trn)

Figure 58. Total Spend on Electricity Using an LCOE Approach in Citi’s‘Action’ Scenario. (Total spend = $59.4trn)

Other, $7.1trn,
11%

Other, $8.0trn,
14%

Coal, $11.4trn,
19%

Coal, $23.0trn,
35%

Hydro, $11.0trn,
17%

Hydro, $11.0trn,
19%Gas, $10.2trn,
17%

Nuclear, $9.6trn,
14%
Solar, $2.6trn, 4%Wind, $1.5trn, 2%

Nuclear, $11.8trn,
20%Gas, $13.6trn,
21%

Wind, $4.3trn, 7%

Solar, $0.3trn, 0%

Source: Citi Research

Source: Citi Research

Converting these differentials to a timeline showing incremental investment vs.
savings on power costs produces the results shown in Figure 59.
Figure 59. The Net and Cumulative Incremental Costs of Following the Citi ‘Action’ Scenario
1,400
1,200

Undiscounted spend/savings ($bn)

1,000
800
600
400
200
0
-200
-400
-600
-800
energy efficiency spend

Energy efficiency/renewables savings

Net annual cost (saving)

Cumulative cost

Source: IEA (2014), Citi Research© 2021 Citigroup

August 2015

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Citi GPS: Global Perspectives & Solutions

We estimate that by 2030 the cost of power production from renewables will havecome down far enough to be fully cost competitive. However, this benefit is thenoffset by investments needed for energy efficiency on both the demand-side and theindustry-related side.
Cumulative incremental electricity
investment between both scenarios would
amount to $1.1 trillion

Overall, in the period 2015-2040 we estimate that cumulative incremental
investments will amount to $1.1 trillion, as highlighted in Figure 59, Figure 60, andFigure 61.

Figure 60. Total Investment in Both Citi Scenarios 2015-40 (Including
Efficiency, but Excluding T&D Spend)

Figure 61. Incremental Difference in Investments Annually Between
Both Scenarios

80,0001,200.0
Cumulative investment of $1.1trn

67.3

66.1

1,000.0

Total investment in $bn

60,000
Energy efficiency

50,000

Other
NuclearCoal

40,000Gas
Hydro
30,000Solar
Wind

Cumulative investment in $bn

70,000

800.0

600.0

400.0

20,000200.0
10,000

Citi Action

Source: Citi Research

Citi Inaction

2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040

0.0
0

Source: Citi Research

However, this amount could be a smaller sum if one discounts those costs that arisein the future. The question then becomes what is the right discount rate to use when
considering investments into a carbon-light power market. From an investment pointof view one would consider the cost of capital of renewable projects. Ultimately
project owners and bank providers bear the financial risk when investing into theseinfrastructure projects. Further, the equity on projects bears the majority of financial
risk for those projects. Currently the cost of equity for renewables projects is around
5-7% depending on what type of asset and how stable and trustworthy theregulatory regime is deemed. However as our investment costs are denominated inreal terms, the corresponding cost of equity could drop by 1-2% to bring the realproject cost of equity to around 4-5%.
However, contrary to the argument that investments into a carbon-light future should
be discounted from a financial viewpoint, climate change scientists have argued that
discounting should reflect an inter-generational trade off, as discussed earlier.
Fundamentally, the idea of discounting is being used in finance because monetary
value can be enhanced from one period to another via say a bank savings account,and therefore a higher monetary value is assigned to the present. When considering
climate change, some scientists argue that society should not use any form of
discounting as it implicitly assigns a higher value to present generations vs. future
generations.
The difference between a low discount rate and a discount rate that reflects theequity risk of renewable projects can bring down costs from $1.1 trillion to $0.4
trillion in net present value (NPV) terms. However we also note that a consistent
discounting rate needs to be used when contrasting investments with avoided
liabilities.
© 2021 Citigroup

62

Citi GPS: Global Perspectives & Solutions

August 2015

Figure 62. Cost of Action: How Much Does It Cost Society To Transform Our Current Electricity
Market in Net Present Value (NPV) Terms
1,200.0

Cost of action in $bn

1,000.0

800.0

600.0

Scientist andAcademics WACC
(weighted average
cost of capital)

400.0

Investment WACC
(weighted average
cost of capital) for
renewables
projects

200.0

0.0
1.0%

2.0%

3.0%

4.0%

5.0%
6.0%
Discount rate

7.0%

8.0%

9.0%

10.0%

Source: Citi Research

Impact of Power Transformation on CO2
For a 50% chance of meeting temperature
increase of 2°C, cumulative GHG emissions
need to be capped at 2,000GT CO2e

In this section we examine our scenarios in emissions terms. Malte Meinshausen
has predicted for an illustrative 50% chance to not exceed long term temperaturerises beyond 2 degrees Celsius; the allowable greenhouse gas emissions budget is2,000GT CO2e between 2000 and 2049.
Meinshausen, who makes a distinction between greenhouse gases (Kyoto gases
below) and carbon dioxide (CO2), has attached the following probabilities to
exceeding 2 degree Celsius in long term temperature rises for different greenhousegases and carbon dioxide emission levels in Figure 63.
Figure 63. Meinshausen Greenhouse Gas Budget
Indicator
Cumulative total CO2 emissions 2000-49

Cumulative Kyoto-gas emissions 2000-49

Source: Meinshausen et al (2009)© 2021 Citigroup

Probability of exceeding 2 degrees Celcius
Emissions
Range
886Gt CO28-37%
1,000Gt CO2 10-42%
1,158Gt CO2 16-51%
1,437Gt CO2 29-70%
1,356Gt CO2e 8-37%
1,500Gt CO2e 10-43%
1,678Gt CO2e 16-51%
2,000Gt CO2e 29-70%

Illustrative default case
20%
25%
33%
50%
20%
26%
33%
50%

August 2015

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Citi GPS: Global Perspectives & Solutions

Difference between CO2 and CO2 Equivalent
One important distinction in the emissions debate is the difference between CO 2
emissions and CO2 equivalent (CO2e) emissions. CO2e emissions measuregreenhouse gases – this captures both CO2 emissions plus other gases such as
methane, F-gases and N2O adjusted for their global warming potential relative to
CO2.
For the power market however, greenhouse gas emissions in CO2e and CO2
emissions are to a large extent aligned. The vast majority of emissions whengenerating electricity from fossil fuels are in the form of carbon dioxide, therefore
there is little deviation between both CO2 and CO2e emissions in the power market.
However, this depends on what is being measured. The IPCC (Figure 64) calculates
the lifecycle GHG emissions (from cradle to source) of power generation. This
includes not only the CO2 emissions from the combustion of fossil fuels in power
plants, but also methane and other greenhouse gas emissions from the extractionof fossil fuels, extraction of materials used for solar and wind power generation andtransportation. The EIA data calculates only the CO2 emissions from power
generation and does not include other greenhouse gas emissions.
In the context of linking temperature rises to emissions, quoting the budget in CO 2e
terms is a more accurate measure as it captures other important greenhouse gases
on top of carbon dioxide which are responsible for global warming. Similarly the IEA
quotes their 450 scenario in greenhouse gas terms, where the 450ppm refers togreenhouse gas concentration (CO2e). Therefore, for this study we use CO2e (IPCC
figures) and compare those to the greenhouse gas budget described by
Meinshausen which includes all cumulative Kyoto-Gas emissions.
Figure 64. Greenhouse Gas vs. Carbon Dioxide Emissions per Unit of Electricity Generation
1.2

CO2e
range
(IPCC)

Greenhouse gas emissions in t/MWh1CO2
estimate by
EIA

0.8

0.6

CO2
estimate by
EIA

CO2e
range
(IPCC)

0.4

0.2

0
Gas

Source: IPCC (2014) and EIA© 2021 Citigroup

Coal

64

Citi GPS: Global Perspectives & Solutions

In 2015, coal and gas fired generation will
emit 9.2 and 2.6 GT CO2e respectively

Currently, coal- and gas-fired electricity generation are the largest greenhouse gas
emitters (CO2e) in the power market (Figure 65), estimated at 9.2GT CO2e and2.6GT CO2e, respectively. Future investments into energy efficiency will help reduce
electricity consumption as a whole whilst substitution from coal-fired to gas-fired torenewable energy generation will reduce emission intensity. Both measures should
lead to reduced greenhouse gas emissions of 9.3GT CO2e by 2040, a 60%
reduction compared to a business as usual scenario.

Figure 65. Total Greenhouse Gas Emissions in 2015 in Power Market –Citi Estimates
Nuclear
0%

Figure 66. Greenhouse Gas Lifecycle Emissions in t CO2e per MWh

Other
6%
Gas
19%

Coal
75%

There is a difference of over 200GT of CO2eof cumulative emissions emitted between
our action and inaction scenario

Coal

1.00

Gas

0.47

Solar

0.47

Nuclear

0.02

Wind

0.01

Hydro

0.00

0.0

Note: ‘Other’ is mainly emissions from electricity generated from oil
Source: Citi Research© 2021 Citigroup

August 2015

0.2

0.4

0.6

0.8

1.0

1.2

Source: Citi Research

Implications of Citi Scenarios
Our Citi 'Inaction' scenario implies cumulative CO2e emissions of 500GT CO2e
between 2013 and 2040. In contrast our Citi 'Action' scenario, which assumes
investments into renewables and energy efficiency, implies that this cumulative
number reduces to 300GT CO2e (Figure 67). In this scenario emissions are likely tostay flat between now until 2020 until the benefits of investments come through inthe emissions data (Figure 68).

Figure 67. There is a CO2e Discrepancy Between our Status Quo andTransformation Scenario

Figure 68. If Greenhouse Gas Emissions Were to Grow In Line withpower Market Emissions (Citi ‘Action’ scenario)
25.0

600.0

496.9

500.0

400.0

297.5

300.0

1,400.0

Meinshausen
CO2e budget

20.0

Annual emissions in Gt CO2e

Carbon emissions in Gt CO2 equi (2013-40)

65

Citi GPS: Global Perspectives & Solutions

1,200.0

1,000.0
15.0

800.0

600.0

10.0

400.0
5.0

200.0

200.0

0.0

0.0

2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040

100.0

Cumulative emissions in Gt CO2e (2013-2040)

August 2015

Other CO2e emissions cumulative (RHS)
Power market CO2e emissions cumulative (RHS)

0.0
ActionInaction

Power market emissions anually (LHS)

Source: Citi Research

Source: Citi Research

However, we highlight that the power market is not the only area where decisive
action needs to be taken in order to limit climate change. For illustration, we show
our cumulative emissions estimates in the power market under our ‘Action’ scenario
in Figure 68, and assume that emissions from outside the power market such as
land use, the transport market, industry etc. stay in similar proportions to what theseareas emit today. The results are less encouraging, as they highlight that eventackling emissions in the power market as the single largest emitter, we still need totake decisive action in other carbon-heavy activities such as the transport market,(which we discuss in the next section), if we are not to blow through the ‘carbon
budget’. However, we would note that the simplistic approach to 'non-power
emissions shown in Figure 68 potentially overstates their scale significantly.
Figure 70. Emissions in the Year 2040 – A Comparison Between BothScenarios
30.00

0.50

25.00

0.40

20.00

0.30

Citi Action
Citi No Action

0.20

Emissions in Gt CO2e

0.60

15.00

10.00

0.10

5.00

0.00

0.00

2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040

Carbon intensity (t/MWh)Figure 69. Carbon Intensity Drops in Our Citi ‘Action’ Scenario

Source: Citi Research© 2021 Citigroup

Citi Action

Energy Efficiency

Source: Meinshausen et al. (2009), Citi Research

Solar PV/Wind
onshoreCiti No Action

66

Citi GPS: Global Perspectives & Solutions

Carbon intensity of electricity mix falls in our
Citi ‘Action’ Scenario

August 2015

In comparison with our Citi ‘Inaction’ scenario the carbon intensity of the electricity
mix drops in our Citi ‘Action’ scenario from 0.54t (CO2e)/MWh to 0.25t (CO2e)/MWhdue to the shift in electricity mix (Figure 69). Additional carbon savings are made via
energy efficiency investments reducing overall electricity consumption. In 2040 weestimate that 15.4GT CO2e per year is being saved between both our scenarios.
Two thirds of these savings relate to investments into solar PV and onshore windwhile the remaining third is due to energy efficiency investments.
However, it needs to be highlighted that a large gap exists in carbon intensity
measured in CO2/kWh between different regions, as seen earlier in Figure 19 and
Figure 20. In emerging markets regions such as China and India, given their relative
size in emissions and their coal-weighted electricity mix, carbon policy can make agreater impact.

Carbon Pricing: The Cost of Action or the Cost of Avoided
Liabilities?
As discussed earlier, if it is more expensive to follow a low carbon route (which ouranalysis logically says that it is) then some form of incentive or penalty needs to be
imposed to incentivize that low carbon behavior (or vice versa).
The most widely understood approach is by putting a ‘price’ on carbon emissions
which dis-incentivizes countries, companies, institutions or individuals to emit
carbon, thereby encouraging them to use less energy, or to generate or use lower
carbon energy. Moreover a carbon price naturally directs investment towards themost cost-effective abatement projects first.
There are two different ways to think about a socially acceptable way to pricecarbon emissions:1.

Analyze the investment required to reduce carbon emissions, and to tax carbon
emissions accordingly to fund these investments.

2.

Estimate the liabilities associated with carbon emissions and tax carbon
emissions to offset those liabilities.

As seen earlier, we estimate that a transformation into a carbon-light power market
could cost society ‘only’ an additional $1.1 trillion out to 2040. Were we simply to
divide this figure by the carbon emissions, this would imply a surprisingly low
implied carbon price of just $4/t of CO2 needed to fund the power market transition
between both our Citi scenarios. This figure is so low because as renewable energy
becomes cheaper than conventional in later years, there is effectively a net saving
to using it, and hence simplistically a ‘negative’ carbon price in later years which isclearly non-sensical. Moreover, a carbon price that ‘reduces’ over time is alsocounterintuitive. Clearly if a carbon price incentivizes an entity to address the mostcost-effective abatement opportunities first (the “low-hanging fruit”) then bydefinition as each ton abated becomes more expensive, a higher carbon pricewould be needed to incentivize that action. Hence, we recognize that adifferentiated carbon price might be needed at different points in time (depending on
progress) and across different regions in order to incentivize investment into
renewable power and ‘fund’ a lower carbon future.

© 2021 Citigroup

August 2015

67

Citi GPS: Global Perspectives & Solutions

In practical terms, in earlier years when particularly solar PV is more expensive thanconventional fuels, society would need to impose carbon prices which are highenough to level out the playing field. With the rapid fall in the cost of electricity fromrenewables we anticipate solar PV to be competitive with conventional fuels by
2030 and hence there is theoretically no need for further incentives via a carbon
price in the power market alone, as shown in Figure 71.
Figure 71. Short-Term Carbon Price Required to Incentivize Investment
80.0
70.0

Short term carbon price $/t

60.0
50.0
40.0
30.0
20.0
10.0
0.0

2040

2039

2038

2037

2036

2035

2034

2033

2032

2031

2030

2029

2028

2027

2026

2025

2024

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

-10.0
-20.0

Solar

Wind

Source: Citi Research

It is important to highlight though just how much the economics of renewable energy
varies across the world. For example the cost of solar PV electricity is very sensitive
to sunshine, which varies drastically across regions (Figure 72).
Figure 72. Solar PV Cost of Electricity Generation Across Different Regions – Citi Projectionsfor 2015
200
180

Cost of solar PV in $/MWh

160
140
120

100
80
60
40
20
0

Source: Citi Research© 2021 Citigroup

68

Citi GPS: Global Perspectives & Solutions

August 2015

Therefore, the speed of investment and deployment are likely to vary geographicallyat any given carbon price. As discussed earlier in this report, we view a single‘global’ carbon price (or market) as being an unlikely outcome from COP21 in Paris,
rather that countries will adopt their own mechanisms based on their own energy
demand, growth, mix and resources, mechanisms which may or may not be intertradable via mechanisms such as the CDM or JI.
A Word on the Potential of Solar and Energy Storage
Solar is already competitive at the domestic level in various countries where
irradiation (sunlight levels) and residential rates are high. Solar has almost zerovariable cost, with most of the cost upfront capex. In our first Energy Darwinism
report, we highlighted a case study of Germany which showed how annual solar
installations grew from 1GW in 2007 to 7.4GW in just three years. The problem withthe expansion of solar (and a criticism of the LCOE approach) is that solar only
generates electricity at certain times and therefore conventional plants are stillrequired to cover the demand at other times. This intermittency is the key drawback
to solar making storage the ‘holy grail’ to the solar story; in the longer term it could
have an even more dramatic impact on the electricity markets (for more informationrefer to Battery storage – the next solar boom? and Energy Darwinism II).
Battery storage is starting to become a reality, with the introduction of Tesla’s
Powerwall, a wall-mounted rechargeable lithium-ion battery. According to Tesla, thebattery is designed to enable load shifting by charging during times when demand islow, and discharging when demand is high. The battery can also store solar power
generated during the daytime for use at night. It is available at 7kWh or 10kWh andthe costs start at an estimated $3,000. The jury is still out on the economics of the
product, with it being more economical in certain countries. However, since Elon
Musk’s announcement on the 30th of April, Tesla has taken orders worth roughly$800 million in potential revenue (Source: Bloomberg - Tesla's Battery Grabbed$800 Million in its first week). Even if you disagree with the economics, it is hard todeny the fact that energy storage could have a huge impact on the electricity market
with an increase in investment in solar over the next decade. This technology could
be enormously disruptive for utility companies, as highlighted extensively inprevious publications such as Let the Survival Game begin as Lost Decade Takes
Hold.

