Navigating
EnergyTransitions
Mapping the road to 1.5°C
IISD REPORT© 2022 International Institute for Sustainable Development | IISD.org

October 2022

Navigating Energy Transitions© 2022 International Institute for Sustainable Development
Published by the International Institute for Sustainable Development
This publication is licensed under a Creative Commons AttributionNonCommercial-ShareAlike 4.0 International License.

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Navigating Energy Transitions: Mapping the road to 1.5°C
October 2022

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Acknowledgements
The International Institute for Sustainable Development would like to thank the authors and thereviewers for their contribution to the preparation of this report. The authors and reviewers havecontributed to the report in their individual capacities; their affiliations are only mentioned for
identification purposes.
Authors
Chapter 1: Angela Picciariello (International Institute for Sustainable Development)
Chapter 2: Olivier Bois von Kursk, Greg Muttitt (International Institute for Sustainable Development)
Chapter 3: Olivier Bois von Kursk, Greg Muttitt, Angela Picciariello (International Institute for
Sustainable Development)
Chapter 4: Mohamed Adow (PowerShift Africa), Andreas Goldthau (Willy Brandt School of Public
Policy at the University of Erfurt and Institute for Advanced Sustainability Studies), Diala Hawila(International Renewable Energy Agency), Thijs Van de Graaf (Ghent University)
Chapter 5: Mara Abbot (Ceres), Thomas Day (NewClimate Institute), Frederic Hans (NewClimate
Institute), Andrew Logan (Ceres), Silke Mooldijk (NewClimate Institute), Kyla Tienhaara (Queen’s
University, Ontario)
Chapter 6: Lucile Dufour, Angela Picciariello (International Institute for Sustainable Development)
Reviewers
Alaa Al Khourdajie (Imperial College London; IPCC, Working Group III Technical Support Unit),
Andrea Bassi (International Institute for Sustainable Development), Nico Bauer (Potsdam Institutefor Climate Impact Research), Sarah Brown (Ember), Anna Christie (University of Edinburgh),
Kate Dooley (University of Melbourne), Lucile Dufour (International Institute for Sustainable
Development), Lisa Fischer (E3G), Claire Fyson (Climate Analytics), Phil Gass (International
Institute for Sustainable Development), Anna Geddes (International Institute for Sustainable
Development), Ivetta Gerasimchuk (International Institute for Sustainable Development), Neil
Grant (Climate Analytics), Kaisa Kosonen (Greenpeace International), Michael Lazarus (Stockholm
Environment Institute), Aman Majid (Climate Analytics), Merete Villum Pedersen (Ministry of Foreign
Affairs, Denmark), Annalisa Perteghella (ECCO Climate), Elke Pfeiffer (Net Zero Assets Owner
Alliance), Steve Pye (UCL Energy Institute), Lukas Schaugg (International Institute for Sustainable
Development), Kelly Trout (Oil Change International)
Chief scientific editors
Olivier Bois von Kursk, Lucile Dufour, Greg Muttitt, Angela Picciariello (International Institute for
Sustainable Development)
Media and outreach communications
Charly Blais, Aia Brnic, Natalie Jones, Paulina Resich (International Institute for Sustainable
Development), Maria Dolben, Conor Quinn (Greenhouse Agency)
Graphic and layout design
Katherine Clark, Elise Epp, Anna Pokhilenko (International Institute for Sustainable Development)
Language editing
Strategic Agenda

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Executive Summary
Key Messages:•

According to a large consensus across multiple modelled climate and energy
pathways, developing any new oil and gas fields is incompatible with limiting
warming to 1.5°C. Global oil and gas production and consumption must decrease
by at least 65% by 2050.

•

Governments should create enabling environments for redirecting both public
and private capital flows toward the clean energy transition, including the
deployment of additional solar and wind capacity. The annual investment gap forthe required wind and solar deployment amounts to USD 450 billion until 2030.
Forecasts indicate that up to USD 570 billion will be spent every year in new oil
and gas development and exploration during the same period.

•

There is no room for new fossil import infrastructure in Europe in 1.5°C-aligned
gas phase-out pathways. Existing import capacity can meet the gas demand forEurope in the medium- and longer-term. In 2022 and 2023, the short-term supply
crunch and its potentially dire consequences cannot be alleviated in time by
newly added gas capacity.

This report aims to inform policy-makers, investors, and companies on what is required
to align their energy decisions with the goals of the Paris Agreement, based on modelled
pathways consistent with limiting warming to 1.5°C. We base this analysis on the first-evercomparison of selected climate and energy scenarios across the full body of published global
modelled pathways: those reviewed by the Intergovernmental Panel on Climate Change(IPCC), those produced by intergovernmental organizations such as the International
Energy Agency (IEA) and the International Renewable Energy Agency (IRENA), and by theprivate sector.
The report focuses on pathways for the phase-out of oil and gas, and for the expansionof wind and solar, required to provide a greater than 50% probability of limiting global
temperatures within the 1.5°C limit. We do not address coal, because Paris-aligned pathways
for coal phaseout have been extensively reviewed elsewhere (Yanguas Parra et al., 2019).
Moreover, we focus on wind and solar energy since they provide the most greenhouse gas
mitigation potential at the lowest cost from all currently available options in all sectors (IPCC,
2022). We find a high degree of alignment between scenarios, suggesting that a common setof actions is required. The small variations found across scenarios illustrate that there is still a
range of paths to implement this set of actions in line with the 1.5°C target. Now more thanever, understanding how energy decisions by policy-makers, investors, and companies affectour ability to comply with this target is essential. The current energy crisis poses substantial
risks to the achievement of a clean energy transition, but also shows the value of shifting ourenergy systems from fossil fuels to clean energy.

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Phase-out Pathways for Oil and Gas Production
Our comparison of multiple climate and energy scenarios finds that, for the world to reachnet-zero emissions in line with the 1.5°C target, global oil and gas production needs todecline rapidly.
According to the median of selected IPCC scenarios and the IEA’s Net Zero Emissions by
2050 (NZE) scenario, oil and gas production should decline respectively by 15% and 30%
by 2030, and by 65% by 2050, compared to 2020 levels. Production volumes from alreadyoperating fields and those currently under development would generate more oil and gas
emissions than would be permissible under these pathways (Figure ES1). It implies that no
new oil and gas fields should be developed, as they would either generate stranded assets,or push the world beyond the 1.5°C target, unless currently producing fields’ operations are
significantly curtailed.
Figure ES 1. Global oil and gas production, based on selected IPCC and IEA 1.5°C
pathways
25

Selected IPCC
1.5°C pathways

GtCO2

20

IEA NZE pathway

New fields
exceed 1.5°C

15

New exploration10

New fields
Fields underdevelopment

5

Producing fields
0
2020

2025

2030

2035

2040

2045

2050

Sources: Byers et al., (2022); IEA (2021); Rystad Energy (2022b).

All other analyzed pathways—the illustrative mitigation pathway high renewables (IMP-Ren)
scenario, the Bloomberg New Energy Finance New Energy Outlook pathway, the IPCC IMP
low demand (IMP-LD) scenario, the One Earth Climate Model, Navigant, and the IRENAWorld Energy Transitions Outlook scenario—reinforce the findings of the selected IPCC
scenarios and IEA’s NZE scenario. They point to the urgent need for production to decline
by at least 65% between now and 2050, with small variations in the steepness of production
decline rates. Since oil and gas consumption needs to decline at roughly the same pace as
forecasted production from existing fields, these scenarios bear similar implications to the

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IPCC scenario and IEA’s NZE scenario: in order to align with the 1.5°C goal, no new fields
should be opened (Figure ES2).
Figure ES 2. Global oil and gas production, based on other selected 1.5°C pathways

GtCO2

25

New fields andexploration

20

Under development
and producing fields

15

Selected IPCC
1.5°C pathways
IEA NZE pathway
BP Net-Zero
IRENA

10

DNV Net-Zero
IMP-Ren
BNEF

5IMP-LD
Navigant
0
2020

OECM
2025

2030

2035

2040

2045

2050

Sources: BNEF (2021); BP (2022); Byers et al., (2022); DNV (2021) ; IRENA (2022); Navigant (2018); Rystad
Energy (2022b); Teske et al., (2022).

Development Pathways for Wind and Solar Capacity
Enabling a structural shift in the energy sector in line with 1.5°C pathways will requiresignificantly scaling up the annual rate of renewable technology deployment. Our report findsthat policies currently deployed in support of renewable energy fall short of these objectives:
according to the selected IPCC scenarios and IEA’s NZE scenario, by 2030, annual capacity
additions should be at least 2.5 times higher for wind and 1.5 times higher for solar energy
compared to current policy forecasts (Figure ES3). All other analyzed scenarios broadly
confirm the need to rapidly add far more wind and solar capacity than planned, and generally
point to even higher required rates of deployment for the two technologies.

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Figure ES 3. Annual wind and solar capacity additions under selected IPCC and IEA
1.5°C pathways
400
350Wind capacity(IEA NZE pathway)

WIND

Wind capacity(selected IPCC
1.5°C pathways)

300

GW

250

New policies needed toenable faster growth

200
150
100

Wind projection(based on current policies)

50
0

2015

2020

2025

2030
Solar capacity(selected IPCC
1.5°C pathways)

700

GW

SOLAR
600

Solar capacity(IEA NZE pathway)

500

New policies needed toenable faster growth

400
300
Solar projection(based on current policies)

200
0

2015

2020

2025

2030

Sources: BNEF (2022); Byers et al., (2022); IEA (2022).

Financing Solar and Wind Deployment: The investment gap
All analyzed scenarios point the need to massively increase wind and solar capacities in order
to effectively displace oil and gas production. To achieve this, investments in renewables willneed to increase rapidly during the course of this decade.
Our selection of IPCC 1.5°C pathways shows that, between now and 2030, total annual
investments in both wind and solar should amount to about USD 830 billion. Current
investment plans do not come close to such amounts. Unless new policies are implemented,
there will be an annual investment gap of more than USD 450 billion until 2030.

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However, estimates show that capital and operational expenditures for the exploration andextraction of oil and gas in new fields—incompatible with IPCC, IEA 1.5°C pathways, andour broader selection of scenarios—are expected to reach USD 570 billion annually by2030, for a cumulative total of USD 4.2 trillion between 2020 and 2030 (Figure ES4). By
themselves, these investments would suffice to bridge the entire investment gap for wind andsolar by 2030.
Figure ES 4. Wind and solar investment needs and investment gaps
Selected IPCC 1.5°C pathways

2030 investment forecast

1,000

USD billion/year

800
Investment
gap
600

Investment gap issmaller thaninvestment forecast
in new oil and gas
development

Solar
400

Investment
forecast

200
Wind
0
2015

New fields andexploration

2020

2025

2030 Wind andSolar

Producing
fieldsOil andGas

Sources: Byers et al. (2022); Rystad Energy (2022b)

The War in Ukraine and its Implications for Energy Systems
In 2022, the energy market disruptions due to the Russian invasion of Ukraine and theconsequent economic sanctions on Russia have strained global gas supplies. They bringquestions on the present and future role of gas in energy and power systems to the forefrontof policy discussions. Yet the replacement of gas with clean power generation alternatives
is an important step in achieving oil and gas production levels that are compatible with a
1.5°C future.
Our report finds that global gas power generation capacity should decrease by more than 55%
by 2035 compared to 2020 levels. Currently forecasted generation from gas power plants
already in operation, in construction, or being planned, is expected to deliver more generation
capacity than would be consistent with the Paris Agreement throughout the forthcoming
decades (Figure ES5). Therefore, the construction of new gas-fired power plants risks leading
to a dangerously high number of stranded assets.

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Figure ES 5. Global gas power capacity
2,500

2,000

Gas power plants
Announced
In pre-construction

1,500

GW

Under construction
1,000

OperatingSelected IPCC
1.5°C pathways

500

0
2020

2025

2030

2035

2040

2045

2050

Source: Byers et al. (2022); Global Energy Monitor (2022).

In Europe, the shortage of gas supply has so far pushed policy-makers to accelerate thetransition to renewable energies, on the one hand, and to pursue alternative gas supplies,on the other. Based on the selected IPCC pathways, our report finds that existing global
import capacity could meet medium- and long-term European demand without Russian
imports, if Europe were to reduce gas consumption in line with the 1.5°C target (FigureES6). The potential supply crunch in 2022 and 2023 could have dire consequences, but
new gas supply infrastructure will not come online in time to address it adequately. Not only
can Europe meet its energy needs by reducing dependence on Russian gas supply throughaccelerating renewable energy, energy efficiency and electrification, it must do so to alignwith 1.5°C pathways.
The European gas crunch has also prompted a global dash for gas, which is incompatible withthe timely achievement of an energy transition compatible with the 1.5°C target. As such, theimpacts of the energy crisis may also be considerable in developing countries, especially thosewith exploitable gas reserves. They may face higher risks of stranded assets once the European
dash for gas has reached its peak. It is therefore essential that developing countries continue
to pursue 1.5°C-compatible transition pathways, and leapfrog from current fossil-basedenergy paradigms to clean energy sources that can guarantee a more sustainable and secureenergy future. It requires dedicated policies to foster capacity building and infrastructuredevelopment, and support of donor countries and international financial institutions throughadequate streams of climate finance.