Fossil Fuels
Coal-fired plants are the largest single emitters in the power market, making up 40%of the current energy mix. However, coal’s high abundance and low price hashistorically made it the fuel of choice for many countries. In terms of LCOE coalcurrently represents the most competitive source of electricity generation.

© 2021 Citigroup

August 2015

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Citi GPS: Global Perspectives & Solutions

Figure 73. Coal Emits Nearly Three-Quarters of All GHG Emissions in the Power Market
Nuclear
0%

Other
6%
Gas
19%

Coal
75%

Source: Citi Research

Since coal is the most carbon-heavy fuel, a
tax on CO2 emissions would have a material
effect© 2021 Citigroup

Given coal is also the most carbon-heavy fuel, any carbon price imposed onemissions would impact the economics of the coal-fired plants the most, whilst gas
plants would be less affected by a carbon tax due to their lower carbon emissions
per terawatt-hours (TWh) produced.

70

Citi GPS: Global Perspectives & Solutions

August 2015

Global Power Market Outlook 2020: Updating the Energy
Darwinism Curves
Since our Citi GPS Energy Darwinism report in 2013, one of the most striking
developments in power markets has been the emergence of yield vehicle structures(yieldcos) which finance project equity; this development has reduced the cost ofcapital for renewables projects significantly.
Figure 74. LCOE Decline Driven by Equipment Cost Reductions and Financing Cost
Reductions
140
121.9

70% Equipment

120

Solar LCOE in $/MWh

100

93.9

30% Financing
83.9

80

60

40

20

0
2015

2020

Source: Citi Research

Yieldco’s could drive down the cost ofcapital in the renewable space

We anticipate that the acceptance of yieldcos in the renewables space will further
drive down cost of capital via two channels: (1) reducing cost of equity as more
equity and income investors become comfortable with the yieldco risk profile and (2)project developers and equipment providers building a track record under the publiceye. This development could also reduce spreads on debt project financing. We
estimate that the weighted cost of capital for renewables projects can be reduced byanother 1% by 2020 down to 4% leading to further reductions in cost of capital.
Our updated ‘Energy Darwinism’ curve is shown in Figure 75; for a fullunderstanding of how this integrated global energy cost curve is derived, and its
implications see the original ‘Energy Darwinism’ report.

© 2021 Citigroup

August 2015

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Citi GPS: Global Perspectives & Solutions

Figure 75. Updated 2020 Energy Darwinism Curve140

Cost of electricity in $/MWh

120

100

80

60

40

20

0
0

1000

2000
3000
4000
5000
Cumulative electricity production in TWh

Coal

Gas

Solar

6000

7000

Wind

Source: Citi Research

In 2020, we anticipate wind energy to be fully competitive with conventional fuel,even on supercritical coal capex and efficiency assumptions. Gas is very sensitive
to the cost of gas extraction per project - at the lower gas band around $1$2.50/MMBtu it becomes difficult for wind to compete.
While better financing conditions provide a boost to the solar cost of electricity
generation and competitiveness by 2020 we still anticipate solar costs to be above$80/MWh. However, solar energy costs are very sensitive to irradiation with notableregional differences; in very sunny regions such as Africa, Chile, and Saudi Arabia,
solar could compete on competitive terms with (unsubsidized) conventional fuels.
(See Figure 76)© 2021 Citigroup

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Citi GPS: Global Perspectives & Solutions

August 2015

Figure 76. Solar LCOE Across Regions
Solar cost of electricity generation in $/MWh

200
180
160
140
120

100
80

2015
2020

60
40
20
0

Source: Citi Research

Carbon Pricing: Game Changer for Coal?
Coal would be mostly affected by a carbon
price of $4 tonne of CO2

If we were to overlay the very low $4/t carbon price over our original energy
Darwinism curve we find that the coal section of the curve is unsurprisingly mostaffected. Coal has the highest emission ratio per unit of energy production and acarbon price of $4/t would shift the coal projects on the curve up by about $4/MWh.
This would render many coal projects less competitive against low cost gas andwind power. As outlined in our long term/short term carbon price discussion manysolar projects would still be uncompetitive at these carbon prices.
Figure 77. Darwinism Curve with Minimal Carbon Pricing
140

120

Cost of electricity in $/MWh

Citi Inaction
scenario

Citi Action
scenario

100

Coal lesscompetitive

80

60

40
Wind shifts
down

20

0
0

1000

2000
3000
4000
5000
Cumulative electricity production in TWh

Coal

Source: Citi Research© 2021 Citigroup

Gas

Solar

Wind

6000

7000

August 2015

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Citi GPS: Global Perspectives & Solutions

A more relevant scenario would be to apply shorter-term carbon prices to theEnergy Darwinism curve. Figure 78 and Figure 79 show the Darwinism cost curves
with a $25/t and a $50/t carbon price. As before, coal is impacted most negatively
impacted becoming amongst the most expensive generation options at $50/t, and aquestionable choice at $25/t, especially given the life of a coal plant is potentially 40
years. Gas continues to span the length of the curves, though clearly assets at theupper end of the curve are pushed even further up the curves. Obviously wind andsolar are the big beneficiaries, with wind in particular becoming the lowest cost
option at $50/t (and amongst the lowest at $25/t). Solar remains expensive, though
at $50/t moves into the second quartile of the cost curve.
Figure 78. Energy Darwinism Cost Curve Out to 2020 at a Carbon Priceof $25/t

Figure 79. Energy Darwinism Cost Curve Out to 2020 at a Carbon Priceof $50/t

140

140

120

120

Coal largely priced
out

Cost of electricity in $/MWh

Cost of electricity in $/MWh

Coal lesscompetitive

100

80

60

40

Wind shifts
down

20

100

80
Solar broadlycompetitive

60

40

20

0

0
0

1000

2000
3000
4000
5000
Cumulative electricity production in TWh
Coal

Source: Citi Research

Gas

Solar

6000

7000

0

1000

Wind

2000
3000
4000
5000
Cumulative electricity production in TWh
Coal

Gas

Solar

6000

7000

Wind

Source: Citi Research

We would highlight that these curves only incorporate incremental energy assets
potentially coming onstream between now and 2020, and hence there are only five
years of cost reductions shown for solar. Given the dramatic learning rates ofaround 20% discussed earlier for solar, as time goes on, solar should continue toaggressively reduce in cost, and longer term curves are likely to see solar continue
its inexorable move down the curve.
As discussed in the original energy Darwinism report, significant quantities of
conventional assets at the upper of the cost curve are in our opinion likely to
become stranded. Adding a material cost of carbon to energy will only exacerbate
this issue, and is likely to ‘strand’ a significantly greater proportion of conventional
assets, and issue examined in much greater detail in a later chapter.

© 2021 Citigroup

74

Citi GPS: Global Perspectives & Solutions

August 2015

Drivers of Change (2): Energy
Efficiency
Highlights
 Our Citi 'Action' scenario entails a total spend on energy efficiency of $19.4 trillion

between 2015 and 2040, almost two thirds of which we expect to take place inthe transport sector.
 Transportation emissions were estimated at around 7GT of CO2e per year,

representing approximately 14% of total GHG emissions in 2010, and 23% of
total energy-related CO2 emissions in 2013. The majority of the emissions are
related to the oil used in road transport.
 Transport emission regulations are being widely adopted, with increasingly

stringent miles-per-gallon targets being set globally.
 These efficiencies are expected to be achieved via technological advances suchas turbochargers, direct injection, start/stop systems, thermal management,
lightweight materials, low resistance tires and transmission technologies.
 BP estimates that energy efficiency measures could result in only a 30% overall

increase in fuel usage, despite a potential doubling of vehicle fleets.
 While oil is likely to continue to dominate transport fuels out to 2035, otherpropulsion technologies such as fuel cells, natural gas, and electricvehicles/hybrids are also likely to play an increasing role in reducing emissions.
The imminent launch of new models using alternative technologies from several
high profile manufacturers could also add a boost to rates of adoption that haveso far been relatively slow.

© 2021 Citigroup

August 201575

Citi GPS: Global Perspectives & Solutions

Transport-Related Emissions
An $11.5 trillion investment would be
required in the transport sector

While the previous chapter on the power market transformation touched on theassociated energy efficiency spend, 60% of the $19.4 trillion investment in energy
efficiency between 2015 and 2040 in our 'Action' scenario will occur in the transport
segment (Figure 80). In this chapter we examine that investment and its
implications.
Figure 80. Energy Efficiency Spend Between 2014 and 2040 by Activity

Buildings/Industry ,$7.9trn, 41%

Transport, $11.5trn,
59%

Source: Citi Research

Energy efficiency policies, especially in transport, should be considered an
extremely important mechanism for meeting climate change objectives. These
relate to actions such as investments in low resistance tires, lightweight materials
and direct fuel injection; however energy savings from fuel switching (for example
from using an electric vehicle rather than a gasoline one) are not counted as anenergy efficiency investment, even though in practice they do increase the overall
efficiency of the system.
In 2010, GHG emissions from the transport sector were estimated at 7GT CO2e.
Emissions from this sector, dominated by oil for road transport, have increased by
1.7% per year on average since 2000, but with different underlying regional
trends.15

15 IEA (2013)© 2021 Citigroup

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Citi GPS: Global Perspectives & Solutions

August 2015

Figure 81. Transport- Related Greenhouse Gas Emissions from 1970 to 2010

Source: Sims at al. (2014)

The transport sector has seen a substantial increase in global growth in the past
two decades, in the form of increased vehicle ownership and energy use in alltransport sectors. However to help mitigate the environmental impacts, many
countries have developed transport sector policies to improve the energy andenvironmental performance of vehicles and fuels. Citi has undertaken a detailed
analysis on how regulations on fuel economy and the transport sector in general arechanging the market for energy efficiency engine technologies.

Are Emissions and Fuel Targets Propelling the Car of the
Future? Which Technologies are Estimated to Grow?
Emissions regulations in the transport sector
are expected to increase over time

© 2021 Citigroup

The introduction of regulations together with changes in consumer demand hascompelled automakers to pursue development strategies that focus on fueleconomy and a reduction of emissions. Figure 82 below shows the emissions
regulations including historical performance together with enacted and proposed
targets in different regions up to 2025.

August 2015

77

Citi GPS: Global Perspectives & Solutions

Figure 82. Emissions Regulations: Gram CO2 per kilometer to 2025

Source: International Council on Clean Transportation, Citi Research

These global regulatory regimes are generally in place up to the latter part of thisdecade. However, even when taking into consideration the significant strides thathave already taken place in emerging markets, we believe that many of the highgrowth opportunities in transport-related energy efficiency will likely come from“workhorse” powertrain technologies. Figure 83 and Figure 84 below show the
proposed growth in engine technologies together with the CO2 savings and market
growth potential of different engine and transmission technologies.

‘Workhorse’ powertrain technologies will
provide the high growth in transport-related
energy efficiency sector

Figure 83. Growth in Engine Technologies

Figure 84. Overview Technologies, CO2 Saving and Market Growth
Potential

Gr

CO2 Saving

Market Grow th (20142024)

Turbochargers

10%

6%

Direct Injection

10% - 20%

9%

Variable Valve Timing

1% - 5%

8%

Thermal Management

Significant

27%

New Combustion Techniques

Slight21%

Automatic Manual Transmissions

7%

8%

Electric Clutch

7%

10%

Dual Clutch Transmissions

10%

12%

Continuous Variable Transmissions

7%

4%

Stop Start

7%

11%

Mild Hybrid

25%

36%

Full Hybrid

40%

17%

Plug In Hybrid

70%

33%

Electric Vehicle

100%

18%

Electric Vehicles >1mn/year with battery
costdown

1.5
Mu
6.5
Mu

Plug-In
Hybrids
incentives in
EU, China &
US

7 Mu
2.5
Mu

12+12V massive
application @ Premium
OEMs
Launch ofValeo
12V StARS
microhybrid

EfficientTransmissions

Full cell emergence

Mass production of 48V
systems in EU, US &China

Efficient Engines

Technology

200 2015

2016

2017
Stop & Start

Source: Valeo© 2021 Citigroup2018
12+12V

2019
48V

2020
PHEV

2021

2022

Battery EVs

2023

2024

Efficient Engines

51 Mu

FCEV

Source: Company Data, Citi Research

78

Citi GPS: Global Perspectives & Solutions

Direct injection and start/stop systems can
reduce CO2 emissions by an extra 1020%and 7% respectively

August 2015

An example of an efficient engine is a direct injection system which allows fuel to be
injected into the engine combustion chamber at a highly pressurized level thereby
controlling more precisely the amount and timing of fuel directed into the engine,
rendering the engine more efficient. Direct injection often works with turbochargers,
reducing CO2 emissions by an extra 10-20%. European auto-parts manufacturer
Valeo believes that gasoline direct injections engines should have a compound
annual growth rate (CAGR) of around 9% to 2024. Penetration rates are currently
about 30-35% in Europe and 31% in North America. Other examples include
Start/Stop systems which could reduce CO2 emissions by 7%, and thermal
management which relates to the monitoring and influencing of the heat of theengine which can contribute significantly to the dynamics and, as a result, has thepotential to be one of the fastest growing areas for powertrains (CAGR of ~27% asestimated by Valeo). Advances in transmission technology such as automatedmanual transmissions and dual clutch transmissions are also instrumental to theimprovement in fuel economy for internal combustion engines. For more information
on different engine and transmission technologies please refer to Citi GPS report
Car of the Future II.

Figure 85. Companies Involved in Efficient Transmission Technologies
Product Category
Direct Injection
Low Resistance Tires
Turbochargers
Variable Valve Lift & Timing
Thermal Systems & HVAC
Torque Transfer (Driveline)
Stop/Start“Workhorse” Technologies
Select Companies involved
Delphi, Continental
Continental, Bridgestone, Goodyear, Michelin
Honeywell, BorgWarner, Cummins, IHI, MHI
BorgWarner, Denso
BorgWarner, Mahle, Visteon, Denso, Delphi
American Axle, Magna, BorgWarner, GKN, JTEKTJohnson Controls, Denso, Valeo, BorgWarner

Transmission Technologies
Product Category
Select Companies involved
Automated manual transmissions
Aisin, BorgWarnerContinuously variable transmissions
Aisin, JATCO
Dual clutch transmissions
Aisin, BorgWarner, Getrag, ZF

Source: Company Reports, Mezler Engineering Services, Citi Research

Non-Conventional Technologies: Can these Technologies
Grow in the Near Future?
A key question is whether non-conventional technologies such as electric vehicles(EVs), fuel cells and compressed natural gas (CNG) vehicles can also makesufficient advances, gain acceptance, and cause a market tipping point. We thinkthat due credit should be given to these unconventional technologies; however, it isimportant to highlight that disruptive change in the automotive industry does notoccur overnight, given long product cycles, capacity requirements and high costs.
Zero-tailpipe emissions could be an
important selling point of electric cars
especially in countries with high air quality
pollution.

© 2021 Citigroup

From an operating cost perspective, EVs remain superior with a fuel cost-per-mileof only $0.04, which is lower when compared to CNG ($0.07) and conventional
gasoline cars, even at current prices. EV’s offer maintenance savings from theabsence of required oil changes, and have improved performance thanks to theirunique torque characteristics. Even though there have been debates about well-towheel emissions, the zero tailpipe emission selling points of these vehicles are a
powerful consideration for both consumers and regulators. Costs, long charging
times and infrastructure remain the greatest barriers to mass adoption, even with
tax incentives. While sales of lower-priced US electric cars have been tepid over theyears, the major test for EVs will be held in 2017 with the debut of electric cars from
Tesla and GM, both of which are targeted at the mass market level. While the US
may not have seen huge successes so far, in other markets where taxes on motor
fuels are significantly higher, there have been greater success stories for EVs. In
Norway for example, 1% of the car fleet is now electric.