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Figure ES 6. Europe gas consumption and supply

Europe gas consumption (Bcm/year)

800
Europe 1.5°Caligned gas
consumption

700
600

Russia gas supply

500
400

LNG
(80% utilization)

300

MENA pipelines(90% utilization)

200

Azerbaijan
existing fields

100

Europeexisting fields

0
2020

2025

2030

2035

Source: Author’s calculations, based on BP (2022b); Byers et al. (2022); Global Energy Monitor (2022a);
Rystad Energy (2022b); European Commission (2022c)

The Private Sector and the Energy Transition
Phasing out oil and gas production and deploying wind and solar capacities in line with the
1.5°C target requires concerted efforts from public and private actors alike. In this report, wehave taken a closer look at two key areas where the private sector can positively contribute to
the transition, and where governments can play an enabling role.
Governments must act promptly to prevent the licensing of new oil and gas fields. Currently,
considerable barriers exist to governments’ ability to do so without incurring the risk of legal
action. If governments were to cancel all upstream oil and gas projects by 2050 in line with
IEA’s NZE scenario, our report finds that they might risk an aggregate USD 234 billion
claims in so-called investor-state dispute settlements, and a total of USD 340 billion if they
additionally cancelled projects in development but not yet producing oil and gas. Possible
solutions to this issue range from moratoria on any further licensing or issuing of exploration
permits for oil and gas, and the payment of a compensation by governments in return for awaiver of treaty rights, to eventually reforming and terminating investment treaties altogether.
Investors too have an important role to play in the transition to a 1.5°C-compatible future.
In the last couple of years, an unprecedented wave of corporate net-zero targets has beenannounced. However, there currently exists no clear and consistent definition for thesetargets. This has particularly been the case for net-zero targets in the oil and gas sector, often
overestimating companies’ actual emissions reductions. To this end, other frameworks andtools are emerging to fill the gaps. These include international climate disclosure reporting
frameworks and national-level mandatory disclosure requirements.

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Key Recommendations
The selection of modelled pathways analyzed in this report all point to a common set ofactions to limit global warming to 1.5°C. Based on these pathways and our analysis of thecurrent opportunities and barriers to policy change, we recommend that:
1. Governments should prevent the development and licensing of any new oil
and gas fields. Developing any fields beyond those already in operation or underdevelopment would pose substantial risks of either not meeting the 1.5°C target
or creating stranded assets, because those fields would have to be decommissioned
before the end of their lifespan, unless currently producing fields’ operations are
significantly curtailed.
2. Governments must provide more and better support to wind and solar
deployment. They need to improve current policies and put in place new ones, toincrease solar and wind capacity worldwide. These should include policy frameworks
aimed at reducing permitting and licensing delays for renewables’ installation, as well
as localizing renewable energy value chains to make them more resilient to trade wars,
political conflicts, and price volatility.
3. Governments should create enabling environments for redirecting both public
and private capital flows toward the clean energy transition, including the
deployment of additional solar and wind capacity. The forecasted investmentsin the exploration and development of new oil and gas fields—incompatible with the
1.5°C pathways—are higher than the investment gap for wind and solar deployment.
4. The current energy crisis, experienced by Europe in particular, should not
be tackled by increasing the continent’s reliance on gas. Doing so would risk
putting the 1.5°C target even further out of reach, or creating stranded assets for newly
built infrastructure both in Europe and in gas-exporting countries, while not solving
the short-term crunch. Governments and investors should instead view the crisis as
an opportunity to further step up Europe’s clean energy ambition, by strengthening
existing frameworks such as the EU Fit for 55 package and the European Green Deal.
5. Investment treaties need to be urgently and radically reformed or repealed
to allow governments to enforce 1.5 °C-compatible oil and gas phase-out
pathways. Governments can tackle this issue by pursuing one or a combinationof existing solutions, namely a moratorium on any further licensing or issuing of
exploration permits for oil and gas, setting up systems to pay out compensationin return for a waiver of treaty rights, and eventually reforming and terminating
investment treaties.
6. Governments should better regulate the long-term targets of the corporate
sector, at both the global and national levels, to ensure that they support thegoals of the Paris Agreement. Regulative approaches by governments hold criticalpotential to ensure highly ambitious corporate long-term targets. Such regulation
could provide robustly defined concepts that add substantive criteria to ensure Paris
Agreement compatibility, and mandate comprehensive and third-party verified
disclosure practices.

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7. Governments should set up mandatory requirements for companies’
reporting methodologies. Until then, investors can fill the gap by adopting
voluntary reporting methodologies. Corporate climate reporting is instrumental
to the ability of the financial sector to channel capital where it is most needed toaccelerate the energy transition. Rigorous mandatory standards would enable theproduction of standardized material information, consistently disclosed within andacross countries.

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Table of Contents
1.0 Introduction..................................................................................................................................................................... 1
2.0 Energy/Climate Models and Energy Pathways.............................................................................................4
2.1 Strengths and Limitations of Energy/Climate Models..................................................................................6
2.2 Equity and Regional/National Targets.........................................................................................................................7
2.3 Key Uncertainties: CCS and carbon dioxide removal.....................................................................................8
2.4 The Pathways Used in This Report.................................................................................................................................9
3.0 Energy System Transformation and Infrastructure Needs...................................................................13
3.1 Paris-aligned Oil and Gas Phase-out Timelines...............................................................................................15
3.2 The Role of Gas Power Generation in the Energy Transition...................................................................19
3.3 Renewable Energy Deployment Needs.....................................................................................................................21
3.4 Regional Dimensions.............................................................................................................................................................. 24
3.5 Financing the Transition ..................................................................................................................................................... 26
4.0 The War in Ukraine and the Geopolitics of Energy Transitions.......................................................... 30
4.1 The War in Ukraine and the Dash for Gas..............................................................................................................31
4.2 Alternatives to Gas in Europe........................................................................................................................................ 40
4.3 Implications for Renewables of the War in Ukraine......................................................................................45
4.4 Opportunities for Developing Countries to Leapfrog................................................................................. 52
5.0 Fostering Enabling Environments to Accelerate the Transition to Net-Zero............................... 57
5.1 Legal and Economic Challenges to the Energy Transition.......................................................................58
5.2 Investment Treaties and Oil and Gas Phase-out............................................................................................ 59
5.3 Corporate Net-zero Targets: An inadequate state of play entering a crucial decade .... 62
5.4 Institutional Investor Tools and Strategies: A growing movement, with a need forreliable information..........................................................................................................................................................................70
6.0 Conclusions and Key Policy Recommendations..........................................................................................78
Resources...............................................................................................................................................................................81
Appendix..............................................................................................................................................................................102

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List of Figures
Figure ES 1. Global oil and gas production, based on selected IPCC and IEA 1.5°C pathways......v
Figure ES 2. Global oil and gas production, based on other selected 1.5°C pathways........................vi
Figure ES 3. Annual wind and solar capacity additions under selected IPCC and IEA 1.5°C
pathways............................................................................................................................................................................................................vii
Figure ES 4. Wind and solar investment needs and investment gaps............................................................ viii
Figure ES 5. Global gas power capacity.....................................................................................................................................ix
Figure ES 6. Europe gas consumption and supply.............................................................................................................. x
Figure 3.1 Global oil and gas production, based on selected IPCC and IEA 1.5°C pathways....... 16
Figure 3.2 Global oil and gas production, based on other selected 1.5°C pathways............................ 17
Figure 3.3 Global gas power generation capacity............................................................................................................20
Figure 3.4 Annual wind and solar capacity additions under selected IPCC and IEA 1.5°C
pathways........................................................................................................................................................................................................... 22
Figure 3.5 Annual wind and solar capacity additions under BNEF, Network for Greening the
Financial System, and OECM 1.5°C pathways.................................................................................................................... 23
Figure 3.6 Cumulative wind and solar capacity deployment needs, 2022–2030................................... 25
Figure 3.7 Wind and solar investment needs and investment gaps.................................................................... 27
Figure 3.8 Regional cumulative investment needs for wind and solar, 2022–2030.............................. 28
Figure 4.1 Wholesale gas prices in key markets since 2018.................................................................................... 32
Figure 4.2 EU natural gas imports by source........................................................................................................................ 33
Figure 4.3 Estimated time needed for the Russian Federation to shift its gas exports to Asia..... 34
Figure 4.4 Europe’s LNG rush since February 2022......................................................................................................... 35
Figure 4.5 LNG exports (billion cubic metres) in the IEA’s net-zero scenario............................................ 39
Figure 4.6 Europe gas consumption and supply, bcm/year..................................................................................... 40
Figure 4.7 TTF price development, Natural Gas Forward Day Ahead, USD per metric million
British thermal unit................................................................................................................................................................................... 42
Figure 4.8 Global weighted average total installed cost, capacity factor, and LCOE of
newly commissioned utility-scale solar PV, onshore and offshore wind, 2010–2021..........................47
Figure 4.9 Renewable share of annual power capacity expansion......................................................................49
Figure 5.1 Climate initiatives for financial institutions: A landscape................................................................72
Figure 5.2 Map of climate reporting frameworks and resources...........................................................................74

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List of Tables
Table 2.1 Scenarios featured in this report: Use of CDR and CCS......................................................................11
Table 3.1 Oil and gas production phase-out pace in key model pathways..................................................19
Table 4.1 Major African natural gas projects that may accelerate.................................................................... 36
Table 5.1 Shortcomings of existing net-zero pledges across sectors identified in recently
published literature, and of net-zero pledges and related transition plans in the oil andgas sector.........................................................................................................................................................................................................64
Table A.1 Scenario filtering criteria based on IPCC feasibility and sustainability
assessment for CCS and CDR...................................................................................................................................................... 103
Table A.2 List of the 26 IPCC 1.5°C pathway limiting CDR and CCS deployment.............................104

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Abbreviations and Acronyms
AR6

IPCC Sixth Assessment Report

BECCS

bioenergy and carbon capture storage

BITbilateral investment treaty

BNEF

Bloomberg New Energy Finance

CCS

carbon capture and storage

CCU

carbon capture and utilization

CCUS

carbon capture, utilization, and sequestration

CDR

carbon dioxide removal

CIF

cost, insurance, and freight

ECT

Energy Charter Treaty

EU

European Union

FF55

Fit for 55

FSRU

floating storage and regasification units

GHG

greenhouse gas

GRI

Global Reporting Initiative

IAM

integrated assessment model

IEA

International Energy Agency

IIGCC

Institutional Investors Group on Climate ChangeIMPillustrative mitigation pathway

IMP-LDIMP low demand

IMP-Ren

IMP high renewables

IPCC

Intergovernmental Panel on Climate Change

IRENAInternational Renewable Energy Agency

ISDS

investor–state dispute settlement

ISSB

International Sustainability Standards Board

LCOE

levelized cost of electricity

LNG

liquefied natural gas

MDB

multilateral development banks

NGFS

Network for Greening the Financial System

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NZE

Net Zero Emissions (by 2050)

OECD

Organisation for Economic Co-operation and Development

OECM

One Earth Climate Model

PRI

Principles for Responsible Investment

PVphotovoltaic

SASB

Sustainability Accounting Standards Board

SBTi

Science Based Targets Initiative

SEC

Securities and Exchange Commission

TCFD

Task Force on Climate-related Financial Disclosures

TPI

Transition Pathways Initiative

TTF

Title Transfer Facility

UNCTAD

United Nations Conference on Trade and Development

UNFCCC

United Nations Framework Convention on Climate Change

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1.0
Introduction

Navigating Energy Transitions

The world must set itself on a pathway consistent with limiting global warming to 1.5°C toavoid the most disruptive and tragic consequences of climate change on people, ecosystems,
and economies. This is extremely urgent and every fraction of a degree matters: at present
rates of greenhouse gas (GHG) emissions, the world’s remaining carbon budget will be
extinguished in approximately 8 years. The world can still achieve the 1.5°C goal, but thewindow to do so is narrowing quickly. Governments must urgently exceed the ambition of
their current Paris Agreement pledges.
Mitigating GHG emissions from fossil fuels will require fossil fuel production to decline
rapidly, as well as a fast and sustained establishment of alternative and cleaner modes of energy
consumption and production. That requires, among other actions, a major shift of investment
flows from fossil toward clean energy sources. The war in Ukraine and the resultant energy crisis
have only made more pressing the need to reduce countries’ dependencies on fossil fuels andmove as fast as possible toward cleaner modes of energy production.
Energy scenarios can play a key role in fostering such a transformation by indicating suitableenergy pathways that can be translated into policy frameworks conducive to a clean energy
transition. They can also inform the shift of capital flows away from fossil-based energy
production and toward renewable energy sources, in line with art. 2.1c of the Paris Agreement,“making finance flows consistent with a pathway toward low GHG emissions and climateresilient development.”
This report aims to inform policy-makers, investors, and companies on what they can doto align their energy decisions with the goals of the Paris Agreement, based on modelled
pathways consistent with limiting global warming to 1.5°C. We base this analysis on pathways
from a selection of the most authoritative energy and climate models, which represent andprovide insights about possible ways the future could unfold, based on various technical,
economic, societal, and policy assumptions. This report is the first to compare findings acrossthe full body of published energy model pathways: those reviewed by the Intergovernmental
Panel on Climate Change, those produced by intergovernmental organizations such as theInternational Energy Agency and the International Renewable Energy Agency, and by theprivate sector. The report focuses on pathways for the phase-out of oil and gas, and for the
expansion of wind and solar, required for a good chance of global temperatures staying within
the 1.5°C limit.
Models rest on a number of assumptions, for example related to the costs, performance, andavailability of various energy technologies in the future. Our report begins by discussing theseassumptions, outlining the main strengths and limitations of each model, and explaining the
choices we made in terms of selection of scenarios (Chapter 2).
We then analyze the selection of scenarios and draw key conclusions on:• The required phase-out pathways for oil and gas production between now and 2050,
at the global level.
• The required levels of solar and wind energy deployment to substitute fossil energy
production, at both global and regional levels.

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Navigating Energy Transitions• The investment gaps between current and planned spending and the investment
needed to achieve Paris-aligned investment pathways, both globally and regionally(Chapter 3).
The current energy and geopolitical crises triggered by the ongoing war in Ukraine areaffecting the strategic energy decisions made by governments and private actors, and may be
exacerbating some of the barriers to a clean energy transition. But it is also creating a renewed
urgency to move faster with the energy transition than has so far occurred. We analyze themain energy consequences of the war, with a particular focus on Europe’s recent dash for gas,and discuss the various options available to move Europe beyond gas. Moreover, we outline
the expected impacts of the war on renewable energy development in different regions, andoptions for developing countries to leapfrog in spite of the dash for gas (Chapter 4).
In order to provide clear and actionable recommendations for policy-makers, financial actors,
and investors, the report discusses the role of the private sector in such a transition, and ofgovernments to create an enabling environment for private actors. We highlight some of themain legal and economic barriers faced by governments when trying to phase out oil andgas production, related to the multitude of investment treaties which protect the forecasted
revenues that oil and gas companies might generate with their licensed reserves. We also
discuss frameworks and tools that could help make corporate net-zero targets more effective
and align institutional investors’ strategies with a 1.5°C-compatible world (Chapter 5).
Finally, we recommend a number of actions that governments, investors, and financial
institutions can take in order to achieve positive change in line with the implications of theenergy scenarios (Chapter 6).

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2.0
Energy/Climate Models
and Energy Pathways

Navigating Energy Transitions

Key Insights•

Energy and climate models represent and provide insights about ways the
future may unfold, based on various technical, economic, societal, and policy
assumptions. Analysis of such futures (“pathways”) plays a key role in informing
climate policy decisions.

•This report’s core findings are based on two 1.5°C pathways: the median of 26
pathways reviewed in the Intergovernmental Panel on Climate Change’s (IPCC’s)
Sixth Assessment Report (AR6), and the Net Zero Emissions by 2050 scenario(NZE), published by the International Energy Agency (IEA) in the 2021 editionof World Energy Outlook. We also compare these with several other pathways
to identify common features and differences, namely: the IPCC illustrative
mitigation pathways (IMPs)—IMP-Ren and IMP-LD—as well as pathways fromthe International Renewable Energy Agency (IRENA), One Earth Climate Model(OECM), Bloomberg New Energy Finance (BNEF), Navigant, DNV, and BP.

•

Two critical assumptions in models regard the availability at scale of methods toremove carbon dioxide (CO2) from the atmosphere and/or of carbon capture andstorage (CCS) technology. Given the uncertainties related to the deployment ofthese technologies, the scenarios analyzed in this report are selected because
they do not exceed IPCC judgements of feasible and sustainable deployment
levels.

Energy and climate models1 represent and provide insights about ways the future may unfold,based on various technical, economic, societal, and policy assumptions (Moss et al., 2010).
Analysis of these modelled futures (“pathways”)2 plays a key role in informing climate policy
decisions and features centrally in reports of the IPCC.
Pathways limiting warming to 1.5°C (with no or low overshoot of the target) generally see
CO2 emissions reduced by 48% by 2030, compared with 2019 levels, and reaching net-zeroby around 2050 (IPCC, 2022).3 Most pathways see reduced usage of all three fossil fuels by
2030 and major reductions by 2050, with coal declining the fastest (IPCC, 2022, Table 3.6).
However, the world remains far off track. In 2022, greenhouse gas emissions are continuing
to increase, and while the world can still achieve the 1.5°C goal, the window for this is closing.
Governments must urgently exceed the ambitions of their current Paris Agreement pledges(Nationally Determined Contributions) and begin enacting proposed changes before the
1.5°C goal moves out of reach (IPCC, 2022).

This report uses the term “energy/climate models” (or sometimes just “models”) to include both integrated
assessment models (IAMs), which are generally managed by academic research groups and assessed by the
IPCC, and models of the energy system alone, such as those published by intergovernmental and private sector
organizations. IAMs represent the energy, climate, and economic systems in an integrated way.
1

The terms “pathway” and “scenario” are often used interchangeably. In this report, we generally use the term“scenario” when describing the assumptions inputted into the model, and “pathway” when describing the resulting
energy systems and emissions outputted from the model.
2

Specifically, this refers to pathways whose probability of limiting end-of-century warming to 1.5°C or less isgreater than 50%, categorized as C1 by Working Group 3 in AR6.
3

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Energy/climate models are used for a wide variety of purposes. For example, IEA’s World
Energy Outlook (2021c, p. 3) aims at “enabling governments to understand what they needto do to put emissions into rapid and sustained decline” to reach net-zero emissions by
2050. OECM, commissioned by the UN-convened Net-Zero Asset Owner Alliance and theEuropean Climate Foundation, “provides very granular sector specific net-zero pathways
based on currently available technologies […] For asset owners committed to net-zero
portfolio alignment, sector pathway information is of utmost importance for investment
portfolio steering” (Teske et al., 2020, p. 3). Some academic studies aim to better understandhow different factors shape possible futures through asking “What if?” questions (Evans andHausfather, 2018).
These models can shed light on the implications of policy choices or explore the most effective
or lowest-cost means to achieve policy goals. Researchers used models to assess the pace atwhich coal power generation should be phased out to achieve the Paris Agreement’s goals(Rocha et al., 2016), which informed the goals of the Powering Past Coal Alliance (2018),
whose members have committed to phasing out coal power by 2030 in the countries of theEuropean Union and Organisation of Economic Co-operation and Development, and by 2050
in other countries.
To interpret the implications that model pathways carry for real-world decisions, it isnecessary to understand how models work, why they were built, and what their strengths andweaknesses are.
This report aims to inform policy-makers, investors, and companies on what it would taketo align their energy decisions with the Paris Agreement’s goals, based on global modelled
pathways consistent with limiting warming to 1.5°C and showing a probability of 50% or
higher. We base this analysis on pathways reviewed by the IPCC as well as those generated
by intergovernmental organizations such as the IEA and IRENA and those from the private
sector. The report focuses on the phase-out of oil and gas, and expansion of wind and solar.
We do not address coal, because other reports have extensively reviewed Paris-aligned
pathways for coal phase-out (Yanguas Parra et al., 2019).

2.1 Strengths and Limitations of Energy/Climate Models
Models are powerful tools for revealing the interactions between different elements of complex
systems, including dramatically changing systems (DeCarolis et al., 2017; Taylor et al., 2014).
They help explore the range of futures that are technically and economically viable. For
example, models helped enable policy discussions on the 1.5°C goal in the Paris Agreement,
by describing a technically and economically viable energy system to limit emissions (van Beek
et al., 2022).
As simplified mathematical depictions of the world, models necessarily rest on many
assumptions, and the further they look into the future, the more uncertain these assumptions
become. These include not only big-picture assumptions about the shape of the world, suchas on population size or energy service demands, but also parameters describing the costs,
performance, and availability of various energy technologies (Keppo et al., 2021).

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Different models display different strengths. For example, models managed by academic
researchers are often more transparent in their methodologies and more flexible in their
exploration of research questions. Intergovernmental organizations’ energy models tend to
narrow the range of possibilities they consider, which makes using their pathways simpler for
decision-makers but provides less detail for them to prepare for an uncertain future. Energy
models managed by commercial organizations often use the most up-to-date cost estimates
but can be less transparent in how they work, making it harder to interpret any of theirconclusions (Pfenninger et al., 2017; Skea et al., 2021). These models also suffer trade-offs
between the level of complexity or detail they provide and the computing power required tooperate them. Models variously give more resolution in geography, technological processes,
end uses, infrastructure, or actors.
More fundamental assumptions underpin the structural logic by which models bring together
these varied factors, either by simulating how future decisions will be made or by identifying
some kind of optimum pathway. Whether simulating or optimizing, models commonly rely
on a logic based on economic and technical efficiency. As such, most energy/climate models
poorly represent human behaviours, social-political factors, or disruptive changes (Li andStrachan, 2016; McCollum et al., 2017; Wilson et al., 2019), though there are nascent efforts
to better reflect socio-political factors in models (Cherp et al., 2018; Geels, Berkhout and Van
Vuuren, 2016; Mercure et al., 2019; Trutnevyte et al., 2019).

2.2 Equity and Regional/National Targets
Generally, IAMs have not been adopted for the representation of complex value judgments,
as the assumptions required for this could be highly contentious. One of the most importantof these judgments is how to equitably share mitigation efforts between different countries
and actors (Keppo et al., 2021; Pye et al., 2020).4 It is widely recognized that certain
countries have contributed more than others to climate change through past emissions, andthat countries vary significantly in the financial and other resources they have available tocontribute to solving the problem (IPCC, 2022). This is known as the principle of common but
differentiated responsibilities and respective capabilities, which is a central tenet of both the UN
Framework Convention on Climate Change (United Nations, 1992, art. 3.1) and the Paris
Agreement (United Nations Framework Convention on Climate Change, 2015, art. 2.2).
An equitable international approach has several dimensions, two of which tend to recurin equity debates and receive broad acceptance: differentiated mitigation, where Global
North countries act sooner and do more to reduce their emissions; and climate finance,
which wealthier countries provide to poorer ones (Calverley and Anderson, 2022). Climate
negotiations involve serious contestation about how much more and how much sooner
Global North countries must act, which wealthier countries should provide finance, whichpoor countries should receive it, as well as the amount provided. In some analyses, the twodimensions are linked: if developing countries receive more finance, they may be able toEquity considerations can be incorporated into models if appropriately interpreted (via value judgments and/or
assumptions) and codified into a useable form.
4

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mitigate faster, with less difference in pace from developed countries (Holz, Kartha andAthanasiou, 2018).
Therefore, the geographic breakdown of mitigation efforts will depend on the approach toequity. In this report, we discuss fossil fuel phase-out only at the global level. As a general
guide, phase-out should be faster in the Global North than the global average suggested
here. Conversely, we do provide a basic regional breakdown of growth in wind and solar
deployment based on the models, with the caveat that in the Global South these will only bemeaningful as targets to the extent that sufficient finance is made available.

2.3 Key Uncertainties: CCS and carbon dioxide removal
Two critical assumptions in energy/climate models regard the availability of methods toremove CO2 from the atmosphere and/or of CCS technology,5 neither of which have yet been
deployed at a significant scale. Regarding CO2 removal (CDR), the IPCC has said “CDR
deployed at scale is unproven, and reliance on [CDR] is a major risk in the ability to limit
warming to 1.5°C” (Rogelj, Shindell and Jiang, 2018, p. 96).
These assumptions are highly consequential for the kind of energy system that may beconsidered consistent with temperature limits. The more countries undertake CDR in the
future, the longer the world can take to decrease near-term emissions (and by extension, thelonger it can take to decarbonize energy systems) (IPCC, 2022). Similarly, CCS creates apotential means to decouple fossil fuel use from CO2 emissions, in theory allowing continued
use of fossil fuels even as emissions decline (Budinis et al., 2018).
Many models rely on very large-scale CDR, with removal achieved either by carbon
sequestration through reforestation and afforestation, or through bioenergy with CCS(BECCS).6 This reliance has been highly controversial within the scientific community, wheresome view major CDR as “essential” to achieving the Paris Agreement’s goals, given the
difficulty of reducing emissions (Galán-Martín et al., 2021), while others see CDR relianceas “an unjust and high-stakes gamble” (Anderson and Peters, 2016) that is at best highly
speculative. Models that aim to minimize total system costs often favour CDR: later removalsof CO2 provide a way to push costs decades into the future, resulting in lower discounted
costs (Emmerling et al., 2019; IPCC, 2022; Rosen and Guenther, 2016). Yet that very distancein the future increases the uncertainty of deployment. Reliance on it also creates the danger
where, by the time those uncertainties are resolved, the emissions will already have occurred.
Therefore, if CDR cannot be deployed to the extent expected, it will be too late to reverse theemissions (Smith et al., 2015).
CCS is sometimes considered alongside carbon capture and utilization (CCU), using the combined term
CCUS. In CCU, the captured CO2 is used, for example by being processed into fuels, or by being pumped into
oil fields to increase reservoir pressures and drive enhanced oil recovery (EOR). Use of waste CO2 to produce
fuels is a very early-stage and speculative technology; if successfully deployed, it will not reduce the amount of
CO2 entering the atmosphere, but will rather obtain additional energy services from the carbon before the CO2 isemitted. In the case of EOR, any emissions benefit from storing the CO2 is offset by additional emissions arisingfrom the extra oil. For these reasons, in this report we focus only on CCS, not CCU.
5

Other proposed methods of CDR – including through direct air capture, soil or ocean sequestration, or enhanced
weathering – play less of a role in most models.
6

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Major limitations and uncertainties surround future deployment of CDR. Both forests and
BECCS require considerable land area. For example, capturing 11.5 Gt of CO2 per year using
BECCS (compared with present annual global emissions of 40 Gt CO2) would require a landarea of 380–700 Mha, which is equivalent to one to two times the size of India, or to 25–46%of the world’s arable land. Capturing the same amount with forests would require threetimes as much land as BECCS would (IPCC, 2022). This land requirement raises concerns
regarding competition with food production and biodiversity impacts where wild land isconverted. Taking these limits into account, scholars have estimated what could be considered
the maximum sustainable potential of various CDR approaches (de Coninck et al., 2018; Fusset al., 2018). There are also feasibility challenges for all energy system changes, related to theirtiming, disruptiveness, and scale, which other researchers have assessed, including for BECCS
and fossil CCS (Brutschin et al., 2021; IPCC, 2022, Annex III, Table II.1).
Even at potentially feasible levels, the uncertainties remain about whether and how CDR or
CCS can be delivered. CCS deployment to date has consistently fallen behind expectations.
After more than 30 years of efforts to commercialize CCS, today there are only 27 CCS
facilities in operation, which have a total nameplate capacity of 36 Mt CO2 (0.1% of global
emissions). Only five of these facilities aim to deliver long-term storage of CO2, while the others
are used in enhanced oil recovery (Global CCS Institute, 2021). Many CCS projects havefailed (Robertson and Mousavian, 2022; Wang, Akimoto and Nemet 2021), and costs remainhigh compared with other low-carbon alternatives. Indeed, the costs of a facility with CCS will
always be higher than the costs of the same facility without CCS (Budinis et al., 2018).
For either CCS or CDR, some of the largest challenges relate to governance. Many
unanswered questions remain on how these measures can be implemented, monitored, andregulated to ensure their effectiveness, and what institutions are needed to deliver incentives,funding, and penalties at the global level (Greenpeace, 2021).