August 2015

Citi GPS: Global Perspectives & Solutions

Battery technology advancements could
increase the uptake for EV’s

Whilst skeptics will point to the slow pace of battery technology advancements as
proof of the future low uptake for EV's, we think that the outlook for thesetechnologies remains bright, though we do acknowledge that the ramp up would
probably be slow (still <2% in most markets by 2020). We believe that the race of
EVs is very much still on especially if we look at the competitive environment ofparticipants including Tesla, BMW, Nissan and GM. The uptake of EVs is also likely
to differ regionally; for example there is currently strong government support for
EV’s in China, with the government subsidizing more on the BYD E6 than the US
government is on Tesla Motors. Even though the oil price has plunged recently, theChinese government remains committed to reducing its reliance on oil imports andbecome more energy secure. EVs are not only a solution to this issue, but also form
part of the solution to reducing air pollution in China, a key focus for the Chinese
government.
There are parallels between the EV market and the solar industry a decade ago;few would have predicted at that time the speed of cost reductions or the level ofpenetration which solar has achieved. However, as that industry has proved, withthe right incentives and investments, industries can change rapidly, and we believethat the EV and battery market offer similar potential to surprise on the upside.
Other fuel switching technologies such as CNG and hydrogen fuel cell systems arealso currently being discussed as possible solutions to reduce transport related
emissions. CNG is at present confined mainly to commercial fleets, though a small
volume of light duty vehicles utilize a bi-fuel approach (gasoline or natural gas canbe used to fuel the vehicle). The Boston Consulting Group believes CNG lightvehicle volume in the US could grow to over 300,000 vehicles by 2020, up fromaround 100,000 in 2014. CNG offers a number of advantages including energy
security for gas producing countries such as the US, low cost fuel and a 20-30%
reduction in CO2 emissions compared to gasoline cars. The most glaring challenges
are infrastructure requirements, energy density and a large cost premium (refer toCiti GPS: Energy 2020: Trucks Trains and Automobiles).

CNG and fuel cell technologies such as the
new Toyota Mirai could also have an effecton CO2 emissions from the transport sector© 2021 Citigroup

With regards to fuel cell technologies, the spotlight is on the Toyota Mirai, which wasannounced at the end of 2014 and should come to market in late 2015. The Mirai
takes the electricity created from the chemical reaction in the fuel cell stack betweenhydrogen and the oxygen in the air, raises its voltage in the fuel-cell boost converterand powers a motor with it. The Mirai costs are lowered as it can use the motors
and batteries shared with hybrid cars, annual sales of which exceed 1 million units.
Currently, hydrogen is generally extracted from fossil fuels and CO 2 is therefore
produced in the manufacturing process. So in order to be called the ultimate ‘ecofriendly car’ it is imperative that a hydrogen supply system that is CO2 free isdeveloped. Shell believes that by the end of the century, roads will be almost oil-free
and there could be an extensive hydrogen network as wide as the petrol/gasoline
infrastructure today serving a majority-hydrogen fleet. This is partly because of theabundance of hydrogen in the atmosphere and because hydrogen cars have adriving range and refueling time equal to gasoline powered cars. They are also
lighter than current EVs which are equipped with large batteries (refer to Citi GPS:Car of the Future.

79

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August 2015

Figure 86. Comparison of Gasoline Engine, HEV, PHEC, EV and FCVs
Gasoline Engine
CO2 Emission(Gasoline engine=100)
SafetyPrice ($)
Battery amount (kWh)Battery power
Driving range (Km)Charging time
Infrastructure100

Hybrid Electric Plug-in Hybrid Electric
Vehicle (HEV)
Vehicle (PHEV)
60-75
30

◎
◎
Unnecessary

Fire (low risk)
16,000>0.8-1.3

Fire (high risk)
30,000>5-15

Unnecessary
more than 500km
Unnecessary
Gas station

Strongmore than 500km
Unnecessary
Gas station

Strongmore than 500km以上
Good
Gas station
Charging station

Electric Vehicle(EV)
0

Fuel Cell Vehicle(FCV)
0Fire (high risk)
Gas explosion
20,00050,000？
15-25 Estimated to be same to
HEVModestModest200km
more than 500k
Bad
Unnecessary
Charging station
Hydrogen station

Source: Company Data, Citi Research
The successful adoption of fuel cells could
depend on the investment in required
infrastructure.

We believe that fuel cell vehicles are unlikely to take off for over a decade due tocost and infrastructure requirements. According to Fiat, building the infrastructure
for fuel cells could cost up to £50 billion ($78bn) in a country the size of the UK.
While that is a large number in absolute terms, in the context of the trillions ofdollars being discussed in this report it is relatively small. The US Energy
Information Administration (EIA) states that by 2025 sales of fuel cell cars could be
no more than 0.05% of total number of cars sold. However, this view is not sharedby Toyota, as they believe that fuel cells costs will be cut in half by 2020. That said,by 2030, we believe that sales could pick up and significant growth could be driven
by regulations such as the Zero Emission Vehicles Regulation in California, which
mandates that 22% of sales of cars by 2025 must be either plug-in hybrids of fully
electric/hydrogen cars.

Will a Low Oil Price have an Effect on Energy Efficiency
Investment in Transport?
With average gas prices at the pump sliding below $3 per gallon in the US andvehicle mix moving back in favor of larger trucks and SUVs, it seems a good time to
discuss US Corporate Average Fuel Economy (CAFE) requirements that will be
examined as part of the CAFE ‘mid-term’ review set to take place in 2017. The aimof the review is to evaluate the feasibility of current fuel economy/emissions plansout to 2025. Industry observers wonder whether the stricter standards that
ultimately lead to 54.5 miles per gallon by 2025 may be lowered or delayed if lower
energy prices continue or government urgency over this matter changes. It appears
to us that the substance of the debate would focus on the years 2022-2025 of the
program and what the mid-term review can accomplish is to allow automakers toargue for the loosening of this second phase of CAFE standards. Proposals could
range from scaling back decade fuel economic targets while introducing stricter,farther out mandates. This could delay the investment in energy efficiency in theUS, but ultimately it would not deter it in the long-term. Of course, a new US
presidential administration will be in place by the time of the review and thatadministration’s receptiveness (or lack thereof) to the current plans could represent
one of the largest variables in the expected outcome.

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What Does This All Mean for Future CO2 Emissions fromthe Transport Sector?
Efficiency gains in the transport sector would
limit fuel transport demand

According to BP's Energy Outlook Report, efficiency gains in the transport market
could limit the growth in transport fuel demand, with transport demand only
increasing by 30% despite a more than doubling of vehicle fleets from 1.2 billion
today to 2.4 billion in 2035. They estimate that fuel economy and efficiency gains
are likely to accelerate and improve at approximately 2.1% per year between 2013
and 2035 and estimate that oil will continue to be the main transport fuel (89% in2035), however the share of non-oil alternatives would increase from 5% in 2013 to
11% in 2035, with natural gas estimated to be the fastest growing transport fuel(Figure 87). Even with fuel efficiency improvements of 2.1% per am, this scenario
would lead to an increase in CO2 emissions from 7GT in 2013 to just above 9.5GT
of CO2 in 2035 as shown in Figure 88. This analysis uses IPCC carbon emission
factors for different fuels and assumes that the same % mix of gasoline and diesel
that is used today is used in the future.
Figure 88. Transport-related CO2 emissions based on a 2.1%
improvement in energy efficiency and BP’s transport fuel mix

12

3500

3000
Renewables

2500
Coal

2000
1500

Gas

1000

Oil

500
0
1990

2000

2010

Source: BP Energy Outlook, 2015

2015

2025

2035

CO2 emissions (GT CO2)

Million tonnes of oil equivalent (MTOE)

Figure 87. Transport Demand by Fuel Type

10
8

6
4
2
0
2015

2020

2025
Year

2030

2035

Source: Citi Research

Obviously without fuel efficiency improvements, CO2 emissions would increase at afaster rate, so legislation such CAFE does make a difference. However fuel mix, isalso important. For example natural gas is 25% less carbon intensive than diesel(emission factors for CNG and diesel is 56,100 kg/TJ and 74,100 kg/TJ
respectively).

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Implications (1): Stranded assets
Highlights
 Switching to a low carbon energy future means that significant fossil fuels thatwould otherwise have been burnt will be left underground. The development of
the so called 'carbon budget' has led to the concepts of 'unburnable carbon' andassociated 'stranded assets'.
 Emissions contained in current 'reserves' figures are around three times higher

than the so called ‘carbon budget’. Some studies suggest that globally a third ofoil reserves, half of gas reserves and over 80% of current coal reserves would
have to remain unused from 2010 to 2050 in order to have a chance of meetingthe 2°C target.
 In financial terms, we estimate that the value of unburnable reserves could

amount to over $100 trillion out to 2050. The biggest loser stands to be the coalindustry, where we estimate cumulative spend under our Action scenario could
be $11.6 trillion less than in our Inaction scenario over the next quarter century,with renewables, wind and nuclear (as well as energy efficiency) the main
beneficiaries. While gas suffers a smaller reduction it is still potentially impacted.
 In this chapter we examine the effect on the oil, gas and coal industries, and inparticular which assets (typically those at the upper end of the cost curves) which
are most at risk of not being developed/used.
 The one potential game changer for the coal industry comes in the form ofCarbon Capture and Storage (CCS); while expensive now, if this can be madeeconomically viable, it could carbon-enable huge potential resources. However,
the industry is, in our opinion, in a something of an existential race to develop
CCS within its survivability timeframe.
 Investors are becoming increasingly active and engaged on the issue of stranded

assets, with actions varying from carbon footprinting, realigning portfolios,
increasing engagement with fossil fuel companies, or at the extreme banninginvestments in certain types of companies.
 Stranded assets and unburnable carbon are becoming a significant issue forcountries, industries, companies and investors, and focus provided by COP21 inParis and beyond is only likely to increase attention.

Introduction
One of the major implications of changing to a lower carbon mix, is the amount offossil fuels that potentially won't be burnt that otherwise might have been. These
concepts of “unburnable carbon” and “stranded assets” started to gain broad
traction in the investment community in 2012 and 2013, largely driven by analysis
from the IEA which stated that:"No more than one-third of proven reserves of fossil fuels can be consumed prior to2050 if the world is to achieve the 2°C goal, unless carbon capture and storage(CCS) technology is widely deployed. … Almost two thirds of these carbon reserves
are related to coal, 22% to oil and 15% to gas. Geographically, two thirds are heldby North America, the Middle East, China and Russia."© 2021 Citigroup

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The Risk for Fossil Fuel Producers
Coal is the clear loser under a low carbon
scenario

Figure 89 and Figure 90 demonstrate the significant changes in the split ofinvestment in power generation and associated fuel costs between 2015 and 2040
under our two scenarios. The clear loser between the scenarios is coal, which sees
its total investment bill fall by some $11.5 trillion over the next quarter century. Gas
investment also reduces though by a far smaller amount, $3.4 trillion in total,reflecting the attractions of gas as a lower carbon transition fuel, given its
significantly lower emissions per MWh vs. coal.
The beneficiaries of the mix shift are unsurprisingly wind and solar which see theirinvestment totals increase by $2.8 trillion and $2.2 trillion respectively. Nuclear isalso a beneficiary, with investment increasing by $2.2 trillion over the period. 'Other'reflects generation technologies such as biomass, geothermal, solar thermal, tidal
etc., which collectively also see an increase in investment of $0.9 trillion.

Figure 89. Total Spend on Electricity Using an LCOE Approach in Citi’s‘Inaction’ Scenario. (Total Spend = $66.1trn)

Other, $7.1trn,
11%

Figure 90. Total Spend on Electricity Using an LCOE Approach in Citi’s‘Action’ Scenario. (Total Spend = $59.4trn)

Other, $8.0trn,
14%

Coal, $11.4trn,
19%

Coal, $23.0trn,
35%

Hydro, $11.0trn,
17%

Hydro, $11.0trn,
19%Gas, $10.2trn,
17%

Nuclear, $9.6trn,
14%
Solar, $2.6trn, 4%Wind, $1.5trn, 2%

Gas, $13.6trn,
21%

Nuclear, $11.8trn,
20%

Wind, $4.3trn, 7%

Solar, $0.3trn, 0%

Source: Citi Research

Source: Citi Research

Accordingly, investments in the coal industry (by both companies and investors)
based on an assumption of 'business as usual' clearly face higher risks, and in our
opinion should be stress tested against either a lower coal demand scenario, and/or
one which incorporates a significant carbon price.
While early analysis of unburnable carbon and stranded assets tended to focus
largely on the overall proportion of reserves that would be unburnable, greater
recent alignment with the investment community has highlighted the risks presented
by the potential devaluation of fossil fuel assets. As the original Energy Darwinism
report highlighted, an increased focus on the economic viability of potential projects
at the upper end of the industry cost curves, either due to lower/different usage
profiles or via the impact of a cost of carbon, has encouraged investors to engage
with companies about the allocation of capital to such projects. To look at it adifferent way, the increased risks of non-usage/carbon pricing effectively raises thecost of capital of such projects, potentially thereby making them unviable.

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Globally a third of oil reserves, half of gas
reserves and over 80% of current coalreserves could be stranded

A 2015 report in Nature by McGlade and Ekins16 summarizes the current thinking
on ‘carbon budgets’, and goes on to assess the geographical distribution of fossil
fuels that might be unused in a 2°C scenario. The study states that for a 50%
chance of limiting warming to 2°C, cumulative emissions between 2011 and 2050
must be limited to ~1,100 gigatonnes of CO2. Figure 91, Figure 92 and Figure 93
present the findings of this study with estimates of fossil fuels left unburned under
two scenarios (a) without CCS and (b) with CCS. Reserves in figures below are
defined as a subset of available resources that can be recoverable under current
economic conditions and which have a specific probability of being produced.
Emissions contained in present estimates of fossil fuel reserves are around threetimes higher (~2,900GT) than the 'carbon budget', while consumption of all
estimated remaining fossil fuel resources would generate emissions of ~11,000GT.
The results show that globally a third of oil reserves, half of gas reserves and over
80% of current coal reserves would have to remain unused from 2010 to 2050 inorder to have a chance of meeting the 2°C target.

Figure 91. Total and Unburnable Oil Reserves

Figure 92. Total and Unburnable Gas Reserves
250

1200

200

1000

Unburnable

1000
800
600

400

150

Unburnable

100
50

200
0

0

With CCS

Without CCS

Source: McGlade et al. (2015),Citi ResearchWith CCS

Without CCS

Source: McGlade et al. (2015), Citi ResearchBillion Tonnes of Coal

1200
Trillion m3

Billion Barrels of Oil

1400

Figure 93. Total and Unburnable Coal Reserves

800
Unburnable

600
400
200
0
With CCS

Without CCS

Source: McGlade et al. (2015), Citi Research

However, volumetric figures of barrels, cubic meters and tonnes are not easy toconceptualize. While these should not in any way be taken as pricing forecasts,
were we to apply current prices of say $70 per barrel of oil, $6.50/MMBTU of gas(an average weighted price of US, European and Asian prices) and $70 per tonne ofcoal, we can view these volumetric figures of unburnable oil, gas and coalresources into $ terms, this being much easier to comprehend. The 'value' of theunburnable fossil fuels resources would clearly change depending on the region
where the asset was stranded and the local price of the commodity at that particulartime, but this approach hopefully gives some idea of scale, as shown in Figure 94.
The total value of stranded assets would beequal to just over $100 trillion

Summing the averages for each fuel implies a total value of stranded assets of justover $100 trillion. Clearly this needs to be kept in perspective – the vast majority ofthese assets have not yet been developed and are not on companies balance
sheets, but it is still a vast number, and is more important when considering the
growth/capex/returns potential of associated companies, and the impact on theeconomies, balances of payments etc. of the countries where those assets lie.
Figure 94. ‘Value’ of Potentially Unburnable Carbon Based on Current Average Market Prices
Scenario

Value of unburnable Oil
Value of Unburnable(US$ trillion)
Gas (US$ trillion)
With CCS
30
22
Without CCS
25
24
Note: Assumes $70 per barrel of oil, $6.50/MMBTU of gas and $70 per tonne of coal
Source: Citi Research

16 McGlade et al. (2015)© 2021 Citigroup

Value of Unburnable
Coal (US$ trillion)
57
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Oil & Gas: Carbon-Stranded, or Economically Stranded?
Due to the current oil price, some assets are
already stranded

Citi Research has found that for the first time in a decade, with the decline in oil
prices, the supply-curve is beginning to deflate and flatten. The in-depth 325 project
analysis (Global Oil Vision) shows that the price environment leaves about 40% of
the current investment in oil stranded at prices below $75/bbl on the supply-curve.
As companies seek to reposition their portfolio further down the supply curve,
sanctioned projects with committed funding will look to embed cost deflation where
possible, while stranded non-sanctioned projects without secured funding are likely
to be delayed or cancelled to maintain acceptable shareholder returns. Figure 95
highlights the 14 projects in our analysis that remain non-sanctioned above $75/bbl.