2.4 The Pathways Used in This Report
This report aims to provide guidance for energy decisions to governments, investors, andcompanies, especially concerning oil, gas, wind, and solar. Our core findings are based on two
1.5°C pathways:• The median of 26 pathways reviewed in the IPCC AR6 Working Group 3 (IPCC,
2022), using data hosted on the International Institute for Applied Systems Analysis’
Scenario Explorer (Byers et al., 2022).
• The IEA’s NZE scenario, published in the 2021 edition of World Energy Outlook (IEA,
2021c).
The methodology for selecting the pathways was based on the approach first proposed by
Climate Analytics (2018) and employed in the Production Gap Reports to analyze pathways
from the IPCC Special Report on Global Warming of 1.5°C (Stockholm Environmental
Institute et al., 2021). It used the IPCC Scenario Explorer database to select pathways that

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are consistent with certain criteria. The set of 26 IPCC pathways7 selected for our analysis
consists of the pathways in AR6 that align with the 1.5°C limit, excluding those whose usageof BECCS or fossil CCS is categorized by the IPCC as raising medium to high feasibility
concerns. It also excludes those whose forest CDR exceeds the IPCC’s estimate of maximum
sustainable potential (see appendix for more detail), which is intended to provide a more
realistic account of their potential contributions over the coming decades.
The subset of pathways all limit warming to 1.5°C (greater than 50% probability) with either
limited or no overshoot. They are generated using three8 models: MESSAGE-GLOBIOM,9REMIND-MAgPIE,10 and WITCH.11 All three are optimization models that find solutions
with the lowest cost or highest economic welfare, subject to various real-world constraints.
The NZE scenario is generated using the IEA’s World Energy Model, a simulation modelof the energy system, using exogenous future policy assumptions that are listed in the
documentation (IEA, 2021b). It thus relies on the IEA’s explicit judgment about which
policies are most realistically achievable, rather than embedding policy choices in costoptimization as an overriding principle.
We focus on these two pathways because the IPCC and IEA are widely used in the current
literature, and in the case of the IPCC, the diversity of pathways improves the robustness of
our analysis. Moreover, we also compare these with other well-known pathways employed byfinancial institutions, consultancies, and the private sector to identify common features anddifferences. Most of these pathways are consistent with limiting warming to 1.5°C with greaterthan 50% probability, and not relying on CCS or CDR to a greater extent than judged feasible
or sustainable, as above.12 The other scenarios considered in this report are:
• IPCC IMP-Ren (illustrative mitigation pathway high renewables): one of the IPCC’s
26 pathways, it is also shown separately because the IPCC uses it as an illustrative
mitigation pathway (IMP) to represent a future with a high level of renewable energy.
• IPCC IMP-LD (IMP low demand): another of the 26 pathways, this IMP represents
a future with low energy demand, achieved through changes in societal behaviours.
• OECM: developed by the University of Technology Sydney for the Net-Zero Asset
Owners Alliance and designed to give a high level of sector granularity to help inform
investor decisions (Teske et al., 2020).

The IPCC does not produce these pathways but rather collect and assess quantitative, model-based scenarios
related to the mitigation of climate change. The final selection of scenarios considered by the IPCC Working
Group 3 was conducted by authors of the AR6 report.
7

The AR6 also considered 1.5°C pathways generated using seven other models, but all of these pathways
exceeded the feasibility/sustainability thresholds on CDR and CCS discussed above.
8

9

Managed by the International Institute for Applied Systems Analysis near Vienna, Austria.

10

Managed by the Potsdam Institute for Climate Impact Research in Potsdam, Germany.

11

Managed by the European Institute on Economics and the Environment in Milan, Italy.

Based on the CDR/CCS criterion, we do not include scenarios from the Network for Greening the Financial
System, from Shell or from Equinor.
12

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Navigating Energy Transitions• Bloomberg New Economic Finance (BNEF) green scenario: one of three netzero scenarios in BNEF’s New Energy Outlook 2021, which prioritizes clean electricity
and green hydrogen. It uses a carbon budget consistent with a 67% chance of keeping
warming below 1.75°C (BNEF, 2021).
• IRENA World Energy Transitions Outlook 1.5°C Pathway: uses
macroeconometric modelling to assess the socio-economic impact of a diverse policy
basket with moderate carbon prices to limit warming to 1.5°C (IRENA, 2022d).
• Navigant Pathway to Net-Zero: a 1.5°C scenario for 100% Decarbonization of
the Global Energy System by 2050, it was developed to provide maximum feasibility,
giving preference to options that have high social and political acceptability (Navigant,2018).
• DNV Pathway to Net Zero: aims to achieve 1.5°C within the bounds of technoeconomic and political feasibility. Accordingly, it employs an integrated system
dynamics simulation model that reflects relationships between demand and supply inseveral interconnected modules (DNV, 2021).
• BP net-zero scenario: one of three possible energy transition scenarios and the only
one that aims to limit warming to 1.5°C, this scenario is based on a subset of scenarios
from the IPCC’s Special Report on Global Warming of 1.5°C, excluding the ones
considered to give overly optimistic assumptions about climate policies (BP, 2022a).
While this report has excluded scenarios relying on CDR or CCS beyond feasibility/
sustainability thresholds (above), it should be noted that all the scenarios considered in thisreport rely on CDR to some extent, and most rely on CCS. Given that neither CDR nor
CCS have yet been deployed at a significant scale and that they raise formidable challenges
of cost, sustainability, and governance, a precautionary approach to judging energy transition
pathways should seek to minimize reliance on CDR and CCS. CDR cannot be consideredan alternative to real emissions reductions (Dooley, Nicholls and Meinshausen, 2022), andpathways with faster decarbonization should be preferred over those that rely more on CDR.
A summary of the scenarios’ use of CDR and CCS follows in Table 2.1.
Having discussed the range of pathways consistent with the Paris Agreement and the 1.5°C
goal, this report will consider their implications for a range of aspects, beginning with thequestion of the licensing of new oil and gas fields, and the investments needed in renewableenergy technologies.

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Table 2.1 Scenarios featured in this report: Use of CDR and CCS
BECCS
Mt CO2

Fossil CCS

Afforestation/
Reforestation

2030

2050

2030

2050

2030

2050

IPCC scenarios
median

70

1,030

670

2,140

730

2,090

IPCC scenarios firstquartile

50

910

400

1,320

360

790

IPCC scenarios third
quartile

240

2,460

770

2,710

910

2,160

IEA NZE

260

1,380

1,330

5,250**

IPCC IMP-Ren

310

2,400

410

560

200

230

IPCC IMP-LD

0

0

-

-

1,340

3,160

IRENA

900

5,000

1,100

2,300

OECM

0

0

0

0

BNEF Green Scenario

-

-

-

-

Navigant

-

-

-

-

DNV

-

-

3,300*

4,700*

BP

1,300

1,300

3,900

Notes:All figures rounded to the nearest 10.
* Includes BECCS** Includes fossil and industrial process CCS
Sources: BNEF (2021), BP (2022), Byers et al., (2022), DNV (2021a), IRENA (2022), Navigant (2018),
Rystad (2022), Teske et al., (2022).

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3.0
Energy System Transformation
and Infrastructure Needs

Navigating Energy Transitions

Key Insights•

According to a large consensus across multiple modelled energy pathways,
developing any new oil and gas fields is incompatible with limiting warming to
1.5°C. Global oil and gas production and consumption must decrease by at least
65% by 2050.

•

The investment levels needed for wind and solar technologies in 1.5°C-aligned
pathways can be achieved by redirecting finance from new, 1.5°C-incompatible
oil and gas fields. The annual investment gap for the required wind and solar
deployment amounts to USD 450 billion until 2030. Forecasts indicate that up
to USD 570 billion will be spent every year in new oil and gas development andexploration during the same period.

•

There is no room for new fossil import infrastructure in Europe in 1.5°C-aligned
gas phase-out pathways. Existing import capacity can meet the gas demand forEurope in the medium and longer term. In 2022 and 2023, the short-term supply
crunch and its potentially dire consequences cannot be alleviated in time by
newly added gas capacity.

This chapter presents a detailed assessment of what an energy transition consistent withlimiting temperature rise to 1.5°C would require. It focuses specifically on emissions reduction
from oil and gas and on the corresponding levels of wind and solar capacities that need to
be installed to deliver a successful transition to a clean energy system. The analysis is basedon climate and energy models assessed by the Intergovernmental Panel on Climate Change(IPCC) and published by the International Energy Agency (IEA), and several other scenarios
from selected modelling groups.
The assessment of the embodied carbon emissions from licensed oil and gas reserves showsthat any extraction beyond fields already in production or under development would unleash
significantly more carbon dioxide into the atmosphere than our selection of scenarios deemed
consistent with the 1.5°C goal. This points toward the need to prevent the exploration anddevelopment of any new oil and gas fields, and to ensure an orderly and managed phase-out offossil fuel production.
In light of the current energy market turmoil and debates around gas supplies, the chapter will
also provide an assessment of the role gas power generation should play in the selected 1.5°C
scenarios.
Finally, this chapter presents an overview of the required levels of wind and solar deployment
in 1.5°C-aligned pathways, both at global and regional levels, and of the investments needed
to enable the deployment of these technologies.

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3.1 Paris-aligned Oil and Gas Phase-out Timelines
Despite repeated warnings over a quickly tightening carbon budget, the consultancy
firm Rystad Energy estimates that, in the absence of stronger climate policies, oil andgas production forecasts show that extraction volumes are expected to continue to rise
above current levels until at least the 2030s (Rystad Energy, 2022b), due to the continued
development of new fields and the potential extraction from licensed reserves currently
being explored. This continued growth risks pushing the world well beyond the Paris-agreed
temperature goal. The Production Gap Report estimated that governments still plan to produce
more than double the amount of fossil fuels in 2030 than what would be consistent withlimiting global warming to 1.5°C (Stockholm Environmental Institute et al., 2021).
This section compares the forecasted levels of oil and gas joint production with the
1.5°C-consistent volumes from a wide range of selected scenarios. We assess oil and gas
volumes jointly, as the extraction of oil and gas is typically conducted by the same companies
and financed through the same financial frameworks, and exploration activities are often
conducted in such a way that the relative levels of oil and gas production are only known whena discovery is made.
Figure 3.1 below shows the volumes of all licensed oil and gas reserves globally, expressedin terms of their embodied carbon emissions. These reserves are broken down into thedifferent stages of their production lifecycle,13 to showcase their respective contribution to
the 1.5°C-consistent carbon budget for the oil and gas industry. The potential emissions offorecasted oil and gas production from currently licensed reserves assume that no further
climate policies are implemented, according to the projections by Rystad Energy’s UCube
model.
Superimposed on this are two pathways which are consistent with 1.5°C. One represents themedian of selected pathways from the IPCC Sixth Assessment Report (AR6), while the other isthe IEA’s Net Zero Emissions by 2050 (NZE) scenario (see chapter 2). These two pathways
both show that oil and gas production should decline by at least 65% by 2050 from 2020
levels. Thereafter, most of the remaining emissions would have to be captured and sequestered
for the world to reach net-zero carbon emissions by the middle of the century to stabilize theclimate to 1.5°C by 2100.