Figure 95. Citi's Global Oil Vision Cost Curve for Oil, Showing the 14 Projects that Remain Non-Sanctioned Above $75/bbl

140
1st Quartile
Total capex:

Blue = non-sanctioned project above$75/bbl breakeven

2nd Quartile
Total capex:
US$548bn

120

Kashagan Phase 1+1E

Breakeven, (Brent US$/boe)

Pacific Northwest LNG
Granite Wash basin (Devon)

100

Pearl Gas to Liquids Bear Head LNG
Pike Ph1
Montney basin (Encana)Other China Gas

JoslynARROW LNG
AP LNG
Wheatstone LNG T1-2
Shah Deniz Phase 2GORGON LNG T1-3 Duvernay basin (Shell)
Ichthys LNG
Powder River basin (EOG)
YAMAL LNGBakken basin (Hess)
Iran Gas Projects Eagle Ford basin (EOG) Sabine Pass
Terre de Grace
Corpus Christi LNG
Eagle Ford basin (Anadarko) Cameron LNG
Vaca Muerta (YPF) Duvernay basin (Encana)Carabobo 1
Novoport
Montney basin (Apache)
Eastern South China Sea Gas
Carabobo 3
Freeport LNG Fortuna FLNG Johan Castberg (Skrugard)
Marcellus basin (Chesapeake)Oman Gas projects
Marcellus basin (Statoil)
Mexico Gas Projects
Granite Wash basin (Chesapeake)
Halfaya Phase 2 & 3
Western South China Sea Gas Brazil Gas Projects Eagle Ford basin (Chesapeake)
Bakken basin (Continental)
Sapinhoa Lula
Eagle
Ford
basin
(Marathon)Eagle Ford basin (Conoco)
Sichuan Basin GasKharafi
West Qurna 2
Saudi Gas Projects stage 3
MajnoonZubairSaudi Gas Projects stage 2West Qurna 1
SeverEnergia
RospanRumaila Ordos Basin Gas
Miran & Bina Bawi Re-injection programme
Khurais3rd Quartile
4th Quartile
Saudi Gas Projects stage 1
Total capex:
Total capex:
Tarim Basin Gas
Duvernay basin (Repsol)Rosebank

80

60

40

20

US$1445bn

US$1050bn

005Source: Citi Research, Company Reports© 2021 Citigroup

10

15

20
25
30
2020E Production, Mboe/d

35

40

45

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Not All Barrels are Equal
LNG, heavy oil and oil sands are the most at
risk

Ongoing sanctioned investments in LNG, heavy oil and oil sands are most at risk of
becoming economically stranded high on the cost curve, due in part to the longdated nature of these developments and their 4-5 year investment lag time before
cost deflation of 16-21% starts to improve returns. US shale projects remain themost agile at repositioning themselves on the curve, benefiting from fast cycle times
and short payback periods (see Global Oil Services – Investing in a Deflationary
World).

Figure 96. LHG, HW and Oil Sands Becoming Stranded While Shale
Repositions Down the Curve

Figure 97. Shale Continues to Drive a Wedge in the Supply Cost Curve
Heavy
Oil & Oil
Sands

$110

Breakeven, (Brent US$/boe)

$100

Shale
Conventional
LNG
Deepwater

$90
$80
$70
$60
$50

$40
$30
$20
0

3

Conventional

Source: Citi Research

69122020E Production, Mboe/d

Deepwater

Heavy Oil & Oil Sands

15

18

LNG

21

Shale

Source: Citi Research

Many of the deepwater tie-backs and hub developments remain attractive in a low
oil price environment, improved by the estimated 19% of cost deflation potential
expected to be embedded. High capital non-sanctioned deepwater projects arelikely to require significant concept development changes or more favorable fiscal
regimes to ensure robust economics before sanction; Global Oil Vision shows that
30% of non-sanctioned deepwater is stranded.

Non-Sanctioned Winners and Losers
The decline in oil prices has dramatically altered profitability across all resource
types causing companies to announce delays and cancellations to non-sanctioned
projects. As the sector begins to reposition investment down the supply-curve, only
the most economically robust or strategically important non-sanctioned projects arelikely to progress through funding stages in the near to middle term. We would
expect companies to mostly progress “Defensive” or top-end “Neutral” projects intheir portfolio and look to limit exposure in “High-Risk” projects in resource types like
non-US shale and LNG.

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Figure 98. Non-Sanctioned LNG and Non-US Shale are “High Risk” with US Shale “Defensive
High-Risk

Neutral

Defensive

Profitability Index (PI) of non-sanctioned captial

100%
90%
80%
70%
PI>2

60%

PI 1.25 to 2

50%

PI<1.25

40%
30%
20%
10%
0%
Non-US
Shale

LNG

Heavy Oil & Deepwater Conventional
Oil Sands

US ShaleNote: Defensive = <40% PI<1.25 and >30% PI>2.0, High Risk = >40% PI<1.25 and <30% PI>2.0; Neutral =the rest
Source: Citi Research

The likely consequence will be a shift in weighting of portfolios towards the mosteconomically robust resource types. A decade of cost escalation and the recent
decline in oil prices has eroded returns on equity in the sector to a record 29-year
low. The reality of the new pricing environment is that it provides a much needed
opportunity for the sector to rationalize capital expenditure, embed cost deflation
into and reposition portfolios further down the cost curve for future upstream
projects.
In conclusion, we expect further cuts in the supply-chain with companies retoolingpotentially via M&A in the mid-term. While the introduction of government fiscal
incentives in the short-term to facilitate production is another clear possibility, this'unstranding' of economically stranded assets would be at odds with most of theclimate goals discussed in this report, and could be argued would not be an efficient
deployment of capital. If nothing else, lessons learned from the stranding of assets
via the recent fall in the oil price gives food for thought about what the impact of theintroduction of carbon pricing (or similar measures from Paris COP21) on highercost fossil fuel reserves might be.

Coal: Survival, Extinction, or Both?
The outlook for the coal industry remains challenging; coal is likely to remain an
important part of the overall energy mix however cyclically and structurally we thinkglobal markets will remain in oversupply capping coal prices and placing significant
pressure on the coal mining industry. Its ultimate survival may perversely comedown to government intervention, which given the current political backdrop
regarding CO2 emissions doesn’t appear likely.

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What Has Changed in the Past Two Years?
Seaborne coal prices have decreased whencompared to domestic coal prices; and on
average around 30% of this industry islosing money

In the original Energy Darwinism report, we expected that coal would be the biggest
loser from the shift that was occurring in the energy mix globally. We argued that thebiggest impact was likely to be felt in the seaborne market, which is a small
percentage of the overall market, as energy importing companies substituted awayfrom imported coal. In the past two years we have seen a dramatic fall in seaborne
thermal coal prices, relative to domestic coal prices. On our estimates around 30%of the seaborne coal industry is now losing money on a cash basis.
Figure 99. Seaborne Coal Price CIF Europe and Domestic US US$/

140
120
100
80
60
40
20
0
2/28/2011

2/29/2012
API2 - Europe

2/28/2013
2/28/2014
PRB - US Coal

2/28/2015

Source: Citi Research, Bloomberg Data

This has placed considerable stress on the coal mining companies; the market
value of the listed equities that Citi Research covers has shrunk from around $50
billion in 2012 to around $18 billion today. To date, mine closures, liquidation andbankruptcy have been limited but given our view of the market we think thesefactors could accelerate.

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Figure 100. Market Cap of Listed Coal Companies Under Citi Research Coverage

45,00040,00035,00030,000Indonesia

25,000South Africa

20,000Australia

15,000USA

10,000
5,000
0
2012

2014

2015

Source: Citi Research

Both investors and governments are
beginning to move away from coalMoreover there has been a shift in investor appetite as regards coal, which has
arguably been politically driven. This is best exemplified by the Norwegian
government applying a coal screen to its sovereign wealth fund (SWF) investments,
a move that is being carefully watched by other investors around the world who
increasingly want to make a contribution to addressing climate change (Further
Pressure on Coal). The Church of England has endorsed recent comments from the
Papacy about reducing greenhouse gas emissions, all of which is leading tocontinued pressure on the coal industry.
The large coal importing countries have also reacted in the past two years. South
Korea is planning to reduce the share of coal in the country’s energy mix from 37%
this year to 27% by 2029. The government will implement an additional tax rise ofaround $4.40/tonne across the board, effective July 1, 2015 on the almost 100Mt
that it imports, which is around 10% of the seaborne market. In October 2014,
China surprised the coal market and introduced an import tariff of 6% for thermaland 3% for coking coal. The China-Australia Free Trade Agreement signed in June2015 will result in the tax being lowered to 4% from January 1, 2016, to 2% fromJanuary 1, 2017 and 0% from January 1, 2018. Coal imported from Indonesia is
exempted from import tax due to the China and ASEAN Free Trade Agreement.
We think that India will remain a net importer for some time to come, but to a
declining extent over time. Short term, the coal ministry is focused on expediting
clearances, bringing in new technology, and improving rail connectivity. This
coupled with the auction/allocation of coal blocks provides visibility on India's
potential to accelerate coal production. However, the process alone would notenhance coal availability until existing constraints are dealt with. Medium term, we
anticipate captive coal production will rise 20% through FY14-20; we now forecast
Coal India’s volumes to grow at 7% through FY14-20 vs. 2% through FY10-14. A
combination of the two should result in India's domestic coal supply growing at ~8%through FY14-20. Our bottom-up demand analysis suggests demand growth of~7%; imports will follow a declining trajectory over time – with deceleration likely tocommence in FY19.

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Figure 101. Seaborne Global Thermal Coal Imports by Country – Citi Forecasts (Mt)

1000
900
800
700
600
500
400
300
200
100

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020

0

China
Korea
Other

Japan
TaiwanIndia
European Union

Source: Citi Research, Wood Mackenzie

Is Time Running Out for the Coal Industry?
The response of the coal industry so far could be best described as optimistic andhopeful. Optimistic that demand will pick up and prices with it, and hopeful that‘clean coal’ technology will become available and save the day. On the demand side
we think thermal coal is cyclically and structurally challenged and that current
market conditions are likely to persist. This in our view will force the companies totake dramatic actions; the large diversified mining companies such as Rio Tinto,
Anglo American and BHP Billiton have either been exiting thermal coal operations
or significantly rationalizing their businesses. The pure play or heavily exposedmining companies appear to want to ride out the storm.
Could CCS be a ‘game changer’ for the coalmarket?

The ‘game changer’ and blue sky scenario for coal rests in carbon capture andstorage (CCS), though as explained below we think the timeframe for commercial
success may be beyond the survival window for a lot of the coal mining companies.
Ironically, the coal industry may need support or bail outs from governments, though
the appetite for rescuing the industry both economically and politically appears
limited. However, despite the stranded asset issue, coal is likely to remain abackbone in certain regions such as South Africa, where the current power
shortages and rolling blackouts suggest that the medium term solution is likely tohave to involve coal, the question being how or whether the government will need toincentivize coal production.

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Carbon Capture and Storage
Carbon capture and storage (CCS) is often cited as an important technology toallow continued use of fossil fuel resources, particularly coal, in a carbonconstrained world. CCS involves three major steps: Capture: The separation of CO2 from other gases produced at large industrial

process facilities such as coal and natural gas power plants, oil and gas plants,
steel mills and cement plants.
 Transport: Once separated, the CO2 is compressed and transported via

pipelines, trucks, ships or other methods to a suitable site for geological storage.
 Storage: CO2 is injected into deep underground rock formations, often at depthsof one kilometer or more, where it is permanently stored.
What is CCS?
Carbon Capture and Storage (CCS) is a technology that can capture up to 90% of
CO2 emissions produced from the use of fossil fuels in electricity generation andindustrial processes, preventing CO2 from entering the atmosphere. However, it isstill at an early stage; according to the Global CCS institute, as of February 2014,
there were only 21 active large scale CCS projects in operation or underconstruction globally, with a combined capture capacity of almost 40 million tonnesof CO2 per year.

CCS Status
The majority of CCS projects are associatedwith EOR as it is more cost-effective thangeological storage© 2021 Citigroup

The Global CCS Institute (GCCSI) has analyzed the status of CCS projects aroundthe world (Figure 102). The majority of projects to date are associated with either
enhanced oil recovery (EOR) or with natural gas processing. The recently
commissioned Boundary Dam project in Canada has been hailed as a milestone
project in the power industry.

91

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Figure 102. Capture Carbon and Storage Projects

Source: Global CCS InstituteTechnical Progress, But a Lack of Policy Drivers
CCS is widely seen as being key to achieving the global greenhouse gas emission
reductions by 2050 needed to put the world on a path towards limiting warming to
2°C, at lowest cost. This would require substantial deployment by 2030 (i.e. 1.5GT)
compared with around 40-50Mt now, rising to ~6GT in 2050. However, if
implementation is to accelerate from 2025, project development, including
assessment of geological storage sites, needs to accelerate quickly.
However, progress is being made. The Canadian Boundary Dam project(SaskPower) which recently started production, has been hailed as a milestone
project. China is progressing the technology, with substantial storage capacity inpetroleum basins in the Pearl River and South China Sea areas. In Australia's Surat
Basin, Glencore is developing the Carbon Transport and Storage project, currently
at a feasibility study stage. As a major coal exporter, Glencore is developing the
120kt per year project to demonstrate to its coal customers that the technology
works. The project is able to take advantage of existing Glencore infrastructure in
the area (Wandoan mine) to keep costs down.

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Carbon prices could provide an incentive for
CCS deployment

Despite progress on the technical front, the industry believes there is a need forgovernment policy to support the business case for broad scale implementation.
While the fossil fuel industry, particularly coal, has tended to resist carbon pricing
developments, ironically the lack of carbon pricing means there has been nobusiness case for large scale CCS deployment.
If progress is not made quickly with CCS, it is difficult to see it playing a major rolein emissions reductions since other technologies may make sufficient progress torender CCS 'too little, too late'. The concept of "clean coal" may then fail tomaterialize, further weakening the prospects for thermal coal as a commodity.

CCS Costs
CCS can more than double the LCOE of acoal fired plant

Assessing the cost of CCS is problematic given the limited number of projects andthe scale thereof to date. The GCCSI provides some indicative costs as shown in
Figure 103, showing that coal with CCS is still significantly more expensive thanother technologies. We understand that the CCS estimates shown in the chart are
based on US conditions (the Boundary Dam figure is a Citi estimate), and CCS
costs will vary with project detail and location. Costs of proving up storage capacity
are probably in addition to the costs shown below. However, if the right attention
and investment is devoted to R&D and implementation becomes more widespread,
there is scope for costs to reduce significantly (as shown by the GCCSI estimates)
as has been the case with other technologies.
Figure 103. Comparison of LCOE’s for CCS vs. Other Power Generation Technologies
200

First commercial CCS plant (BoundaryDam) capex at 12-13$/W, COD: Oct 2014

180
160
160

LCOE in $/MWh

140
120

120

115
100

100
93

80

90

82

70

70

60

60

60

Chile LCOE at
60$/MWh atsome location

40

50

20
0
Coal (CCS)

Gas (CCS)

Source: Citi Research, Global CCS Institute© 2021 Citigroup

Solar PV

Onshorewind

Coal (noCCS)

Gas (noCCS)

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CCS Conclusions
We continue to have reservations about the risk-reward equation for CCS. On thepositive side, it represents a potentially enormous game-changer for energy
markets; with almost 3000 years-worth of potential coal resources (at current usage
rates) if CCS could be commercialized, then in many ways all other bets would beoff. If CCS were to materialize on a large scale, it would provide opportunities forcompanies in the engineering, construction, pipeline and drilling industries, andgeological expertise might align with petroleum industry capabilities. Conversely, we
harbor reservations regarding the large scale of investment required and long
payback periods, which potentially make projects vulnerable if alternative solutions
such as renewables, storage or hypothetically algae, become cheaper and more
widely adopted in the meantime. Regulatory and political risks obviously remain key
factors. We will watch industry progress with interest to see if the needed short-term
momentum does in fact increase.

Implications of Paris COP21 for Stranded
Assets
While any Paris agreement may well not fully align with the 2°C objective, the outcome
is likely to be that countries’ commitments to reducing emissions will strengthen overtime, with obvious implications for stranded assets in terms of both quantity and timing.
Accordingly, while an outcome might not be 'definitely negative', its direction is likely to
be clear, and is likely to raise further the risks posed by stranded assets.

How Might Assets Become Stranded?
There are various possible mechanisms by which assets may become stranded,
which may affect certain types of assets sooner than others. Some of these effects
are already evident in some markets, some may soon become significant, withothers emerging in the longer term. We highlight the key possibilities below:
 Regulations could require the closure of certain operating assets, for example oldor high emissions power stations.
 Regulatory constraints might add to costs, making assets economically unviable.
 Regulations might be enacted to prevent development or construction of certain

new assets.
 Regulation might impose requirements such as emissions constraints, or for

example, the adoption of carbon capture and storage, which would increase
costs to the extent that potential projects may become unviable.
Hence, market mechanisms such as a price on carbon could make existing or new
projects unviable. Demand for fossil fuels could fall as the costs of renewables fall,
and technology improves. Local air quality considerations may also play a role infavoring renewables over coal, and regulations may support this.
Markets are connected, so local legislation
on CO2 emissions could affect aggregate
global demand for fossil fuels© 2021 Citigroup

Given global markets, mechanisms or regulation in one country may of course
affect suppliers elsewhere; local regulation in consuming countries will affectaggregated global demand for fossil fuels, with a potential knock on effect on pricing
and hence consumption patterns in other markets. These price and weakening
demand effects would also depend on (and affect) supply response, because if new
projects are abandoned, this may lead to healthier demand and prices forincumbent producers.

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Any combination of the above could lead to stranded assets. Certain fossil fuelassets may not be developed, with demand and price forecasts too low (or risk
assessments too high) to support project economics as described above.
Premature closure of operations could also occur if weaker markets lead to negative
operating cashflows.

Types of Stranded Assets
The “stranded assets” concept is already in play; the European power sector has
already undergone substantial change in line with the projections of the original
Energy Darwinism report. The current focus is on high cost, high emission and longlife undeveloped oil and thermal coal projects, since high-cost long-life projects
would be most vulnerable if product demand and prices weakened over time. This
includes major new coal provinces such as Australia’s Galilee Basin, which would
require major investment in new export infrastructure to be developed. In oil,
unconventional deposits such as Canadian oil sands and Arctic projects are underparticular scrutiny.
Over time, impacts may spread further to lower cost or lower emissions fossil fuels,
including currently producing projects. Gas and LNG may initially be insulated as alower emissions transition fuel, but fossil fuel constraints could ultimately impact
these commodities too, perhaps several decades hence.

Investor Approaches to “Carbon Risk” and Potential Stranded Assets
Many long-term broad-based investors believe that climate change is one of thebiggest systemic risks they face, as well as presenting one of the largest
opportunities. Tackling climate change is seen as being important to the long term
health of the economy and therefore to investment returns.
Investor actions typically start with so-called 'carbon footprinting' whereby an asset
manager assesses the exposure of funds to carbon, climate change and associatedissues. There is as yet no consensus approach to portfolio footprinting; service
providers each have their own methodologies, and increasingly investors are
considering what approach they might adopt. Typical approaches include Scope 1(direct) and Scope 2 (indirect) emissions, per unit of revenue or market
capitalization. Other approaches may include some forms of Scope 3 emissions(e.g. emissions from customer use of a company’s fossil fuel products), while others
are exploring more novel approaches. A number of major investors have signed up
to the 'Montreal Pledge' (launched at the Principles for Responsible Investment
conference in Montreal in September 2014), signatories effectively committing tomeasure and disclose the carbon footprints of their portfolios. In conjunction withfootprinting, asset managers have started to adopt a variety of other responses tothe issues of carbon, climate change and potentially stranded assets as follows:
Screening, tilting exposure, engagement
and hedging are four ways that asset
managers have responded to the issues of
stranded assets

 Screening: Some investors have applied fossil fuel screens to the “riskiest”

types of fossil fuel assets – examples include thermal coal production, coal-fired
power generation, and oil sands. They may apply a materiality threshold for
exclusion from the fund’s universe, while some funds have taken a broader
approach to divesting fossil fuel assets.
 Tilting exposure: Some investors have adopted or explored ways to “tilt” theirportfolios to reduce carbon exposure, based on their own preferred carbon
intensity metric, or via the use of “low carbon indices”.

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August 2015 Engagement: Some investors prefer to remain invested and to “engage” withcompanies to better understand their resilience to a lower carbon world and tobetter understand capital allocation decisions and what scenarios have been
explored, or to encourage companies not to allocate capital to the riskier types offossil fuel projects. Engagement can also include discussion of executive
remuneration incentives, given that incentives based on reserves replacement or
production growth might encourage allocation of capital to projects at risk of
stranding.
 Hedging: Investors may hedge their portfolios against stranded asset risk by

allocating funds to low emissions or clean technology investment options.

Norwegian Report on Approach to Coal and Petroleum Investments
Perhaps the best public example of an individual fund’s consideration and responseto this issue comes from Norway. The Parliament has announced its intention to
adopt a bill which would exclude the $850 billion (the largest of its kind in the world)
Norwegian Government Pension Fund Global (GPFG) from investing in companies
which themselves, or through entities they control, base 30% or more of theiractivities on coal, and/or derive 30% of their revenue from coal.

Investor Groups
As well as individual actions, investors have started to form international investor
groups, collaborating to encourage policy makers to provide appropriate signals,
emissions pledges and plans to encourage the transition to a low carbon economy,
then standing ready to allocate capital towards the transition under appropriate
policy backdrops. Key investor groups include: The UK/Europe Institutional Investors Group on Climate Change (IIGCC)
 The US Investor Network on Climate Risk (INCR)
 The Australia/New Zealand Investor Group on Climate Change (IGCC).

Other international investor collaborations such as that being launched by the
Principles for Responsible Investment (PRI), are designed to address potentiallyinconsistent corporate climate policy positions, where a company's publicstatements on its support for action to address climate change appear to be at odds
with those of industry associations of which it is a member, or think tanks which it
co-funds.
Another emerging initiative is the Portfolio Decarbonization Coalition, whose
intention is that institutional investors representing large segments of the global
economy will disclose their carbon footprints, and publicly commit to ‘decarbonize’ aspecific portion of assets under management in a particular timeframe. It believes
that that this engagement and reallocation of capital into carbon-efficientinvestments will provide a strong incentive for companies to adapt their own
strategies towards lower-carbon activities.

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Potential Implications for Companies
Change in investor attitudes could divert
capital away from companies or at least
influence their strategies

These changing investor attitudes and initiatives have obvious implications foremissions intensive companies, in that it may divert capital away from thosecompanies, or lead to increasing influence on strategy via a process of greater
engagement. The latter approach is perhaps best demonstrated in the recent
resolutions proposed by investors for the Annual General Meetings (AGM's) of both
Shell and BP. These resolutions (which were supported by both boards and duly
passed) were related to greater transparency around the climate and carbon risk
issues facing the companies. The aim of such resolutions is to encourage energy
companies to develop clear strategies around the risks posed by potential changes
to the world’s energy markets, and to explain how they reflect these strategies intheir investment decisions and allocation of capital.
To what extent increased company disclosures defend the status quo, or contributeto better risk management or an accelerating transition to a carbon constrained
world, remains to be seen. However, it is clear that large long-term investors are
increasingly seeking to be more active stewards of companies they own, and thatenergy transition is becoming an increasingly significant stewardship issue.
In a material sign that this engagement is having an effect, on June 1, 2015 a groupof major European oil & gas companies, namely Statoil, Total, BP, Shell, ENI and
BG, jointly issued a letter calling for governments around the world and the
UNFCCC to introduce pricing carbon systems. They stated their hope that thesesystems would create 'clear, stable, ambitious policy frameworks that could
eventually connect national systems' – i.e. a global carbon market.
If the COP21 meeting in Paris is successful, it could lead to significant quantities of
stranded assets which could fundamentally alter the outlook for the fossil fuel andpower industries. Regardless of the outcome of Paris, investor sentiment ischanging and cannot be ignored – after all investors provide the capital tocompanies, and the removal of this capital (or threat of) could either mean thatcompanies couldn't invest, or could only do so at a higher cost of capital, thereby
potentially stranding more projects.

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Implications (2): Can We Afford It?
Highlights
 This chapter tries to address three key questions– What impact would the higher spend required to follow a lower carbon future
have on global GDP?
– Who pays?
– What would be the distribution of those effects around the world?
 Energy is inextricably linked to GDP, and restricting it, either directly, or bymaking it more expensive, represents a negative supply shock. Accordingly weneed to consider the impact on GDP of the vast investments required into energy.
 Energy as a cost has historically varied between about 3% and 10% of global

GDP in primary energy terms, with the upper levels acting as a brake on global
GDP growth On our analysis, our Citi ‘Action’ scenario does not require a material increase in

the cost of energy as a percentage of GDP, relative to historic levels – in fact the
total costs are lower if we incorporate the fuel savings in later years.
 As discussed earlier, there is a limited difference ($1.8 trillion) in the total bill to2040 between our ‘Action’ and ‘Inaction’ scenarios. However, we demonstrate thehigher earlier spend on renewables and energy efficiency in the action scenario,
which leads to fuel savings later.
 Comparing the in-year differential cost between ‘Action’ and ‘Inaction ‘shows that

there is a net cost per annum of following a low carbon path until 2025, after
which we move into net savings via lower fuel usage. At its worst, this net cost is
only around 0.1% of global GDP; in a cumulative sense there is a net cost out to2035, beyond which there is a net saving; at its worst this cumulative net cost is
still only around 1% of current GDP. In the context of the potential liabilities, these
seem like relatively small figures.
 In a positive sense, a more diverse energy mix could make future energy shocks

less severe, as could the non-fuel nature of renewables. The greater upfront
investment in energy could also help to boost growth and act as a partial offset tothe effects of secular stagnation being witnessed currently. Lower long-term
energy costs as a percentage of GDP could ultimately serve as a significant
boost to GDP, especially compared to the potential lost GDP from inaction.
 The issue of who pays remains a tricky issue – future growth in emissions will

come from emerging markets, while historic emissions were largely put in placeby developed nations. Given that we are all therefore responsible, and would all
suffer the consequences of global warming, it seems logical that everyone shouldplay their part; the issue is of course the split.
 The distribution of effects will depend on national energy intensity, stranded

assets, and the importance of energy to a particular economy, in terms of GDP,
stranded assets, balances of payments, and employment.

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The Impact on Global GDP
Energy costs are inextricably linked to global GDP. Energy is an input into
production, alongside capital, labor, technology and other materials. Restricting
energy (either directly or by making it more expensive) is therefore a negative
supply shock, which will generally make it harder to produce, thereby lowering GDP.
Accordingly it is useful to examine energy costs as a percentage of global GDP in ahistoric context, to be able to consider the likely future impacts of the higher initial
spend on following a lower carbon path.
Figure 104. Energy Costs (Fuels) as a % of Global GDP

10%

Consumers struggled to make a returnon consuming energy above this pricepoint... energy producers wrong to rely
on price inflation to underpin investment

Primary energy costs as % of global GDP

9%
8%
7%

A 3-fold increase in theworld's energy bill was
accomodated for by shifts
to cheaper labour

6%
5%
4%
3%
2%
1%
0%
'71

'74
Oil

'77

'80

'83

Gas

'86

'89
Coal

'92

'95

'98

Nuclear

'01

'04

'07

Hydro

'10

'13

'16

'19

Other

Source: Citi Research; BP Statistical Review of Energy

As Figure 104 shows, energy costs in terms of energy supply (rather than capex),
have varied widely since 1970, between around 3% and 10% of global GDP. The oilshock of the 1970’s is well known, as is the dampening effect that it had on global
growth. In more recent years, increases in the cost of energy to 7-8% (a threefold
increase in the world's fuel bill) have been offset by the shift to cheaper labor as well
as savings made elsewhere.
However, this approach only shows one part of the equation. Clearly if we shift
towards an energy mix with a greater proportion of renewables such as our Citi
‘Action' scenario, fuel costs will be reduced (solar and wind use no ‘fuel’), but thisrelative reduction in fuel usage would be accompanied by a relative increase in thecapital spend per MW (the capital cost of renewables is higher than conventional,
albeit the LCOE may not be in future). In addition, as we saw earlier, a low carbon
future in the Citi 'Action' scenario is likely to entail a significantly higher spend onenergy efficiency than our 'Inaction' scenario.
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Accordingly, we have adjusted these energy cost figures to incorporate the spend
on power generation, using our LCOE approach examined in detail earlier. Since
this inherently captures fuel costs where appropriate, we have adjusted the previous
primary energy demand figures by removing the portion of demand used in power
generation. The resulting spend on power, non-power and energy efficiency can beseen in Figure 105 and Figure 106. Future figures are calculated using current
prices for commodities, with learning rates derived earlier continuing forrenewables.
This more holistic approach of capital investment and fuel cost, while not perfect,effectively captures many other effects in the energy complex such as energy
transport, upstream margins, refining/conversion and not least taxation. It also
raises the issue of the tax that governments take from fossil fuels, on which a lower
carbon future will clearly have a material impact. Offsetting that is the level ofsubsidies currently used in fossil fuels versus renewables, and put as a percentageof global GDP.

A lower carbon future could raise the issueof the tax that governments raise from theuse of fossil fuels

Non-power - Oil

Non-power - Coal

Non-power - Gas

Non-power - Oil

Non-power - Coal

Non-power - Gas

Non-power - Bioenergy

Power

Energy efficiency

Non-power - Bioenergy

Power

Energy efficiency

Source: Citi Research

2040

2035

0.0%

2030

0.0%

2025

2.0%

2020

2.0%

2015

4.0%

2010

4.0%

2000

6.0%

2040

6.0%

2035

8.0%

2030

8.0%

2025

10.0%

2020

10.0%

2015

12.0%

2010

12.0%

2005

14.0%

2000

14.0%

2005

Figure 105. Primary Energy (ex-Power) and Power (LCOE) Spend Under Figure 106. Primary Energy (ex-Power) and Power (LCOE) Spend Under
Citi’s ‘Inaction’ Scenario
Citi’s ‘Action’ Scenario

Source: Citi Research

As discussed in the earlier 'Action vs. Inaction' chapter, the totals of investment inboth primary energy and power (capex and fuel) are actually remarkably similarfrom 2015-40 ($190.2trn and $192trn). With a difference of 'only' $1.8 trillion spread
across 25 years, it is perhaps unsurprising that the charts look very similar.
Figure 107 helps to highlight the differences in spend. It shows the 'extra' spend onenergy efficiency, with the corresponding lower spend on both power and nonpower in both capex and fuel terms, with the annual net difference in spend, and thecumulative difference shown by the lines.

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Figure 107. Net Differential Spend Between Citi’s ‘Action’ and ‘Inaction’ Scenarios with
Cumulative Total of Spend (Positive) or Saving (Negative)
1,500

Differential spend ($bn)

1,000
500
0
-500

-1,000-1,500-2,000
2015

2020
Power

Non-power

2025

2030

Energy effiency

2035
Net

2040

Cumulative Net

Source: Citi Research

Of most interest are the 'difference' lines. As the 'net' line shows, in the earlier years
we invest more in energy efficiency than the power and fuel savings, before wemove to a net 'in-year' overall saving in 2025 and beyond. At this point the
cumulative cost/saving line reaches its inflection point at a net cumulative extra
spend of $775 billion, before the savings start to reduce this figure. The cumulative
cost then becomes a cumulative benefit from 2035 onwards, and would increasesignificantly thereafter. Clearly discounting would have an effect on the net present
value of costs and benefits, a topic that was discussed at length earlier in thisreport.
Returning to the spend as a percentage of GDP charts, it is also worthy of note thatthe total spend as a percentage of GDP (admittedly at current prices) remains
significantly lower than the peaks seen in the early 2000's and in the 70's,
effectively 'freeing up' room to spend the extra in capital costs on renewables andenergy efficiency.
The effects of GDP of a lower carbon pathare potentially very small – largest annual
impact is only 0.1% of global GDP© 2021 Citigroup

The likely effects on GDP of following a lower carbon path are, in our opinion,
potentially relatively small (though the mix of those effects could vary significantly).
The effects on production will depend on the importance of energy to individual
economies (in terms of energy intensity, as discussed earlier) and in terms of
substitutability. Higher upfront costs will hurt supply in the short-term, while thebenefits will be reaped later. However, the hit to growth tends not to be too severe
except the cases of very big shocks. The basic rule of thumb is to calculate energy
as a share of GDP, and multiply this by the change in 'price' (i.e. if energy is 5% of
GDP and energy prices rise by 10%, the cost would be 0.5% of GDP). Accordingly,
on the basis of our (undiscounted) figures, the largest annual impact would still only
be just over 0.1% of global GDP, with a cumulative effect peaking at around 1% of
current GDP. Once again, in the context of the costs to GDP from the impacts ofclimate change (0.9% to 2.5% of global GDP loss for a temperature increase of
2.5°C), this seems like a very small cost.