Licensed oil and gas fields that are already in operation or under development are distinguished from thosewhere discovery has been made, and from those where a licence has been awarded but exploration has not yet
started.
13

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Figure 3.1 Global oil and gas production, based on selected IPCC and IEA 1.5°C
pathways
25

Selected IPCC
1.5°C pathways

GtCO2

20

IEA NZE pathway

New fields
exceed 1.5°C

15

New exploration10

New fields
Fields underdevelopment

5

Producing fields
0
2020

2025

2030

2035

2040

2045

2050

Sources: Byers et al., (2022); IEA (2021); Rystad Energy (2022b).

In the shorter term, the selected IPCC and IEA pathways showcase a 15% and 30% reductionin oil and gas production by 2030 respectively. This is equivalent to an average annual oil andgas production decline of 2% and 3% for the rest of this decade respectively; in the 2030s, theaverage production decline accelerates to 4% and 5% respectively.
The implications of this are important for future energy decisions. While energy scenarios
do not provide any prescriptive insights on what the production decline rates imply, theproduction from currently operating fields and those under development would alreadygenerate more oil and gas emissions than would be consistent with the 1.5°C goal underboth the IEA NZE and selected IPCC 1.5°C pathways.14 As such, new fields could intheory be developed in alignment with those production levels, as long as existing fields withcorresponding production levels were closed.
In practice, however, it is particularly difficult to close existing fields, for economic andpolitical reasons related to jobs, vested interests, and infrastructure lock-in effects, as wellas legal reasons related to the costly compensation owed to investors when governments
attempt to do so, and the implications of which we discuss in detail in chapter 5 of this report.
Therefore, unless these challenges can somehow be overcome, not only is there no need for
new fields, but most importantly there is no room for new fields to be developed if we are
to limit warming to 1.5°C. This is aligned with what the IEA concluded in its World Energy
Outlook 2021 report. Any new development of oil and gas fields would ultimately either

Production from conventional oil and gas fields generally declines by about 4% per year as reservoir pressure
decreases, even when ongoing investment is made to improve the fields’ productivity, such as drilling additional
wells or maintaining infrastructure (Rystad Energy, 2022b).
14

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generate stranded assets15—either because they have to shut down early or because existing
fields will need to produce significantly less than their anticipated amounts—or push the world
beyond the 1.5°C goal.

3.1.1 Sensitivity Analysis of a Broader Set of Scenarios
Besides the selected IPCC 1.5°C pathways and the IEA NZE scenarios, this section analyzes
eight additional Paris-aligned oil and gas phase-out pathways (details on these can be foundin chapter 2). The analysis of these additional scenarios shows that the conclusions derived
from the selected IPCC 1.5°C pathways and the IEA NZE are widely shared among energy
models across intergovernmental organizations, academic institutions, and private sector
consultancies. As Figure 3.2 shows, these additional pathways follow similar trajectories to the
IEA NZE and the median of selected IPCC 1.5°C pathways until the middle of the century,
implying the conclusion that there is no room for new oil and gas fields beyond those alreadyin operation or under development is robust across models.
Figure 3.2 Global oil and gas production, based on other selected 1.5°C pathways

GtCO2

25

New fields andexploration

20

Under development
and producing fields

15

Selected IPCC
1.5°C pathways
IEA NZE pathway
BP Net-Zero
IRENA

10

DNV Net-Zero
IMP-Ren
BNEF

5IMP-LD
Navigant
0
2020

OECM
2025

2030

2035

2040

2045

2050

Sources: BNEF (2021); BP (2022); Byers et al., (2022); DNV (2021); IRENA (2022); Navigant (2018); Rystad
Energy (2022b); Teske et al. (2022).

Although there are some minor variations across scenarios, especially in the 2020s, they allshow that oil and gas production needs to decrease by at least 65% by 2050. Short-term
differences in the rate of production decline across models are largely due to their varying
assumptions on carbon capture and storage (CCS) and carbon dioxide removal (CDR),
as well as assumptions on the rate of coal phase-out. Moreover, several pathways shown in
Figure 3.2 see oil and gas production decreasing below levels consistent with existing fields
Stranded assets are “assets [that] suffer from unanticipated or premature write-downs, downward revaluations
or are converted to liabilities” (Caldecott, Howarth and Mcsharry, 2013).
15

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Navigating Energy Transitions(International Renewable Energy Agency [IRENA], illustrative mitigation pathway low
demand [IMP-LD], Navigant, and the One Earth Climate Model [OECM]); this implies that
not only should new field development be stopped, but further measures such as decreased
investments in existing fields over time and/or early retirement of those fields should beconsidered as well. Others exceed existing-field production in the next 10 to 15 years, butthen fall below it later on (IMP high renewables [IMP-Ren], Bloomberg New Energy Finance[BNEF], and DNV), indicating a potential risk for some assets of becoming stranded if new
fields were developed in the short term. Only in the BP scenario does the 1.5°C pathway
remain consistently above production from existing fields, but then oil and gas production
declines by nearly 70% by 2050.
As mentioned, the rate of oil and gas production decline in each model is affected by theunderlying assumptions each model rests on. Those scenarios with the least reliance on carbon
sequestration displayed significantly faster decline in oil and gas production (see chapter
2 for assessment of carbon sequestration in each scenario). This indicates that oil and gas
production in energy transition pathways is very sensitive to assumptions made regardinglevels of carbon sequestration.
Adopting a precautionary approach to future availability of CDR and CCS technologies—
by limiting their deployment levels in line with the IPCC’s feasibility and sustainability
assessment—implies less carbon sequestration and faster oil and gas phase-out pathways
to be consistent with 1.5°C. Therefore, this again points to the need to end new oil and gas
development to reflect the current technical capacities and sustainability concerns associatedwith CDR and CCS methods. Assumption made on the rate of coal phase-out also have asignificant impact on the oil and gas decline rates in the short term.
As shown in Table 3.1, there are considerable differences in the percentage reduction of oil
and gas, measured separately in 2030, 2040, and 2050, for all the scenarios presented in thischapter. These differences tend to increase with time as the energy mixes change and thedeployment of fossil CCS technologies enables greater use of abated gas power generation.
Moreover, scenarios with higher levels of CDR and CCS tend to have slower rates of decreaseof oil and gas production.
As shown in this section, the analysis of global oil and gas reserves and 1.5°C-consistentproduction levels shows that governments have granted licences in excess of what the world
can afford to produce to comply with the Paris-agreed temperature target. Therefore, licensed
reserves beyond the ones already in production or under development should be kept
underground if the world is to limit temperature rise to below 1.5°C. Analysis in this chapter
shows that this conclusion is shared among a wide range of well-known and highly referenced
scenarios in the literature, all supporting the conclusion that there is no room for new oil andgas fields when designing policies to align with limiting warming to 1.5°C.

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Navigating Energy Transitions

Table 3.1 Oil and gas production phase-out pace in key model pathways

IPCC median

IEA NZE

IPCC IMP-Ren

IPCC IMP-LD

IRENA

OECM

BNEF

DNV

Navigant

BP

2030

2040

2050

Oil

29%

57%

78%

Gas

29%

42%

42%

Oil

21%

54%

76%

Gas

6%

45%

56%

Oil

3%

47%

77%

Gas

33%

58%

78%

Oil

47%

75%

90%

Gas

47%

75%

85%

Oil

37%

-

86%

Gas

22%

-

48%

Oil

31%

89%

98%

Gas

14%

54%

100%

Oil

1%

56%

83%

Gas

7%

56%

85%

Oil

12%

44%

74%

Gas

12%

39%

69%

Oil

24%

95%

91%

Gas

36%

75%

85%

Oil

6%

44%

76%

Gas

0%

30%

55%

Sources: BNEF (2021); BP (2022); Byers et al., (2022); DNV (2021); IEA (2022); IRENA (2022); Navigant(2018); Rystad Energy (2022); Teske et al. (2022)

3.2 The Role of Gas Power Generation in the Energy
Transition
Many current policy discussions focus on the role of gas in energy systems, with somecompanies and governments suggesting gas can serve as a “transition fuel”, since its emissions
intensity is lower than coal or oil at the point of combustion (Deetjen and Azevedo, 2020).
Critics argue that, when methane leakage is taken into account, gas power generation canbe little or no better than coal, and that accelerating the transition to wind and solar canfulfill the world energy demand at increasingly competitive costs (Fyson et al., 2022; Lazard,
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Navigating Energy Transitions2020). These fugitive methane emissions also spread throughout upstream, midstream, anddownstream stages, which makes them harder to abate (Alvarez et al., 2018). Moreover, theextraction of fossil gas from unconventional reservoirs also has a higher overall water footprint
and energy demand than conventional fields (Qin et al., 2018).
Furthermore, the record high energy prices triggered by the war in Ukraine and subsequent
sanctions have exposed critical risks from reliance on fossil gas in the energy system (seechapter 4). These risks and current disruptions in the energy market call for a thoroughassessment of the role gas ought to play in a Paris-aligned future energy system. As power
generation is the largest use of gas (Shukla et al., 2022), this section assesses how much room
there is for gas power in energy models limiting warming to 1.5°C.
The IPCC database of 1.5°C pathways shows that there is a large range of gas consumption
across scenarios (Byers et al., 2022). These differences are largely dependent on the scaleof deployment of abated gas power plants equipped with CCS. This section compares theforecasted global capacity of gas power plants with the capacity consistent with the 1.5°C
pathways assessed for the IPCC/International Institute for Applied Systems Analysis Scenario
Explorer database until 2035.16
Figure 3.3 Global gas power generation capacity
2,500

2,000

Gas power plants
Announced
In pre-construction

1,500

GW

Under construction
1,000

OperatingSelected IPCC
1.5°C pathways

500

0
2020

2025

2030

2035

2040

2045

2050

Note: The following assumptions are made:• The total installed capacity from power plants in construction with missing value as start date were
distributed evenly over 4 years between 2022–2025.
• The total capacity from proposed power plants with missing value as a start date were distributed
evenly over 10 years between 2025–2030.
• Gas power plants have an operational life of 30 years before being decommissioned.
• Operating power plants with a start date prior to 1982 are decommissioned 5 years after 2022.
Source: Byers et al. (2022); Global Energy Monitor (2022b).
The IPCC AR6 Scenario Explorer and Scenarios Database is hosted by the International Institute for Applied
Systems Analysis, which collects all the underlying data behind the scenarios assessed by IPCC Working Group 3.
16

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Navigating Energy Transitions

Figure 3.3 shows that global gas power generation capacity need to decrease by about 55% by2035 compared with 2020 levels. However, current forecast gas power generation from plants
already in operation, in construction, or being planned, are expected to deliver more capacity
than would be consistent with the Paris Agreement throughout the forthcoming decades. Thisimplies that there is no room for the construction of new plants, which would risk leading tostranded assets if 1.5°C pathways are used as a guide to limit warming to 1.5°C.
Therefore, all new constructions of gas power plants beyond those already in operation or inconstruction would eventually have to be decommissioned before the end of their economic
lifetime, or be retrofitted to include CCS, unless existing plants in operation are eventually tooperate at a much lower capacity. Moreover, further analysis of the same subset of selected
IPCC 1.5°C pathways shows that the generation of electricity from all unabated gas power
plants needs to decrease by about 95% by 2040, in order to limit warming to 1.5°C. Since gas
power plants commonly operate for about 30 years, no new unabated gas power plants should
be built, to avoid any future stranded assets or significantly underutilized built capacity.
Retrofitting an existing gas power plant to install CCS capabilities is significantly more costly
than including sequestration technology from the start (Muttitt et al., 2021). Therefore, itwould be ill advised to assume that new unabated plants should be retrofitted in 10 or 15
years. Accordingly, based on the analysis of selected IPCC 1.5°C pathways, and considering
the concerns over CCS capabilities, in order to meet the Paris Agreement temperature goal no
new gas power generation capacity should be developed.

3.3 Renewable Energy Deployment Needs
Enabling a structural shift in the energy sector in line with 1.5°C pathways will requiresignificantly scaling up the annual rate of renewable technology deployment as the world moves
away from carbon-based energy sources. The IPCC AR6 analysis of available technologies tomitigate greenhouse gas emissions concluded that wind and solar technologies have the biggest
mitigation potential at the lowest cost per tonne of CO2 displaced (IPCC, 2022). Accelerating
this transition is of considerable importance not only for climate purposes but also because
transitioning to a renewable energy system tends to “support and reduce the costs of key
elements of human development, such as education, health, and employment” (IPCC, 2022);
this would in turn facilitate the achievement of the UN Sustainable Development Goals.
Moreover, with the current disruptions in the European energy market pushing electricity
prices above EUR 350/MWh, and year-ahead contracts reaching up to EUR 1,000/MWh insome countries, wind and solar energies have become increasingly cost competitive (Hancock,2022). This also increases the imperative to accelerate the energy transition and increase
the rate of deployment of these technologies in order to tackle the electricity price hikes andenergy security challenges brought on by the war in Ukraine. Further analyses on this areprovided in section 4.3 in the next chapter.
This section reviews the pace of wind and solar deployment that is consistent with 1.5°C
energy pathways. Figure 3.4 shows how wind and solar 1.5°C-compatible deployment
rates compare to the deployment forecasts for these technologies under current policies.
The current policies forecast is made by BNEF; it is noteworthy that BNEF estimates are

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significantly more optimistic than many other forecasters in terms of forecasted wind and solar
deployment rates, hence the deployment gap we are estimating is rather conservative.
In the assessed IPCC 1.5°C pathways, wind and solar capacity additions reach 350 gigawatts(GW) and 660 GW respectively by 2030. This represents respectively a fourfold and fivefold
increase in annual capacity addition from current levels. The IEA NZE pathway, shownin Figure 3.4, follows an almost identical trajectory and total annual deployment by 2030.
Conversely, forecasts of expected deployment of wind and solar capacity based on the current
global pipelines of projects and the future implementation of current policies show an increasein capacity addition over the coming decade reaching 135 GW and 400 GW (BNEF, 2022).
As also shown in Figure 3.4, this leaves a large deployment gap that needs to be bridged inorder to supply enough energy to meet the world’s energy demand in 1.5°C pathways.
Figure 3.4 Annual wind and solar capacity additions under selected IPCC and IEA
1.5°C pathways
400
350Wind capacity(IEA NZE pathway)

WIND

Wind capacity(selected IPCC
1.5°C pathways)

300

GW

250

New policies needed toenable faster growth

200
150
100

Wind projection(based on current policies)

50
0

2015

2020

2025

2030
Solar capacity(selected IPCC
1.5°C pathways)

700

GW

SOLAR
600

Solar capacity(IEA NZE pathway)

500

New policies needed toenable faster growth

400
300
Solar projection(based on current policies)

200
0

2015

2020

2025

2030

Sources: Byers et al. (2022); IEA (2022).