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Clearly the cost of energy in future won't be as smooth as portrayed in the charts –there will be supply shocks which could potentially push costs up to or beyond that
10% threshold where GDP begins to be materially affected. However, a morediverse energy mix could potentially make those shocks less severe, or moremanageable.
As discussed, the extent of any energy ‘shock’ depends on 1) on the importance ofenergy in production and 2) one's ability to substitute for it. This highlights several
other dynamic elements with potentially positive connotations: On average energy use per production has come down. All other things being

equal, including one's ability to substitute for energy, this means a shock toenergy supply is now less painful than in the past (though for emerging markets
with higher energy intensity the shock remains larger, especially for thoseindustrializing currently).
 One's ability to substitute is usually a function of the time horizon. The reason

previous spikes in oil prices were so painful (and hit GDP so hard) were that it isso painful to improvise in the short-term – e.g. engines are built for a certain typeof fuel. That means that sudden, sharp shocks are very painful in terms of output(and a lack of substitutability in the short-term therefore means that price spikes
will be large). Even a major shock that is anticipated should have smaller
effects/consequences. Accordingly, the broader energy mix, alongside the lack offuel elements for renewables could have a positive effect in reducing the impactof future energy shocks (at a global level, though again, national effects willvary).
 The world is currently facing signs of a persistent demand shortage (secularstagnation). Against that, adopting a lower carbon route which actually boosts
demand currently (i.e. increased investment) could be an (admittedly small)positive for growth, in that it potentially avoids people being otherwise
unemployed.
 Sometimes when you invest, the returns can dramatically exceed what you put

in. If, as seems possible, energy savings allow us not only allow to achieve ourclimate targets, but make energy much, much cheaper in the long run, there
might not be ‘any’ hit to growth, in fact the effect could be positive.
However, to achieve a lower carbon future will require longer term vision on the partof policymakers, and must overcome parochial thinking.

Who Pays?
Paying for climate change has two meanings; paying by restricting one's own
emissions, and paying for mitigation elsewhere. Carbon markets, if they can be
integrated to a greater extent can help to integrate these two approaches.
The problem of externalities plays a hugepart in the discussion of who should pay

The key issue with who pays is that there are externalities; the fact that one country
will not alone suffer the consequences, positive or negative, of its climate-affecting
actions makes it more difficult to reach socially and globally optimal solutions.
Hence international coordination and cooperation is required (but difficult toachieve). More specifically, the issues are as follows: The majority of future energy demand and emissions growth will come fromemerging markets.

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 The legacy issue that developed markets now have less energy-intensive

economies, and hence restricting their carbon output would be less expensive interms of GDP impact, combined with the fact that developed markets havehistorically accounted for the bulk of carbon emissions which have created theclimate problem in the first place.
Developed markets do acknowledge the legacy argument, and most appear willingto play their part – the $100 billion climate fund pledge is a good example. However,
it is the extent to which they are willing to act, and in particular sensitivity over the
relative size of contributions, which are key issues.
The view that developed markets are doing their part by spending more per MW on
new generation capacity in the form of renewables, and that emerging markets will
be responsible for the future growth in emissions and hence should pay is in ourview too simplistic. It ignores the fact that the existing levels of carbon in theatmosphere were put there by the developed world in becoming ‘developed’ – i.e.
they used the same cheap and dirty power to get richer in previous decades, andhence to adopt a holier than thou attitude to emerging markets is disingenuous.
Indeed there is an argument that developed markets are responsible for more thantheir share of the residual carbon in the atmosphere, given that emerging markets
are at least attempting to go for a balanced and less emitting energy complex thandeveloped markets did historically. To which developed markets would probably
reply, “But we didn’t know at the time, but now you do.”Figure 108. % of Annual CO2 Emissions by Country

Figure 109. % of Cumulative CO2 Emissions by Country

14%

China

27%
35%

China

29%

US

US

EU28

EU28

22%

India
Russia

14%
3%
5%

Japan
ROW

7%

Russia

4%

Japan
8%

ROW

4%

9%

Source: Boden et al. (2013), Houghton et al. (2012), Citi Research

India

19%

Source: Boden et al. (2013), Houghton et al. (2012), Citi Research

Moreover, expecting emerging markets to spend more on power per unit than they
simplistically need to could potentially slow their development, which could
effectively keep millions of people in technical poverty for longer than is necessary.
Given the joint responsibility for historic and future emissions, it would seem logicalthat everyone should pay their fair share, especially since we all suffer theconsequences of inaction. It would be theoretically possible to create attribution
formulae based on cumulative emissions relative to cumulative GDP (potentially ona per capita basis) to enable a fair allocation of costs and an equitable funding
mechanism, though once again this falls foul of the argument that emerging markets
are manufacturing goods for which developed markets are providing the demand.
Mechanisms and political solutions are not however the purpose of this report(instead it being focused on investment). The INDC's to be submitted before COP21
should at least form a starting point for discussions from which some countries canbe pushed to act further.

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The Distribution of Effects
The key issues regarding the distribution of effects are as follows: Emerging markets show significantly higher levels of energy intensity, and are

responsible for the vast majority of the growth in energy demand, and hence theimpact of the higher cost of energy is likely to impact them disproportionately.
 Whether countries are energy importers or exporters, of which fuels, and how

important that energy industry is to their economy will be of key importance to theeffects on localized GDP.
 The geographic distribution of energy reserves around the world will affectcountries in terms of their 'assets' and future ability to develop and benefit fromthese reserves (both in terms of fossil fuel reserves, as well as renewables
resources such as insolation levels, i.e. how sunny the country is) Collectively these will have an effect on local levels of employment.

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Making it Happen: Funding a Low
Carbon Future
Highlights
 Directing the vast amounts of capital required to transform our energy mix will

require innovation on the part of financial markets and the instruments therein.
 While green investment has ballooned in recent years, it is still tiny compared towhat will need to be invested, and as a portion of both equity and debt markets.
We see the most scope in the credit markets, given that renewable energy andenergy efficiency investments lend themselves well to debt financing given theirstable cashflows and operating predictability.
 The potential yields generated offer enormous attractions to investors against a

backdrop of historically low global interest rates, if politicians, regulators andpolicy makers can overcome the barriers holding back private capital, outlined
below.
 The limited investment to date is not due to a lack of investor appetite; there is anincreasingly large investor base with tens of trillions of dollars of assets undermanagement that wishes to gain exposure to ‘green’ investments.
 With both the need and the desire to invest, the missing link has up to now beenlack of availability of investment vehicles of sufficient quality, i.e. investment
grade.
 The majority of energy investment will be required in emerging markets, where

financial markets are typically smaller, less stable and liquid, and political, FX etc.
risks are perceived as higher. Historic finance here has been provided by
Development Finance Institutions (DFI’s), who are now effectively ‘maxed out’.
 The key barrier to attracting sizeable debt investment into energy in emerging

markets has been the lack of investment grade vehicles available. If DFI's orother supranational organizations are able to offer some form of credit/riskenhancement to raise emerging market credit to investment grade this could
bridge the gap between the need for capital and the desire to gain exposure In developed markets the majority of investment will be in energy efficiency which

presents its own issues, given the lack of cashflows which can be ring-fenced tocover financing costs.
 Securitization offers enormous potential for both energy and efficiency

investment, though banking and insurance regulations such as Solvency II
actively discourage entities such as insurance companies from investing insecuritized assets.
 We examine new vehicles such as securitized energy efficiency fixed interest

instruments, and the emergence of green bonds and yieldco's, all of which offer
enormous potential for the future.
 We also highlight the possibilities offered by R&D in terms of the potential it offers

to reduce the overall cost of transitioning to a low carbon energy mix.

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Introduction
As the previous chapters have highlighted, an enormous amount needs to beinvested in energy and efficiency over the coming 25 years, some $50 trillion incapex alone, or close to $200 trillion if we include the cost of fuel. However, as wehave also seen, the sums of money required to go down a low carbon path whilelarger, are in context not that different, especially when we consider the potential
costs of inaction. Moreover, the capital element of that investment could actually act
as a boost to global growth (or at least not too much of a brake). However, thatinvestment will be in different locations and different industries than might otherwise
have been the case. Accordingly it is not just global political will that has to cometogether to tackle the issue of potential climate change; to redirect investment ofthat magnitude into new areas will require innovation in both financial markets andthe instruments therein.

Historic Investment Levels
While the world of green investment has ballooned over the last 10 years, it is still adrop in the ocean compared to total energy investment, and to the amounts
required to adopt a low carbon future. Nevertheless it is worth noting that in 2014
we expect investment in renewable energy actually to have surpassed that ofconventional power generation; in capacity terms it was almost equal in 2013 - amilestone that few would have thought possible a few years ago, and one that offers
faith in our ability to change our investment behavior relatively rapidly.

In 2014, investment in renewable energy
surpassed that of conventional power
generation, totally around $250 billion per
annum

Figure 110. Investment in Clean Energy in the Context of Total Primary
Energy Investment

Figure 111. Cumulative Investment 2014-35 by Type Under the IEA’s‘450 Scenario’

1800
1600
Energy efficiency,$13.53 , 26%

Investment ($bn)

1400

Oil, $11.06 , 21%

1200
1000
800
600

Gas, $7.46 , 14%
T&D, $5.85 , 11%400

Coal, $0.69 , 1%

200
Biofuels, $0.92 ,
2%

0
2004

2005

2006

2007

Clean energy

2008

2009

2010

2011

2012

Renewables,$8.81 , 17%

Other energy investment

Source: Citi Research, Bloomberg New Energy Finance, IEA

Fossil Fuel power,$2.88 , 5%2013

Nuclear Power,$1.72 , 3%

Source: IEA (2014)

Figure 110 shows investment in clean energy has been around $250 billion per year
in recent years, rising further to $310 billion in 2014, but is still dwarfed by the total
investment in primary energy (a total of around $1.6 trillion per year). Onto thisfigure we should really add the estimated current expenditure in energy efficiency of$160 billion per year to gain a full picture of 'cleantech' and energy spend. Thus
renewables represents around 17% of current total investment in primary energy(as opposed to just power).

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However, as Figure 111 shows, the cumulative investment figures out to 2035 underthe IEA's ‘450 scenario’ are enormous. Energy efficiency and renewables are
estimated by the IEA to require capital investment of $13.5 trillion and $8.8 trillion
over the next two decades. Interestingly renewables stays at around 17% of that
total investment, with an annual spend which is actually only at 2014 levels, andhence markets are already arguably providing enough capital to the renewables
industry (in quantum at least, if not necessarily in the markets where it will beneeded). The biggest change is the enormous increase in investment in energy
efficiency which rises from current levels of around $150 billion per year (depending
on definitions) to over $500 million per year, being largely responsible for theincrease in annual spend on energy and efficiency to around $2.5 billion per annum
from 2030 onwards.
So far the bulk of the investment into clean energy has been equity and project
finance, a situation that continued in 2014, as shown in Figure 112.
Figure 112. Announced Investments Into Clean Energy and Efficiency by Financial Vehicle,
2014

Grants0%

Asset finance
33%
Equity
40%

PE
11%

VC
1%

Corporate debt
10%
Convertible
5%

Source: Citi Research, Bloomberg New Energy FinanceAs the pie chart shows, equity in its various forms still provided around 50% of
finance flows into the space in 2014, with the majority of the remainder being
covered by asset finance, with bonds and convertibles making up just 15%.
If we take this equity investment in the context of the global equity market
capitalization of $70 trillion, it pales in significance. Even more extreme is tocompare the fixed income part of annual investment (effectively around $100 billion)
against global credit market values of $166 trillion, equivalent to just 0.06%.
It is therefore only a very small part of the overall investment market which is in any
way directly exposed to the low carbon theme. Given the topic's significance andbroader implications for markets in terms of its potential impacts on global GDP,
health, population displacement, agriculture/food, sea levels, not forgetting theenormous cost of transitioning to a lower carbon energy model, that seems aremarkably small percentage.
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Institutional investors are investing more inclean energy fuels

August 2015

Yet this lack of exposure is not due to a lack of appetite; The IIGCC (Institutional
Investors Group on Climate Change) has more than 100 members representing $12
trillion in assets under management; The Carbon Disclosure Project works withinstitutional investors with $95 trillion of asset under management (AUM); The
Climate Bonds Initiative works with institutions with $34 trillion AUM. As discussed
earlier, the Norwegian Government Pension Fund (the world’s largest sovereign
wealth fund) has announced that it will no longer invest in companies that are overly
exposed to coal, and numerous other institutions have undertaken similar
approaches to make their portfolios more environmentally friendly.
So, if the investment is needed, there are project developers seeking capital, andthe appetite and interest in gaining exposure (or limiting exposure to carbon
intensive investment) is there from a very large part of the institutional investor
base, why isn’t the investment already happening? The simple answer is the limited
quantity and quality of the investment vehicles available.
Figure 113. While DFI’s and Banks have Historically Provided Much of Financing, CapitalMarkets Must Now Innovate to Facilitate Investment
Banks

Creditenhancement

Desire toinvest- AUM

Ratingagencies

FinancialMarkets

Regulation

EE securitisations

EquityFinancial
Instruments$50trnNeed forinvestment

Covered bonds

Green bonds

DFI’s

Source: Citi Research

Therefore, this investment needs to be facilitated via the creation or adaptation of
new financial instruments, and developing sizeable, established, liquid and stable
markets for these products.
The debt market has the largest potential© 2021 Citigroup

While equity markets have mobilized themselves, it is the debt market where
perhaps the greatest potential lies. Renewable energy projects lend themselves
very well to debt capital markets; they have very little operating variability, and havelong term stable cashflows which can therefore take relatively high levels ofleverage (in some cases up to 80%) thereby minimizing the cost of capital andkeeping investment costs as low as possible for a given return. The key risk on
many of these projects is regulatory/political rather than operational – if thisinvestment program is to happen, it must be against a stable regulatory backdrop
with, most importantly, an end to the retrospective regulation that has been seen
recently in various areas around the world. This perceived risk ultimately pushes up
costs and discourages investment, the opposite result to that which is desired.

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The returns offered by these projects and their long term nature should offer
significant attractions against the backdrop of historically low global interest rates,
and a worldwide search for yield. As discussed, the longer term (20 year) nature ofmany of these projects would allow pools of investors such as pension funds,
insurance companies etc. to match long-term liabilities with long-lived assets.
The challenges of allowing the investment to flow are very different for clean energy
investment versus those for energy efficiency; we examine these in turn below.