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Both the IPCC and IEA NZE pathways show that by 2030, annual capacity additions should
be at least 2.5 times higher for wind energy and 1.5 times higher for solar compared toforecasts based on current policies. This indicates that additional policies are needed to enablegrowth consistent with 1.5°C.
Figure 3.5 illustrates that even under different assumptions and policies, energy models from
BNEF, OECM, and the IPCC IMP-Ren all show a need for significantly higher deployment
than is forecast under current policies. These pathways vary considerably in their deployment
need. However, they all show that by 2030, wind capacity must be at least 2 times higher andsolar must be 1.5 times higher, with a number of scenarios indicating 3.5 times for wind and4.5 times for solar.
Figure 3.5 Annual wind and solar capacity additions under BNEF, IMP-Ren, and OECM
1.5°C pathways
1,200

WIND

BNEF

1,000

IMP-Ren

800

OECM

GW

600
New policies needed toenable faster growth

400
200
0

Wind projection(based on current policies)
2015

2020

2025

2030

2,000

SOLAR

IMP-Ren
OECM

1,500

GW

BNEF
1,000

New policies needed toenable faster growth

500

0Solar projection(based on current policies)
2015

2020

2025

2030

Sources: BNEF (2022); Byers et al. (2022); Teske et al. (2022).

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Accordingly, estimates from BNEF indicate that wind capacity deployment may need to be as
high as 1,000 GW annually by 2030, almost 3 times higher than the IPCC and IEA estimates
shown in Figure 3.5. Similarly, the IMP-Ren pathway indicates that solar capacity installation
would need to reach more than 1,800 GW annually by 2030 to orchestrate an energy
transition consistent with the 1.5°C goal.
Global assessments of renewable energy deployment needs are essential to draw a picture of
the future of the energy system and of the scale of the interventions required by governments’climate policies. Additionally, the regional dimensions of the transition and the deployment
gaps provide necessary insights to inform policy and investment decisions at regional andnational levels.

3.4 Regional Dimensions
We have matched the regional data available from the same set of IPCC 1.5°C pathways17
presented above with BNEF country-level forecasts of wind and solar capacity deployment.
This way, we estimated the deployment gap for these technologies across the IPCC regions(i.e. the difference between the deployment levels needed to comply with the 1.5°C goal, or
deployment needs, and the forecasted capacity based on existing policies). By 2030, more than
850 GW of wind capacity must be installed in Asia; this represents half of the global capacitythat needs to be deployed between 2022 and 2030, and 70% of the global deployment gap
for wind. While the Organisation for Economic Co-operation and Development (OECD) andEuropean countries together account for a quarter of the total deployment needs, their current
policies seem to cover such needs to a better extent, hence their corresponding gap in capacity
deployment is only about 30 GW between 2022 and 2030.
While the regional picture looks similar for cumulative solar capacity, the OECD and
European countries present the largest deployment gap over the course of this decade, withnearly 430 GW of missing capacity by the end of the decade. Asia (except Japan) is the region
where most solar capacity additions are needed, with nearly 50% of total capacity needing
to be built in this region. Compared to forecasted deployment, significant additional policies
and investments will be needed to bridge the 340 GW deployment gap in this region over the
coming years.

From the 26 selected IPCC 1.5°C pathways assessed in this report, only 11 included regionally disaggregateddata. Accordingly, the analysis of regional deployment of wind and solar capacity is based on the data provided by
the REMIND and WITCH models, and excluded the data from MESSAGEix. See appendix for more details on
scenarios selection.
17

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Navigating Energy Transitions

Figure 3.6 Cumulative wind and solar capacity deployment needs, 2022–2030
WIND
Asian countries
except Japan
OECD90 and EU (and EU
candidate) countries

1.5°C
consistent

Latin American countries

Forecast
Middle East and Africa
Former Soviet Union
0

200

400

600

800

1,000

GW
SOLAR
Asian countries
except Japan
OECD90 and EU (and EU
candidate) countries

1.5°C
consistent

Latin American countries

Forecast
Middle East and Africa
Former Soviet Union
0

200

400

600

800 1,000 1,200 1,400 1,600

GW
Source: Byers et al. (2022).

As shown in Figure 3.6, the region with the smallest share of cumulative wind and solar
deployment is represented by countries of the former Soviet Union. However, this region
needs to increase its solar capacity by over 6 times the expected levels projected by current
project pipelines and policies in the region. There is also significant catching up required forwind energy in Latin America, as well as in the Middle East and Africa. Capacity deployment
needs to be 2 and 3 times larger respectively compared to current forecasts.
It is important to note that the assessment from integrated assessment models of the required
capacity additions in each region do not necessarily reflect or incorporate considerationsof equity and access. Further considerations to the principle of common but differentiatedresponsibilities and respective capacities of the Paris Agreement would require an accelerated
transition from high-income countries and large historical emitters. Equity concern would
likely involve faster oil and gas phase-out pathways for high-income countries less dependent
on their fossil industries (Calverley and Anderson, 2022).

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Other key system changes are needed to support the transition. Integrating electricity grids,
building transmission lines, and storage facilities will also be necessary to deal with theintermittencies of a renewable energy system. Moreover, beyond the supply-side energy
system change addressed in this chapter, other energy efficiencies and demand-side measures
should be considered to fully implement a successful energy transition compatible with theambition of limiting warming to 1.5°C.

3.5 Financing the Transition
The economic and legal challenges related to phasing out fossil fuel production and the
obstacles posed by the conflict in Ukraine to implementing ambitious energy policies (chapter4) exposed critical threats to the world’s capacity to orchestrate an orderly transition to netzero emissions by 2050. Moreover, the strained fiscal capacity of governments after historicallysignificant spending packages in response to the COVID-19 pandemic creates an additionalrisk of underinvestment in the energy transition. This section will provide an assessment of thefinancing needs that are necessary to deliver the renewable energy capacity aligned with the
1.5°C goal.
Translating the renewable energy capacity consistent with the selected IPCC 1.5°C scenarios
into monetary terms will provide a picture of the investment gaps between current andplanned spending and the one needed to achieve Paris-aligned investment pathways. The
regional disaggregation of investment needs will also provide an assessment of where thelargest needs are. Delivering the resources where it matters most will require not only
governments but also financial institutions and corporations to redirect their capital away fromfossil fuels and toward renewables.

3.5.1 Investment Gaps
Based on the IPCC pathways assessed in this report, this section presents the global
investment needs required to deliver the wind and solar capacity consistent with meetingthe temperature target of the Paris Agreement. In order to effectively displace fossil fuels,
investment in renewables will need to accelerate rapidly during the course of this decade.
Selected IPCC 1.5°C pathways show that between now and 2030, annual investment insolar energy needs to increase 3 times over current levels and more than 4.5 times for wind.
Together, total annual investments in both wind and solar should amount to about USD 830
billion by 2030.
Figure 3.7 shows this evolution of investment needs by multiplying the required capacity
additions shown in this chapter by the capital cost for wind and solar forecasted by IRENA
for the coming decade18 (Asmelash and Prakash, 2019; Prakash and Anuta, 2019). It also
illustrates the sizable investment gap in annual investment levels, and shows that unless othernew policies are implemented, investment levels are only expected to deliver USD 380 billionof investment in wind and solar energy combined by 2030. This leaves an annual investment
gap of more than USD 450 billion by 2030.

18

See appendix for full methodology on the calculation of investment costs based on IRENA cost curves

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Navigating Energy Transitions

Figure 3.7 Wind and solar investment needs and investment gaps
Selected IPCC 1.5°C pathways

2030 investment forecast

1,000

USD billion/year

800
Investment
gap
600

Investment gap issmaller thaninvestment forecast
in new oil and gas
development

Solar
400

Investment
forecast

200
Wind
0
2015

New fields andexploration

2020

2025

2030 Wind andSolar

Producing
fieldsOil andGas

Sources: Byers et al. (2022); Rystad Energy (2022).

However, capital and operational expenditures for the exploration and extraction of oil andgas in new fields—which are incompatible with selected IPCC and IEA 1.5°C pathways—are
expected to reach USD 570 billion annually by 2030 (Rystad Energy, 2022). By themselves,these investments would suffice to bridge the entire investment gap for wind and solar in 2030.
Between 2020 and 2030, investments in new oil and gas fields are expected to cumulatively
reach more than USD 4.2 trillion. Preventing investments in any oil and gas fields beyond
those already under development is essential to limiting temperature rise to 1.5°C, and could
additionally free up a significant sum of capital required to fill the wind and solar investment
gap. In other words, the problem is not a shortage of available capital, but rather that existingenergy investment is going to the wrong places.
The global investment gap provides useful guidance to assess the scale of measures required
to mobilize adequate means to implement the energy transition. However, the enabling
investment policies necessary to enable mobile capital flows toward renewables are generallyintertwined in national and regional circumstances. It is therefore important to also assess theregional investment needs and gaps to facilitate channelling capital to where it is most useful.
The regional disaggregation of global investment needs reveals crucial insights into the stateof the energy transition across different parts of the world. Based on the median of selected
IPCC 1.5°C pathways, a regional comparative assessment of the forecasted cumulative and1.5°C-compatible investments in wind and solar between 2022 and 2030 is shown in Figure
3.8. The figure illustrates the relative investment needs and regional investment gaps for five
IPCC regions until the end of the decade.

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Navigating Energy Transitions

Notably, it shows that more than two thirds of the total wind energy cumulative investment
needs are located in Asian economies (excluding Japan); this accounts for just over 70% of thetotal USD 385 billion investment gap for wind technologies globally. Accordingly, about USD
1.2 trillion is required just for the installation of wind farms in Asia alone by 2030, based on
the 1.5°C-consistent IPCC pathways assessed in this report. However, the highest increase
necessary to fill the regional gaps is situated in Latin America and the Middle East andNorth Africa, with 45% and 55% investment growth respectively required to deploy the windcapacity aligned with 1.5°C pathways.
In terms of investment needs for solar capacity deployment, the OECD and EU countries
have the largest gap, with more than USD 330 billion of additional investment needed by
2030. However, the largest share of total investment still needs to occur in Asian countries
except Japan. While the countries of the former Soviet Union account for the smallest shareof total required investment, this region also has the most growth to achieve over the coming
decade, with investment levels expected to be 10 times under the estimated need.
Figure 3.8 Regional cumulative investment needs for wind and solar, 2022–2030
WIND
Asian countries
except Japan
OECD90 and EU (and EU
candidate) countries

1.5°C
consistent

Latin American countries

Forecast
Middle East and Africa
Former Soviet Union
0

200

400

600

800

1,000

1,200

1,400

USD billion
SOLAR
Asian countries
except Japan
OECD90 and EU (and EU
candidate) countries

1.5°C
consistent

Latin American countries

Forecast
Middle East and Africa
Former Soviet Union
0

200

400

600

800

1,000

1,200

1,400

USD billion
Source: Byers et al. (2022).

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Governments have a critical role to play in creating an enabling environment through regulatory
frameworks and fiscal reforms for investments to flow away from fossil fuels and toward
renewables. Globally, fossil fuels receive subsidies of USD 370 billion per year, while renewableenergies receive only USD 100 billion (Bridle et al., 2019). Addressing these imbalances would
significantly change the economic and incentive structures in the energy sector.
Moreover, mobilizing the vast amounts of capital presented in this chapter into the energy
transition will require redirecting investments by the financial sector. The IPCC’s latest
assessment report observed that the 60 largest banks have provided USD 3.8 trillion to fossil
fuel companies since 2016 (IPCC, 2022). As chapter 5 will show, financial institutions’ netzero strategies are currently inadequate to effectively align with the Paris Agreement targets.
This can be partly attributed to corporate net-zero targets’ lack of transparency, coverage, andinadequate use of scenarios.

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4.0
The War in Ukraine and the
Geopolitics of Energy Transitions

Navigating Energy Transitions

Key Insights•

The war in Ukraine has caused a further tightening of global gas markets, forcing
Europe to seek new sources of gas provision, both in the form of liquefied naturalgas (LNG) and gas pipeline expansion. This “dash for gas” bears medium- to longterm consequences, both for Europe’s ambition to reach the 1.5°C goal and forother countries, especially developing ones, where the construction of new gas
infrastructures is being planned.

•

Four main alternatives to gas in Europe have emerged in recent debates:
significant demand reduction and gas savings; fuel switch to alternative energy
carriers; a strong uptick in investment in renewables and the energy transition;
and a change in the EU gas market model, carrying possible effects for an
emerging green hydrogen market.

•

New risks of derailing energy transition plans in many parts of the world, atleast in the short term, have emerged in the context of the war. However, in thelong term, the cost-competitiveness of renewables continues to increase. Key
concerns relate to supply chain disruptions, which are putting an unprecedented
strain on the renewables industry, especially as policy instruments continue tofocus on compressing prices. The design of renewable competitive procurement
mechanisms and power markets have now resurfaced as ever-pressing needs.

•

Developing countries face great challenges in the context of the global energy
transition. To tackle such challenges, these countries need to abandon fossil
energy and leapfrog toward renewable energy in an equitable and just manner.
This would not only be compatible with tackling the ongoing climate crisis but
also unlock the continent’s human and economic potential.

4.1 The War in Ukraine and the Dash for Gas
4.1.1 Current Dynamics in the Global Gas Market
Since the second half of 2021, global gas markets have been tightening due to the combinationof a strong post-COVID-19 economic recovery, extreme weather events, and unplanned
supply outages. Europe, having fallen at the centre of these considerable market tensions,has entered the 2021/22 heating season with storage inventories well below average, just as
Russian pipeline flows have registered a sharp 25% year-on-year drop in the last quarter of2021 (International Energy Agency [IEA], 2022c).
The Russian Federation’s invasion of Ukraine in February 2022 further exacerbated suchmarket uncertainty and price volatility (see Figure 4.1). In many markets, higher gas prices
have had significant knock-on effects on fertilizer, food, and electricity prices. In response to
the war, the United States, the European Union, and others have imposed economic sanctions
against the Russian Federation and have announced plans to phase out their reliance on
Russian energy supplies.

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Figure 4.1 Wholesale gas prices in key markets since 201860
Europe

USD/MMBtu

50
40
30
20

Japan

10

USA

0
2018

2019

2020

2021

2022

Notes: Prices are monthly average wholesale prices. Gas price for Europe: Title Transfer Facility (TTF).
Gas price for the United States: spot price at Henry Hub. Gas price for Japan: LNG import price, cost,
insurance, and freight (CIF); recent two months’ averages are estimates.
Source: World Bank (2022).

Cutting energy ties with the Russian Federation will be particularly hard for the European
Union. In 2020, imports from the Russian Federation satisfied 41.1% of the bloc’s natural
gas needs, with some member states such as Germany being even more dependent (Eurostat,2022). The volume of imported fossil gas from the Russian Federation in 2021 was 155 billion
cubic metres (bcm). The REPowerEU Plan, adopted on May 18, 2022, aims to curb importsof Russian gas by around two thirds by the end of 2022 and end them by 2027.
Recent sharp cuts in PJSC Gazprom’s pipeline gas deliveries to the European Union haveraised alarms about winter supplies and the huge economic and human costs they may haveon industry and households, especially fuel-poor ones. As a result of the cuts, gas prices
have skyrocketed in Europe, leading to demand destruction, fuel switching (gas-to-coal),
and record imports of LNG. In the first half of 2022, EU imports of LNG rose by 28 bcm
compared with the same period a year earlier (Figure 4.2).
The rapid untangling of the decades-old natural gas trading relationship between the RussianFederation and Europe will impact global supplies. The Russian Federation is still the world’s
largest gas exporter, (IEA, 2022c) and its scope to divert natural gas exports to other countries
is limited by a lack of infrastructure. The Russian Federation supplied just over 30 bcm of gas
to Asia in 2021, compared with 155 bcm of gas exports to the European Union. It will takeat least a decade for the Russian Federation to scale up its gas exports to Asia to match the
pre-war export levels to Europe (see Figure 4.3). Whether it will actually achieve that goal isuncertain as it requires developing new infrastructure while under sanctions as well as forging
supply agreements with new customers.

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Figure 4.2 EU natural gas imports by source
10

9

8

7
Total natural
gas imports

Bcm

6

5

4

3

LNG imports
Imports from
Norway2

Imports from
RussiaImports from
Algeria

10Imports fromminor routes
2020

2021

2022

Notes: Gas imports are weekly data, from January 1, 2020 to August 14, 2022. “Russia”, “Norway”, and“Algeria” only denote pipeline imports. “Minor routes” includes imports from Azerbaijan and Libya.
Source: McWilliams, Sgaravatti and Zachmann (2021).

Little spare capacity exists in other countries to produce or export natural gas or LNG, anddeveloping new reserves and infrastructure experiences long lead times. It usually takes 3–5
years to build new LNG plants after taking a final investment decision (Rozansky, 2022),
while it can take even longer for developing new (conventional) gas reserves (Darko, 2014).

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Figure 4.3 Estimated time needed for the Russian Federation to shift its gas exports
to Asia
180
LNG
160
G

140

B

Bcm/year

120
A

100

Pipelines and
LNG gas terminals
G Arctic T2&3

80
60

F

F Arctic T1

E
B

E Redirecting LNG
D YamalLNG

A

40
20
0

Piped gas

C Sakhalin 2D

B Far eastern routeC

A Power of SiberiaA

Current
exports
to the EU

Current
exports
to Asia

2025

2030

Potential future exports to Asia

Source: IEA (2022e).

4.1.2 The Dash for Gas
Government reactions to the Russian energy shock of 2022 could determine whether they set
themselves on a path toward 1.5°C or lock in carbon-intensive infrastructure. While European
governments have reasserted or even accelerated their decarbonization plans in the immediatewake of the Russian invasion, the worsening energy crunch has compelled them to resort toemergency measures that focus on addressing short-term energy supply needs rather thanlong-term needs to reduce emissions.
This is especially apparent in a wave of new plans to boost LNG import capacity in Europe,
including expansions of operating terminals (see Figure 4.4). In the first months since theRussian Federation’s invasion, an estimated 150 bcm/year of newly proposed or revived
LNG import projects was announced (Aitken, Langenbrunner and Zimmerman, 2022). Thisequates to a total operational capacity to receive and regasify LNG at 160 bcm/year as of April
2022 (Gas Infrastructure Europe, 2022). Offshore terminals, also known as floating storage
and regasification units (FSRUs), have become popular due to the advantages they carry interms of permit requirements, lead time, and cost.

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Figure 4.4 Europe’s LNG rush since February 2022
Germany
Italy
GreeceNetherlands
Spain
EstoniaUK
Croatia010Offshore

20
Onshore

30

40

50

60

70

Bcm/year

Notes: Breakdown of new planned LNG import capacity additions, including expansions of existingterminals, since February 2022. Offshore capacity covers FSRUs, floating storage units and floating
regasification units.
Source: Global Energy Monitor (2022a).

These LNG plans often receive government backing. In Germany, which currently has no
LNG terminal, the federal government has adopted the LNG Acceleration Act to fast-trackthe development of new LNG infrastructure (German Federal Government, 2022). The
REPowerEU Plan entails EUR 10 billion of investment in new gas infrastructure by 2030
through the Projects of Common Interest framework (European Commission, 2022a).
The LNG rush is not limited to Europe. Some countries with large gas reserves view thecurrent geopolitical crisis as an opportunity to expand their gas export infrastructure. In the
United States, for example, the Federal Energy Regulatory Commission has already picked up
the pace in approving projects related to LNG (Shaykevich, Bernhardt and Bird, 2022). Other
major LNG exporters such as Qatar are considering boosting export capacity (Foxman andStapczynski, 2022).
The war and high gas prices have also fuelled renewed momentum to develop and expand
LNG terminals in Congo, Mauritania, Tanzania, and Senegal – countries that do not currently
export LNG (IEA, 2022b; Ng’wanakilala and Dausen, 2021). Similarly, Canada, which does
not have LNG export terminals, is in discussions with European countries about eventually
supplying them with LNG and is considering fast-tracking new LNG projects (Tuttle, 2022).
The dash for gas is not limited to LNG but also includes pipelines. In February 2022, Nigeria,
Niger, and Algeria signed an agreement to restart the development of the previously dormant
Trans-Saharan pipeline. In early June, the Government of Nigeria approved the plan tobuild an offshore gas pipeline via the West African coast to Morocco (Africa News, 2022).
Europe’s push to diversify gas supplies has revived plans for the construction of the EastMed

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gas pipeline, linking the Eastern Mediterranean to Greece and the rest of south-east Europe(Michalopolous, 2022).
There has also been a flurry of new gas import deals. More than 23 million tonnes per year of
LNG export deals have been signed in the first half of 2022 (Wood Mackenzie, 2022), with
Chinese buyers dominating the market on the demand side (IEA, 2022e, p. 38) and UnitedStates companies dominating on the supply side (Paul, 2022). Germany signed a long-term
import contract with Qatar, with first shipments estimated for 2024 (Delfs, Nienaber andRatcliffe, 2022). Italian energy major Eni S.p.A. has signed import deals with Algeria, Angola,
the Congo, Egypt, Mozambique, and Qatar (News Wires, 2022; Rossi, 2022a), and Polishoil and gas company PGNiG has signed an LNG deal with U.S. energy firm Sempra Energy(Blake, 2022b).
EU officials have stepped in and concluded a host of political agreements to boost non-Russian
gas imports. On March 25, the Biden Administration announced that it would ensure deliveriesof an additional 15 bcm of LNG to the European Union in 2022 (White House, 2022a). In
mid-June, the European Union signed a memorandum of understanding with Egypt and Israel
to boost LNG supplies to Europe (Euractiv, 2022b). On July 19, the European Union also
signed a deal to double gas imports from Azerbaijan from 2027 (Euractiv, 2022a).
Some countries cite the European gas crisis as an incentive to develop or grant permits to newgas reserves, including Algeria, Norway (Adomaitis, 2022), and Azerbaijan (Griffin, 2022).
In general, total upstream oil and gas investment is set to rebound by 10% in 2022 comparedwith the previous year (IEA, 2022f). The (announced) exits from the Russian Federation of oil
majors such as BP, ExxonMobil, Shell, and Equinor could see them refocus on developing andpotentially fast-tracking their natural gas projects in Africa, including LNG projects, whichwere previously shelved (Table 4.1) (Rystad Energy, 2022a).
Table 4.1 Major African natural gas projects that may accelerate

Project

Country

Operator

Final
Investment
Decision*Rovuma LNG Phase
1–Mamba South(Area 4 LNG–T1 &T2)

Mozambique

ExxonMobil

2024

2028

2,330

Bir Allah(x-Marsouin) & Orca

Mauritania

BP

2030

2035

2,180

Yakaar–Teranga LNG

Senegal

BP

2030

2034

1,245

Tanzania LNG T1(Block 1 & 4)

UnitedRepublic of
Tanzania

Shell Plc

2026

2031

780

Ethiopia-Djibouti
LNG T1 (Calub &Hilala Phase 2)

Ethiopia

Poly GCL

2030

2033

500

Start-up*

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Project

Country

Operator

Final
Investment
Decision*

Quiluma/Maboqueiro(Northern Gas
Complex)Angola

Eni

2023

2026

425

Coral FLNG Phase 2

Mozambique

Eni

2028

2030

400

Djibouti FLNG
(Calub & Hilala
Phase 1)

Ethiopia

Poly GCL

2025

2029

355

OML 13 (NLNG
Seven Plus)

Nigeria

NPDC

2025–2028

2028–
2030

335

OML 18
Redevelopment(NLNG Seven Plus)

Nigeria

Eroton

2024

2025

330

HI-1

Nigeria

Shell Plc

2023

2027

265

Fortuna FLNG

Equatorial
GuineaLukoil

2024

2028

260

Uzu (NLNG Seven
Plus)

Nigeria

Shell Plc

2023

2026

140

Touat Phase 2(Skikda LNG)

Algeria

NeptuneEnergy

2023

2026

135

UTM Offshore FLNG

Nigeria

UTM
Offshore
Ltd.

2024

2027

135

Equatorial Guinea
LNG T1Equatorial
GuineaMarathonOil

2025–2028

2027–
2030

110

Start-up*

Resources*(MMboe)Note: *conservative estimates.
Source: Rystad Energy (2022b).