Financing Renewable Energy Investment
While developed markets need to invest in energy efficiency rather than new
capacity, growth in energy demand is coming from emerging markets meaning that
it is here that the bulk of asset finance will be required. The equity and certainly debt
markets in these regions are unlikely to be large, stable and liquid, and hence
potentially unsuited to financing these investments, or at least not with a low cost ofcapital. This creates another financial hurdle, especially when these projects mustcompete in LCOE terms with often sizeable subsidies on fossil fuels. In emerging
markets, much of the financing therefore currently comes from banks, on whom
current pressure to reduce the scale and risk of their balance sheets createsanother headwind.
Most investment in these sectors in emerging markets has hitherto been funded by
DFI's. However, these institutions now largely find themselves at capacity, asituation exacerbated by regulatory constraints placing pressure on banks to reduceleverage or raise the quality of their debt portfolios.
While private capital has been actively engaged in investment in renewables andinfrastructure generally in OECD markets, there has as yet been little involvement in
the typically sub-BBB emerging markets, due to the inherent macro-economic,
political, foreign exchange, refinancing, governance and regulatory risk. Yet with
DFI's effectively 'maxed-out', and in the absence of an injection of fresh capital,
private capital must be enticed into these emerging markets to co-invest alongside
the DFI's.
The search for yield against a backdrop of historically low global interest rates offers
enormous potential, if politicians, regulators and policy makers can overcome thebarriers holding back private capital from investing in this sizeable opportunity.
In our opinion, the credit rating issue is one of the most significant issues to beaddressed; if DFI's or other supranational organizations are able offer some form ofcredit/risk enhancement to raise emerging market credit to investment grade this
could bridge the gap between the need for capital and the desire to gain exposure,and address the enormous emerging market infrastructure deficit which exists, andnot just in the world of energy. Indeed, vehicles such as the $100 billion green
investment fund might ultimately facilitate much greater levels of investment if used
for credit enhancement rather than by investing directly.
Clearly securitization offers enormous potential in these markets. However, even if
DFI's can successfully bridge the gap to investment grade, banking and insurance
regulations such as Solvency II actively discourage entities such as insurancecompanies from investing in securitized assets.
Projects certified under the CDM saved 2.9billion tonnes of CO2 equivalent between
2008 and 2012

© 2021 Citigroup

If these emerging markets can be opened successfully, then mechanisms such as
the Clean Development Mechanism (CDM) or Joint implementation (JI) discussed
earlier could be refined to further facilitate cross-investment between countries. The
main issue with carbon markets and hence these mechanisms, is grandfathering

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and abuse via local over-issuance of permits which force a (potentially unfair) flowof capital from one country to another. The UNFCCC estimates that projects
certified under the CDM saved 2.9 billion tonnes of CO2 equivalent between 2008
and 2012 – in the context of annual emissions of 40GT this is relatively small, butwith the right political will, it could become a much larger driver.
An example of these innovative new financing mechanisms is the World Bank’s
Pilot Auction Facility (PAF) for methane and climate mitigation. This is a ‘pay for
performance’ mechanism, which uses auctions to allocate funds into projects inemerging markets that reduce methane emissions. Bondholders in a project will be
issued with emissions reductions certificates, tradable via the CDM, once emissions
have been verified (hence the 'pay for performance'). What is innovative is that the
PAF entails a put option at a pre-agreed strike price, effectively guaranteeing aminimum price for the CER’s. If carbon prices fall, the bond holder is protected, but
if carbon prices are stable/rise, the bondholder keeps the benefit. The PAF
effectively facilitates lower-risk investment into EM methane reduction projects, at
no upfront cost to the World Bank (unless carbon prices fall, in which case it would
be liable for the different between the strike price and the market carbon price).

Financing Energy Efficiency Investment
In developed markets the 'extra' investment of following a low carbon path isforecast to be mainly in energy efficiency, which presents its own difficulties. Energy
efficiency investment is unintuitive; while normally one invests in an asset which
generates cash returns, in the case of efficiency the return usually comes via future
avoided costs (i.e. lower energy bills/usage). It’s effectively the same thing, but it
makes financing it harder as the investment is unsecured, and doesn’t explicitly
generate a cashflow which can be ring-fenced to cover for example interest
payments on the investment cost. Energy efficiency creates greater net cashflows
to an entity, an element of which therefore have to be earmarked to cover theinterest on investment. This lack of ring-fencing is a significant hurdle. In addition, if
energy prices fall via reduced demand (from greater efficiency), the 'return' on
energy efficiency investment falls as the relative benefit is squeezed.
Given the difficulty in financing energy efficiency, the majority of investment to datehas been funded from corporate or personal/household cash reserves, but the rightfinancing mechanisms could once again accelerate and grow investment.
The key issues in energy efficiency investment are size, standardization,accreditation, and the lack of pipeline generated from existing public subsidies
which are limited both geographically and in scale.
Given that much of the necessary investment in energy efficiency will be undertaken
by households, the individual project size will be very small (typically $7.5-$10K perhousehold project in the US) across a fragmented range of property types. This will
therefore require different forms of finance, and pooled or securitized investments
are likely to be necessary. Innovative financing solutions in solar in the US where
panels are installed on household roofs, but paid for by a third party, the return
being shared, shows how goals can be achieved at a residential level without
expecting the householder to put up the full capital investment. Other examples are
PACE (Property Assessed Clean Energy) loans which can again be securitized.
Avenues such as On Bill Repayment (OBR) offer forms of enhancing credit quality
via the use of another entity's revenue collection mechanism.

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WHEEL aims to create a national financing
platform that can help home owners makenecessary improvements such as insulation

Citi and Renew Financial recently announced the first ever asset-backed security(ABS) transaction comprising unsecured consumer energy efficiency loans, the first
securitization from the WareHouse for Energy Efficiency Loans (WHEEL).
Announced in 2014, WHEEL is an innovative public-private partnership between
national leaders in finance and energy in the US, including Citi, Renew Financial,
Pennsylvania Treasury, the National Association of State Energy Officials, Energy
Programs Consortium and a growing number of states and utilities. Its aim is tocreate a national financing platform to bring low-cost, large-scale capital togovernment and utility-sponsored residential energy efficiency loan programs.
Through the recent ABS program, homeowners can borrow up to $20,000 at very
competitive rates to make a range of improvements to their homes, such as HVAC
equipment, water heaters, roofing, insulation, windows and energy efficient
appliances. While a relatively small pilot scheme at the moment in 3 states(Pennsylvania, Kentucky and the Greater Cincinnati Energy Alliance have all joined
WHEEL), numerous additional states are expected to join soon, and the model
should be highly scalable. These mechanisms are not grants, but rather a'socialized credit enhancement facility', which provides cheaper capital for energy
efficiency projects to those who might otherwise be unable to gain access.
Perhaps greater potential for debt capital markets comes via spending on publicbuildings in terms of energy efficiency. Given very high levels of real estate
ownership of building stock by local councils and authorities, the scope for sizeable
investment volumes funded by municipal borrowing ('green munis') is significant.
Several examples of this already exist, for example the Delaware Sustainable
Energy Utility, where an energy efficiency revenue bond of $67.4 million resulted in
net cashflow savings for government agencies in the state equal to 30% of
aggregate project cost.
Even if states are unable to issue green bonds themselves, there is still scope toachieve energy efficiency investment and savings; Detroit recently replaced all of its
street lighting with energy efficient lighting, achieving significant savings on its
energy bills in the process. The notable fact here was that this was facilitated via aloan from Citi to Detroit which was then refinanced, effectively creating an
investment grade vehicle from a municipality with a fairly low rating. ‘Green
investment’ is also likely to be well received by voters generally; given that itachieves financial and energy savings as well, the attractions are likely to besignificant, demonstrating the potential scalability of municipal green bonds.
The above represent examples of projects in which Citi has been involved, as partof its goal to lend, invest and facilitate $100 billion within 10 years to financeactivities that reduce the impact of climate change. This new target, announced in2014, follows Citi's previous commitment to facilitate investment of $50 billion over
10 years, which was completed 3 years ahead of schedule in 2014.
A large part of energy efficiency savings will also be in the transport sector, andhere again much of the investment will be taken by corporates who could effective
issue green bonds (we have now seen the issue of green corporate bonds byseveral large multinationals such as Toyota) to finance these investments. Grants
could also have an effect here, as has been seen with grants to purchasers of someelectric vehicles, thereby offsetting the increased capital cost.
Storage while not technically reducing overall consumption, offers the potential for
more efficient power markets, smoothed demand profiles and less stranded
generation assets. As such it can potentially reduce the overall cost of an electricity
market, thereby freeing up capital for investment elsewhere. Residential storage incombination with home energy management systems (such as Hive and Nest) alsooffers reduced consumption and cost. (See Battery Storage: The next solar boom?)© 2021 Citigroup

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Regulatory Considerations
Efficiency standards could also make adifference to the overall energy usage

It is not just financial markets that have their part to play. From a regulatory
perspective, greater application of efficiency standards, knowledge, andaccreditation will also facilitate greater investment in energy efficiency. Efficiency
standards and understanding/marketing thereof on electrical appliances, cars andbuildings will also help to reduce overall energy usage.
One thing we have learnt from regulation is that it needs to be regularly updated
and flexible enough to adapt to externalities such as lower economic activity, themain reason that an effective over-issuance of permits relative to lower economic
activity has left carbon prices so low in the EU ETS. The same was true of solar
regulation in Germany; a lack of flexibility in granting high legacy feed-in tariffs tosolar farms despite a massive fall in the price of solar panels led to super-normal
returns and an unjustifiable subsidy bill which inevitably led to a boom and bustcycle. Conversely what must be sacrosanct is that regulation must not be
retrospective, as witnessed in several countries, most notably Spain. This raises
future costs of capital for everyone (and not just in that region) and deters future
investment.

Ending fossil fuel subsidies and diverting
those funds into cleaner energy could havean effect on the mix of energy sources at alimited cost

© 2021 Citigroup

A particularly tricky area will be an end to end to fossil fuel subsidies (and potentiallyrenewable subsidies). Subsidies are incredibly negative for both energy efficiency
and renewables in that they make the relative merits of undertaking a project muchless compelling. The justification for subsidies is that energy is necessary to boost
growth and in developing markets energy needs therefore to be available andaffordable. However, diverting those subsidies into different forms of energy(cleaner energy, e.g. gas vs. coal, or renewables, or indeed energy efficiency) could
have a transformational effect on the energy complex at relatively limited cost. The
IEA estimated that fossil fuel subsidies in 2013 amounted to $548 billion. Admittedly
the implied subsidy will fall significantly this year, potentially to we estimate $300350 billion given the recent fall in the oil price, but in the context of total primaryenergy spend of $1.6 trillion per year, this is still a very large figure. Add to this theestimated $121 billion of global renewable subsidies in 2013 (IEA), and the extent towhich the world is already manipulating energy markets becomes clear; thechallenge therefore is simply to adjust them in a different direction.

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10.0%$7.4trn

9.0%$7.2trn

8.0%$7.0trn

7.0%$6.8trn

6.0%$6.6trn
5.0%$6.4trn
4.0%$6.2trn

3.0%$6.0trn

2.0%

Total Global Energy Spend

Subsidies as a % of total global energy spend

Figure 114. Fossil Fuel and Renewable Energy Subsidies as a Percentage of Total Global
Energy Spend$5.8trn

1.0%
0.0%$5.6trn
2007

2008

Global energy spend (RHS)

2009

2010

2011

Fossil fuel subsidies

2012

2013

Renewable subsidies

Source: Citi Research, IEA

Financial Instruments
We examine below some of the key instruments available which could be
developed further to facilitate low carbon investment:
 Green bonds
 Yieldco's
 Covered bonds
 Securitization

Green Bonds
Recent years have seen the emergence of the so-called ‘green bond’.
Green Bonds are a fixed income instrument, the proceeds of which will be used
exclusively to finance 'Green Projects', defined as any activity or project which
promotes progress on environmentally sustainable activities, and is in accordancewith the recently launched 'green bond principles' outlined below:
1.

© 2021 Citigroup

Use of Proceeds: The finance raised by the green bond must be used forenvironmentally friendly and sustainable projects such as renewable energy,
energy efficiency, sustainable waste management, sustainable land use,biodiversity conservation, clean transportation, sustainable water management,
and climate change adaptation.

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2.

Project Evaluation and Selection: The green bond issuer must outline thedecision making process it intends to adopt in determining the eligibility of
projects to receive proceeds, in terms of which specific category of project, thecriteria which makes the project eligible, and the environmental sustainability
objectives.

3.

Management of Proceeds: The proceeds should be credited to a sub accountand tracked as they are invested with a high level of transparency. The use of
an auditor or other third party to verify allocation of funds and tracking is
encouraged.

4.

Reporting: Issuers should report at least annually on the use of proceeds, interms of which projects have been financed. The principles also recommend
the use and disclosure of qualitative and quantitative performance indicators of
the expected environmental sustainability impact of the investments

Types of Green Bonds
There are four main types of Green Bonds: The most popular and mainstream is aregular fixed income bond which has a full guarantee by the Issuer, however the“use of proceeds” of the bond can only be used for “climate friendly” projects, asmentioned above.
 Green Use of Proceeds Bond: the most common type, a normal fixed incomebond with recourse to the issuer, the proceeds of which must be used forenvironmentally friendly/sustainable projects.
 Green Use of Proceeds Revenue Bond: (non-recourse to issuer, linked instead

to income streams).
 Green Project Bond: Linked to a single/multiple qualifying green project, with norecourse to the issuer.
 Green Securitized Bond: A bond with collateral and cashflows provided bymultiple projects.
The majority of green bonds issued to date have been via supranationalorganizations such as the World Bank and International Finance Center (IFC),
though the last couple of years have seen corporate green bonds emerge such as
those from Unilever and Toyota. Figure 115 highlights the rapid growth that has
been seen in the green bond market.

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Figure 115. Historic Green Bond Issuance
40

Green bond issuance ($bn)

35
30
25
20
15
10
5
0
2007

2008

2009

2010

2011

2012

2013

2014

Source: Climate Bonds Initiative

In 2014 green bonds issuance totaled $37
trillion

As Figure 115 shows, green bond issuance rocketed in 2014 to nearly $37 billion,
and expectations for 2015 vary from $50 billion to $100 billion, showing further rapid
growth. Cumulative green bond issuance currently stands at $59 billion via some
300 bonds from 19 countries in 23 currencies.
The markets for green bonds are still evolving, but the emergence of accreditingorganizations and industry guidelines/best practices such as the green bondprinciples is helping to develop the market.

Yieldco’s
Recent years have seen the birth of the yieldco in both the US and more recently
Europe. A yieldco is essentially an investment vehicle which invests in multiple projects,
thereby once again reducing risk vs. single asset project finance via the portfolio effect.
These projects are typically levered at anything up to 80%, with the long term stablecashflows being well-suited to cover interest payments on the debt and to provide
dividends to equity investors. Dividends paid are typically 90% of cash available for
distribution (CAFD), thereby providing a dividend buffer to cover limited volatility incashflows, as well as providing cash to invest in new projects which are typically
dropped down from a sponsor/parent via a right of first offer (ROFO) agreement. As
well as providing spread-risk equity investments, yieldco's can raise debt at a parent
rather than project level thereby once again reducing single asset risk.
Investors tend to view these vehicles on a total return basis, i.e. dividend yield plus
CAGR of dividends, with a currently tight valuation correlation. However, it isnotable that companies in areas where regulatory risk is perceived to be higher(particularly where there is a history of retrospective regulation), yields need to behigher to offset this perceived risk. This starkly demonstrates the impact of a lack ofregulatory stability or trust on the implied cost of capital, with knock on effects on
the relative costs of different energy forms and the ability of nations therefore totransform their mix.
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Covered Bonds
One of the most promising ‘new’ instruments with the potential to fund green
investment is the covered bond. A covered bond essentially has the advantage of
not just being asset backed, but also benefitting from a guarantee from the issuer oranother body such as a government or supra-national organization. This concept ofdual recourse thereby reduces risk and leads to potentially higher credit ratings.
Covered bonds have been in existence for around 250 years, often being used in
the real estate market, as well as in areas such as public housing. The similarities
with green investment which also provides a ‘social good’ are obvious and could be
used as a justification for guarantees from governments or other organizations.
Against a backdrop of banks trying to reduce leverage ratios these assets have thepotential to be treated as high quality assets, thereby potentially allowing investment
by banks without negatively affecting credit or liquidity thresholds.
Project bonds often entail construction risk, and guarantees could help tosignificantly reduce this risk and hence the cost of finance and overall project cost.
This effect has already been witnessed in the US alternative energy sector withgovernment loan guarantees during the construction of projects.
The other advantage of government guarantees would be that it would effectively
give governments ‘skin in the game’; given investors’ perception that one of thelargest single risks for many of the projects is regulatory, making the government a
stakeholder would give greater comfort in the stability of regulation.
While governments have historically facilitated investment in alternative energy via
feed-in tariffs, and investment or production tax credits to improve the relative
economics of new forms of generation, as the LCOE’s of these technologies
improve, these mechanisms become less necessary. Accordingly, the capital freed
up by the removal of these subsidies could be used to provide guarantees forcertain types of investment.

Other Financial Instruments
While equity and evolving fixed income instruments will provide the bulk of thefinancing for the energy transition, there are other financial instruments and markets
that will be no less important. The insurance industry has long been interested in
the potential effects of climate change given the associated liabilities. Instruments
have existed for decades to allow investors to effectively hedge weather risk – forexample temperature (degree-days) based instruments in the gas/utilities sector
offsetting demand volatility. However, instruments which provide insurance against
wind volatility are also being developed, and could once again reduce risk andvolatility in this and other green sectors, thereby improving credit quality.

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Research and Development
The Global Apollo Programme advocatesgreater investment in R&D that could
promote a faster transition into cleaner
energyWhile not strictly a financial instrument, another mechanism which could help topromote the energy transition is incentives to allow R&D investment into newtechnologies. Current R&D budgets into green projects, climate change andgeoengineering are currently estimated at just $5.9 billion per year globally (Global
Apollo Programme). As we have seen, this figure is dwarfed by historic levels ofcombined subsidies into both alternative and conventional energy of well over $500
billion. By facilitating greater investment in R&D, the cost of existing solutions could
be reduced more rapidly, as well as increasing the chances of the emergence of
new technologies (such as CCS) which could have a material impact on the costand speed of the energy transition, as well as offering the potential for ‘gamechanging’ discoveries.
The Global Apollo Programme, a group consisting of some of the world's leadingindustrial, political and scientific minds, advocates exactly this, believing that asignificantly larger investment into R&D could promote much faster and cheapertransformation of the energy mix. The group's ultimate goal is that via a major R&D
program using the best resources available globally, baseload wind and/or solar
should become less costly than coal-based power, in every country.

The Green Climate FundOne positive to come out of the (otherwise disappointing) Copenhagen COP
meeting was the agreement to create by 2020 a $100 billion per year green climate
fund, the idea of which was that funding provided by developed nations would be
used to help fund the transition to a cleaner energy mix in developing nations.
While this has received relatively downbeat estimates of its likely effectiveness, weshould not ignore its potential impact, given the relatively limited differential in costs(which are becoming ever smaller) between clean and conventional energy. In
context that $100 billion could fund much of the differential in spend in early years,
and help to promote energy efficiency.
The downside is that as yet, only $10.2bn of those funds have actually been
mobilized. Moreover, the efficacy of an entity such as this will be crucial; it must not
become bogged down in bureaucracy and politics, which given its very nature will
be quite a challenge.

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Conclusions
The UN COP21 meeting being held this December represents the first realopportunity to reach a global legally binding agreement for the reduction ofgreenhouse gas emissions. Other past meetings have failed to achieve this;however, this time it feels different — countries including all the big emitters seem tobe coming to the table with positively aligned intentions, against a backdrop of an
improving global economy, and with public opinion broadly supportive. At the time ofwriting, a total of 21 countries and 1 region, including the US, China and the EU
have submitted their national pledges (INDCs) to reduce GHG emissions over time.
Nevertheless, to achieve this accord will take brave, forward-looking and nonpartisan decisions on the part of policymakers.
The sums of money at stake in terms of investment in the energy sector are
staggering — we estimate at $190.2 and $192.0 trillion between 2015 and 2040 for
Citi’s ‘Action’ and ‘Inaction’ scenarios, respectively. The difference is marginal
between the two scenarios; mainly due to the fact that although we spend more on
renewable resources and energy efficiency in the ‘Action’ scenario, this is offset bysavings in fossil fuels through lower usage and the lack of fuels used by wind andsolar. However, going down the route of ‘Inaction’ would lead to a reduction in global
GDP which could reach $72 trillion by 2060 depending on temperature increase,scenario and discount rate used. We calculate the implied return of incremental
avoided costs on annual spend and even though the returns are not spectacular, intoday’s context of low yields, and certainly in the context of potential implications ofclimate change inaction on society and global GDP, and with the additional benefitof cleaner air, the ‘why would you not’ argument comes to the fore, an argumentthat becomes progressively harder to ignore over time.
Yet adopting this low carbon future will not be without pain for some. Switching to a
low carbon energy future would mean that potentially significant quantities of fossil
fuels that would otherwise have been burnt would remain in the ground. This
concept known as stranded assets or unburnable carbon has recently come to theforefront of the discussion on climate change. Investors are becoming increasingly
concerned with this issue, and have increased their engagement with fossil fuelcompanies to understand the potential risks to their investments. A study has shownthat if we are serious about meeting the ‘carbon budget’ and have a chance oflimiting temperature increase to 2°C, then globally one-third of oil reserves, half ofgas reserves and 80% of coal reserves would have to remain in the ground; weestimate that the total value of stranded assets could be over $100 trillion based on
current market prices. However, Citi research shows that some conventional
resources are already effectively stranded from an economic point of view due tolow commodity prices, whilst coal companies are already experiencing someconsiderable stress as can be seen from the dramatic fall in seaborne thermal coalprices.
It is not just policymakers that must think outside of the box; to provide the vast
amounts of capital required in different and new industries and locations will requiresignificant innovation on the part of financial markets and institutions. Much of theenergy investment behavior that needs to be changed will be in emerging markets
given their demand growth, and energy and carbon intensity, yet financial markets
in these regions are often less sizeable, stable and liquid. There is enormous
investor demand for low carbon investment, with investor groups representing tensof trillions of dollars under management committed to investing in a moreenvironmentally friendly manner. The stumbling block to date has been the lack of,and in particular the quality of many of the investment opportunities available.
Bridging the gap between investors and the need for investment will be key in© 2021 Citigroup

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facilitating our energy transformation. We believe that the credit markets offer
perhaps the greatest scope to facilitate this investment, and we highlight thesignificant innovation which is taking place currently, which while in its infancy offers
significant encouragement for the future, as well as potentially exciting and verylarge opportunities for the financial world.
Paris offers a generational opportunity; one that we believe should be firmly
grasped with both hands.

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References
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Fossil-Fuel CO2 Emissions, Carbon Dioxide Information Analysis Center, Oak Ridge
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BP p.l.c. Energy Outlook 2035. www.bp.com/energyoulook
Braconier H., Nicoletti G.and Westmore B. (2014). ‘Policy Challenges for the next 50 years’.
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CDM Policy Dialogue (2012). Climate Change, Carbon Markets and the CDM: A Call to
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Clarke L., K. Jiang, K. Akimoto, M. Babiker, G. Blanford, K. Fisher-Vanden, J.-C. Hourcade,V. Krey, E. Kriegler, A. Loschel, D. McCollum, S. Paltsev, S. Rose, P.R. Shukia, M. Tavoni,
B.C.C. van der Zwaan, and D.P. van Vuuren, 2014: Assessing Transformation Pathways. In:
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Adler, I. Baum, S. Brunner, P. Eickemeier, B. Kriemann, J. Savolainen, S. Schlömer, C.
von Stechow, T. Zwickel and J.C. Minx (eds.)]. Cambridge University Press,
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IEA (2014a). Special Report: World Energy Investment Outlook, Paris.

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IPCC (2014). Climate Change 2014: Mitigation of Climate Change. Contribution ofWorking Group III to the Fifth Assessment Report of the Intergovernmental Panel on
Climate Change [Edenhofer, O., R. Pichs-Madruga, Y. Sokona, E. Farahani, S. Kadner,
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IPCC, (2013): Summary for Policymakers. In: Climate Change 2013: The PhysicalScience Basis. Contribution of Working Group I to the Fifth Assessment Report of theIntergovernmental Panel on Climate Change [Stocker, T.F., D. Qin, G.-K. Plattner, M.
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limiting global warming to 2oC, Nature, 8 January 2015, Vol 517.
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warming to 2oC. Nature 458, 1158–1162 (2009).
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Warming World, New Haven, CT, Yale University Press
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Sims R., R. Schaeffer, F. Creutzig, X. CRIZ-Nunez, M. D’Agosto, D.Dimitru, M.J.
Figueroa Meza, L. Fulton, S. Kobayashi, O. Lah, A. McKinnon, P. Newman, M. Ouyang,
J.J. Schauer, D. Sperling, and G. Tiwari, 2014: Transport. In: Climate Change 2014:
Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment
Report of the Intergovernmental Panel on Climate Change [Edenhofer, O.R. PichsMadruga, Y. Sokona, E. Farahani, S.Kadner, K.Seyboth, A.Adler, I. Baum, S.Brunner,
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J.C. Minx (eds.)]. Cambridge University Press, Cambridge United Kingdom and New
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Tans, Dr. Pieter, NOAA/ESRL www.esrl.noaa.gov/gmd/ccgg/trends/) and Keeling, Dr.
Ralph, Scripps Institutions of Oceanography (scrippsco2.ucsd.edu/)
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Victor, David G. (2011). Global Warming Gridlock, Cambridge, UK: Cambridge
University Press.
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Author Biographies
Jason Channell is a Managing Director and Global Head of Citi’s
Alternative Energy and Cleantech equity research team. Throughout
his career, Jason’s research has spanned the energy spectrum of
utilities, oil & gas and alternative energy. He has worked for both buyand sell-side firms, including Goldman Sachs and Fidelity
Investments, and has been highly ranked in the Institutional Investor,
Extel and Starmine external surveys. His knowledge has led tosignificant interaction with regulators and policymakers, most notablypresenting to members of the US Senate Energy and Financecommittees, and to United Nations think-tanks. Jason holds a degree
in Engineering Science and Management from the University ofDurham.

Elizabeth Curmi, PhD, is a Vice President and thematic analyst
working on the GPS series. She is currently based in the London
office and joined Citi in April 2015. Prior to taking on this role, shespent over four years at the University of Cambridge researching
natural resources, in particular energy and water and theirconnections. Elizabeth received a PhD from the University of York in
2010, in Environmental Economics and Management

Phuc Nguyen joined Citi Research as a graduate in 2012. He is partof the Global Alternative Energy team and sits in London. He holds a
MEng degree in Engineering, Economics and Management from
Oxford University where he specialized in aerothermal engineering

Elaine Prior is a Senior Analyst in Citi Research Australia withresponsibilities for ESG (Environmental, Social and Governance) andsustainability research on Australian listed companies. Her equities
research has covered carbon regulation, physical climate change,
coal seam gas environmental issues, "green buildings", changing
water dynamics, industrial safety, human rights in retail supply
chains, bribery and corruption, the ageing population, executive
remuneration and board diversity. Prior to joining the firm in 2007,
she has held various roles in investment research and funds
management since 1987, with focus on the resources sector. She
was a top-rated BHP analyst for several years, specialising inanalysis of the global iron and steel industries and steelmaking raw
materials. She has a Bachelor of Science (Honours) degree in
Chemistry (Bristol, UK) and a Master of Science (Dist) degree inPetroleum Engineering from Imperial College, London. She
previously worked with Shell and then a consultancy, conducting
technical and economic studies of petroleum reservoirs, mainly in the
UK North Sea and Australia. In 1999, she undertook a degree in
Antarctic Studies at University of Tasmania, gaining an enhanced
appreciation of climate change science, and then worked briefly on
environmental projects relating to Antarctic tourism.

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Alastair Syme joined Citi in January 2011 as the Global Head of Oil& Gas Research. Alastair started out as a geoscientist in the oil
industry (BHP Petroleum, Schlumberger) in the early 1990s and thenhas worked in equity research from the late 1990s (Merrill Lynch,
Schroders and Nomura). Alastair was ranked #1 in the Oil & Gas
sector in Institutional Investors "All-European Research Team"survey in 2009 and 2010. He has a BSc (Hons) degree in Geology
from Canterbury University, New Zealand.

Heath Jansen is a Managing Director and Global Head of Citi’s
Metals and Mining research team. Heath is based in London,
covering both equities and commodities, with principle stock
coverage of the global diversified mining companies. He has
consistently been a top three ranked analyst in European, CEEMEA
and South African external surveys for commodity and equity
research. Heath originally joined the firm in 2005, from JP Morgan,and has worked as an analyst on the sector since 2000. Heath began
his career with Rio Tinto as a process engineer, before advancing to
the position of Smelter Superintendent and he holds bachelor
degrees in Science (Chemistry) and Commerce (Accounting).

Ebrahim Rahbari is a Director in the Global Economics Team of
Citi Research in New York. Ebrahim works closely with Citi global
Chief Economist Willem Buiter and focuses on economic events,
developments and trends of global significance, including trends inmonetary policy, global investment, debt and deleveraging andlonger-term growth in output and trade. Ebrahim joined Citi in 2010
and prior to his current role, Ebrahim was a Director of European and
Global Economics in London, where he focused on economic
developments in the Eurozone, including the ECB and the European
sovereign debt and banking crisis, and was Citi's lead economist forGermany (2012-15) and for Spain (in 2012). Ebrahim holds a
Master's degree and PhD in Economics from London Business
School and a BA (Hons) in Economics and Management from Oxford
University (Balliol College).

Ed Morse is Managing Director and Global Head-Commodities, Citi
Research in New York. He previously held similar positions at
Lehman Brothers, Louis Capital Markets and Credit Suisse. Widely
cited in the media, he is a contributor to journals such as Foreign
Affairs, the Financial Times, the New York Times, The Wall Street
Journal and the Washington Post. He was most recently ranked oneof “The 36 Best Analysts On Wall Street by Business Insider (one oftwo commodity analysts) and #23 among the “Top 100 Global
Thinkers of 2012” by Foreign Policy. He worked in the US
government at the State Department, and later was an advisor to theUnited Nations Compensation Commission on Iraq as well as to the
US Departments of State, Energy and Defense and to theInternational Energy Agency on issues related to oil, natural gas andthe impact of financial flows on energy prices. A former Princeton
professor and author of numerous books and articles on energy,
economics and international affairs, Ed was the publisher ofPetroleum Intelligence Weekly and other trade periodicals and also
worked at Hess Energy Trading Co. (HETCO).

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Seth Kleinman joined Citi as Head of Energy Strategy on thecommodities side. He covers all aspects of global oil and gas
markets. Seth has spent the last 15 years in the energy markets as
an analyst, trader and researcher. He started in market analysis at
PFC Energy in Washington DC, moved into physical and prop trading
at Hess Energy Trading Company in New York. He moved to Morgan
Stanley to write oil research, before moving to London with Glencore
to head up its global oil analysis team there.

Tim Kruger is the James Martin Fellow in the Oxford
Geoengineering Programme at the Oxford Martin School, Universityof Oxford. Tim Kruger leads a group across the University of Oxford
exploring proposed geoengineering techniques and the governancemechanisms required to ensure that any research in this field isundertaken in a responsible way. He has investigated in detail one
potential geoengineering technique, that of adding alkalinity to theocean as a way of enhancing its capacity to act as a carbon sink andto counteract the effects of ocean acidification. He is a co-author of
the Oxford Principles, a set of draft principles for the conduct ofgeoengineering research which have been adopted as policy by the
UK government.

Professor Cameron Hepburn is the Director of the Economics of
Sustainability Programme at the Institute for New Economic Thinking
at the Oxford Martin School and a Fellow at New College, Universityof Oxford. He is an expert in environmental, resource and energy
economics. He has degrees in law and engineering, a doctorate ineconomics, and over 30 peer-reviewed publications in economics,
public policy, law, engineering, philosophy, and biology.
He is involved in policy formation, including as a member of the
DECC Secretary of State’s Economics Advisory Group. He has also
had an entrepreneurial career, co-founding two successful
businesses and investing in several other start-ups.Cameron is amember of the Economics Advisory Group (with Lord Stern andProfessor Helm) to the UK Secretary of State for Energy & Climate
Change. He served for almost a decade as a member of the
Academic Panel, in the UK Department of Environment, Food andRural Affairs and the Department of Energy and Climate Change. He
has advised governments (e.g. China, India, UK, Australia) andinternational institutions (e.g. OECD, UN organisations) on energy,
resources and environmental policy.
Cameron began his business career with work at oil multinational
Shell, law firm Mallesons and then management consultancy
McKinsey & Co. Cameron is now a founder-investor in the social
enterprise and clean energy sectors. In 2006, with Alex Wyatt he cofounded Climate Bridge, a developer of clean energy projects in
China and around the world, with offices in four countries. Also in
2006, with Robin Smale he co-founded Vivid Economics, a boutiqueeconomics consultancy where he has worked with private sector (andgovernment) clients on strategy in relation to market structure andresource, energy and environmental issues .

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NOW / NEXT
Key Insights regarding the future of Climate Change

REGULATION

In 1988, the IPCC was created to assess the science of climate change and look at whether formal
diplomatic talks would need to be undertaken to discuss the issue of greenhouse gas emissions. / In
December 2015 heads of representative states will meet in Paris to discuss setting up a new binding
international agreement with the aim of keeping global warming to 2oC and mobilize funds to allow
developing countries to both adapt to and mitigate climate change impacts.

GLOBAL REACH

The world can largely ignore the implications for emissions and feed an energy-hungry planet with cheap
fossil fuels to drive global economic growth. / The cost of inaction is not only the total energy spend on
capex and fuel. The overall costs and risks of climate change including externalities such as health andenvironmental effects could total 0.7% to 2.5% of global GDP in 2060.

COMMODITIESEmissions contained in current ‘reserves’ figures are around three times higher than the so-called‘carbon budget’. / Switching to a low carbon energy future means that significant fossil fuels that would
otherwise have been burnt will be left underground. Some studies suggest that globally a third of oil
reserves, half of gas reserves and over 80% of current coal reserves would have to remain unused from2010 to 2060 to have a chance of meeting the 2oC target.

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