4.1.3 The Geopolitical and Climate Consequences of Europe’s Dashfor GasEurope’s hunt for energy carries profound implications for geopolitical allegiances, energy
security in developing and emerging economies, as well as the world’s ability to meet the Paris
Agreement’s climate goals. One of the consequences of the war is the renewed geopoliticalimportance of the Mediterranean and African regions, now perceived as central to the EU’s
energy security. Europe’s hunt for gas supplies could squander its previous efforts to foster
green partnerships with its southern neighbours. It could also lead to new equilibria within
the European Union as southern member countries such as Italy and Spain try to position
themselves as new gas hubs, shifting the balance of Europe’s energy security from the East

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to the South. At the same time, we see closer fossil fuel-based ties between Europe and theUnited States. Since June 2022, the United States has been sending more gas to Europe
than Russia (Shiryaevskaya, 2022a).
Europe’s gas diversification efforts do not eliminate security of supply risks. In late 2021,
for instance, the Maghreb–Europe gas pipeline was shut down due to a diplomatic dispute
between Algeria and Morocco. A few months later, Algeria threatened to cut gas supplies
to Spain if the latter re-exported the gas to Morocco. In September 2022, fighting erupted
between Azerbaijan and Armenia, complicating the EU’s ambitions to increase its importsof Azerbaijani gas. Several current or prospective gas exporters in Africa are struggling withdomestic stability, notably Mozambique where oil major TotalEnergies SE had to withdraw its
staff from an LNG project in 2021 due to the deteriorating security situation.
Another clear side effect of the EU’s dash for gas and the war in Ukraine is that emerging
and developing countries are increasingly being priced out of the LNG market. Since thelast quarter of 2021, and continuing in 2022, buyers in emerging nations such as Pakistan,
Bangladesh, Thailand, and Argentina have struggled to attract LNG imports (Stapczynski,
2022; Stapczynski and Koh, 2022). In July 2022, a USD 1 billion LNG purchase tenderfrom Pakistan did not receive a single offer (Stapczynski, 2022). While some developing
countries such as Bangladesh have resorted to cutting off their electricity supply for parts ofthe day, others like India have resorted to using more coal. In some cases, LNG cargoes thatwere due to developing countries have been diverted so as to profit from surging prices in
Europe, even if suppliers are forced to pay penalties under contracts with developing nations(Shah and Hirtenstein, 2022). FSRUs that were recently chartered by Senegal (since
May 2021) and Ghana (since January 2021) to import LNG have yet to receive their firstcargoes. Similar LNG import projects planned in Côte d’Ivoire and Benin have been put on
hold (IEA, 2022e, p. 48).
In Asia, gas was long viewed as a bridge fuel between coal and renewables, but due to thecurrent price shock, that bridge may be shorter and narrower than originally thought. The
project pipeline shows that demand for LNG from emerging economies in Asia is set to increaseby around 22 bcm, including from new entrants into the LNG business such as Vietnam and
the Philippines, where new LNG terminals are set to come online in 2022 (Reynolds, 2022).
As neither of them has signed long-term contracts, they will need to compete with Europe andnorth-east Asia for limited spot cargoes in the years ahead (IEA, 2022e, p. 43).
Even though the outlook for LNG demand might have shifted since February 2022, countries
that plan to build new LNG terminals face several risks, including delays, cost overruns,
outages, and a more competitive and potentially shrinking market in the medium term (Plante
and Nace, 2021). In all scenarios analyzed in chapter 3 of this report, gas production needs todecrease sharply between 2025 and 2050 (by 34% according to the selected Intergovernmental
Panel on Climate Change [IPCC] 1.5°C pathways assessed in this report; by 85% according
to the Bloomberg New Energy Finance net-zero scenario; and by 100% according to the One
Earth Climate Model scenario). This equally holds for LNG trade. For the world to have a
50% chance of limiting global warming to 1.5°C (Figure 4.5) (IEA, 2021a), IEA’s Net Zero
Emissions by 2050 (NZE) scenario projects that there needs to be a 60% decline in natural gas
traded as LNG between 2025 and 2050, as well as a 65% decline in trade by pipeline.

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Figure 4.5 LNG exports (billion cubic metres) in the IEA’s net-zero scenario
500

LNG exports (Bcm)

400

Other
Africa300

Middle East

200

Southeast
Asia
Australia

100

0
1971

RussiaNorth
America
1980

1990

2000

2010

2020

2030

2040

2050

Source: IEA (2021a).

New fossil gas infrastructure such as LNG terminals and pipelines can considerably impact
climate goals. Burning natural gas eventually generates carbon dioxide, but levels of methaneleakage along the entire natural gas value chain have long been underestimated. Moreover,once capital is locked in, the resulting emissions will be locked in as well, or the projects will
become stranded assets (Kemfert et al., 2022).
An exception might be FSRUs, which have become very popular in north-western Europe
because of the considerably shorter lead times compared with onshore terminals. These
units have fewer lock-in risks as they can be chartered for shorter periods. However, there
are only 5–10 FSRUs available to Europe in the short term (Dempsey, 2022; European
Commission, 2022b).
Policy-makers claim that new natural gas infrastructure will be able to handle green fuelssuch as hydrogen or derivatives (e.g., ammonia) in the future (White House, 2022b). Yet,when it comes to new onshore LNG terminals, major questions remain about the technicalfeasibility and business case of doing so (except, of course, imports of synthetic methane)(Shiryaevskaya, 2022b). Natural gas pipelines can theoretically be repurposed to hydrogen if
they are built using steel that has a low susceptibility to hydrogen embrittlement. However, at
this stage, the cost efficiency of transporting hydrogen through pipelines, especially over long
distances, remains unclear.
Figure 4.6 shows European gas consumption in the median IPCC 1.5°C pathway and in the
IEA’s NZE scenario. These lines are superimposed on shaded areas representing the various
sources of gas supply, both European production and import infrastructure. Assuming Europe
reduces gas demand in line with 1.5°C pathways, the existing supply is sufficient without
Russian imports, except for a short-term potential supply crunch in 2022/23.
Research by Artelys (2022) and Brown (2022) has shown that Europe can meet its energy
needs while reducing its dependence on Russian supply through accelerating renewable

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energy, energy efficiency, and electrification, without new gas infrastructure. Our analysis adds
that not only can Europe do so, but also it must do so to align with 1.5°C pathways. Indeed,as with global oil and gas production, building additional supply would lead either to Europe
exceeding 1.5°C aligned gas consumption or to stranded assets.
Furthermore, additional production commonly takes 2–3 years from final investment decision,and 5–10 years from the award of new licences, while construction of new pipelines or LNG
terminals takes several years even after permits are awarded (which itself can also take years).
Therefore, neither additional infrastructure nor production can address the near-term supply
crunch, as no meaningful infrastructure can be built in that time, making new production andinfrastructure unsuitable solutions.
Figure 4.6 Europe gas consumption and supply, bcm/year

Europe gas consumption (Bcm/year)

800
Europe 1.5°Caligned gas
consumption

700
600

Russia gas supply

500
400

LNG
(80% utilization)

300

MENA pipelines(90% utilization)

200

Azerbaijan
existing fields

100

Europeexisting fields

0
2020

2025

2030

2035

Note: MENA: Middle East and North Africa
Source: Author’s calculations, based on BP (2022b); Byers et al. (2022); Global Energy Monitor (2022a);
Rystad Energy (2022b); European Commission (2022c).

However, does the current infrastructure exist in the right places in Europe? This is still an
open question and one that would require more in-depth investigation, which is outside of thescope of this report.

4.2 Alternatives to Gas in Europe
In policy debates, four elements emerge as central regarding alternatives to gas in Europe:
significant demand reduction and gas savings; fuel switch to alternative energy carriers; astrong uptick in investment in renewables and the energy transition; and a change in the EU
gas market model, with possible effects for an emerging green hydrogen market.

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4.2.1 Gas Savings
Demand reductions have become central in EU policy debates to weather potential gas
shortages in the winter of 2022–23, and to avoid rationing. The European Commission
estimates that Europe will need to save some 45 bcm of gas over the heating period of fall
and winter 2022–23 in case of a Russian supply cut. To that end, and based on a European
Commission proposal, the Council agreed in July 2022 on a gas-saving target of 15%, effective
between August 1, 2022 and March 31, 2023. Demand reduction is voluntary, and countries
are free to choose their respective policy instruments. However, should countries miss theirtargets – that is, in the event of a “Union alert” (Council of the European Union, 2022) – theEuropean Commission can take coercive measures.
Gas-saving needs will be uneven across the European Union. According to estimates,
Germany’s reduction needs may be up to 30% compared with its consumption in previous
years, whereas the Netherlands could continue without savings. Countries such as Hungary or
Bulgaria may even face saving needs of up to 50% (McWilliams and Zachmann, 2022a).
Governments are by and large heeding the call, but many are moving slowly, some areresisting, and others, such as Hungary or Spain, have even rejected the EU’s gas-saving
plan. Differences in the national policy measures that are in place reflect the realities of acountry’s respective energy mix and energy systems, but essentially centre around encouraging
households, businesses, and industry to enhance savings and conservation. For example,
France and Spain reportedly require stores to close entry doors to avoid wasting energy in air
conditioning and heating. Efforts also centre on enhancing short-term savings in heating, withdiscussions in Germany focusing on changes in landlord and tenant law.
Lowering the indoor temperature may, in fact, yield annual energy savings estimated at 10
bcm per degree across Europe (IEA, 2022a), equivalent to one fifteenth of the 2021 Russian
gas imports. Because much of the household-level efforts will need to remain voluntary,observers have pointed to the need to using soft policy tools, such as nudging, to achieve gassaving targets (Neuhoff et al., 2022).
Mid- to long-term efforts include supporting energy efficiency measures in the building stock,installing heat pumps, and fostering district heating systems less dependent on natural gas.
For example, the Government of Germany set the target of 500,000 new heat pumps per
year from 2024 onward, at which point the new heating systems must rely on at least 65% ofrenewables. In fact, sales of heat pumps went up by 25% in 2022, signalling an increase in theappeal of non-gas heating infrastructure in housing.
As far as industry is concerned, European corporations had already reacted to a highprice environment prior to the war in Ukraine, and reduced demand by approximately 7%(McWilliams and Zachmann, 2022b). The prices of gas futures at the Dutch virtual trading
point TTF suggest that the tight market environment will continue well into 2023, arguably
further incentivizing industry-level efficiency measures and conservation/savings. There isroom for additional policy measures, such as the auctioning system proposed in Germany(Dezem and Wilkes, 2022). However, there also are limits as to how much companies can
save. Unsustainable price levels may eventually mean economic contraction and closure ofindustrial operation.

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Figure 4.7 TTF price development, Natural Gas Forward Day Ahead, USD per metric
million British thermal unit
60

USD/MMBtu

50
40
30
20
10
0
July 2020

January 2021

July 2021

January 2022

July 2022

Source: Nasdaq (2022).

4.2.2 Fuel Switch to Alternative Energy Sources and Carriers
Alternatives to gas in Europe include a switch to other fuels, both fossil and renewable. In
reaction to tightening gas markets and facing a potential supply shortage, European industry
has sought to replace natural gas with coal or oil in industrial processes. For example, thechemical sector has in part turned to steam generators running on oil, as have parts of theglass industry (Blas, 2022). Coal regained prominence in power generation, thanks to its
flexibility in production, which holds particular importance in countries with higher shares of(more volatile) renewable electricity. Discussions also emerged around prolonging runningplants (Germany) or building new ones (Poland) to replace gas in the power sector.
There are, however, limits to fuel switching. Some industrial processes – notably heating – are
not as efficient when compared with alternative fuels or carriers such as electricity. Moreover,both oil and coal markets are strained as well, and when the Western oil embargo against
the Russian Federation is fully implemented, crude prices may surge even further. Nuclear
power hardly presents a short- to medium-term solution, given its construction times of 10 ormore years, in addition to the difficulties of delivery it faces (half of France’s nuclear reactors
were down in 2022). Climate change places additional limits on alternative fuels. During
the summer of 2022, exceptional drought forced a nuclear power plant in France to halt its
operations, and in Italy as well as other regions, hydropower proved to be vulnerable to climate
impact. Finally, a fuel switch to fossil energy sources bears the risk of delaying the green
industrial transformation.
In this context, hydrogen has emerged as a possible solution for European industry,
particularly when it comes to process heat. The REPowerEU Plan singles out greenhydrogen as a means to replace Russian gas (European Commission, 2022b). Indeed, allleading European economies have put in place hydrogen strategies, although with varying
characteristics and targets (Lambert and Schulte, 2021), as has the European Union. Yet, it
is fair to assume that home-grown green hydrogen will not suffice to cover the EU’s needs,

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and 10 million tonnes of renewable hydrogen imports may be required by 2030 according
to REPowerEU. Green hydrogen partnerships are taking shape, such as Germany’s August2022 agreement with Canada, which is expected to yield 500,000 tonnes of green ammonia
by 2025 (Parkes, 2022). The European Union is also enhancing its cooperation with North
African countries, such as Morocco and Egypt, with a view to creating a Mediterranean greenhydrogen partnership.
However, the question remains open as to whether sufficient partnerships will be in place andoperational to cover additional demand as part of a timely fuel switch, as well as the degree
to which green hydrogen can decarbonize industrial processes in the short term and at scale.
Arguably, green hydrogen will not present a solution to the present crisis, as the volumes
needed will not come through within the necessary time frame.

4.2.3 Fostering Investment in Renewables and the Energy Transition
In the wake of the Russian Federation’s invasion of Ukraine, European governments as wellas the European Commission were quick to stress the need to ramp up renewable energy
capacity to replace gas imports from Russia, and fossil fuels more generally. Though theimpact of current efforts will not necessarily be immediate (and are more likely to be mediumto long-term), the war in Ukraine indicates that there is the potential to significantly accelerate
the EU’s energy transition. This is a function of national and EU-level policy efforts to foster
renewable energy projects, infrastructure, and related investment.
To that end, European governments have mobilized significant amounts of public funds.
Germany, for example, pledged more than EUR 200 billion by 2026 for sustainable industrial
transformation (Reuters, 2022c), while France announced incremental spending of EUR 6
billion to the same end (Euractiv, 2022a), in addition to an earlier EUR 30 billion of COVID19-related green recovery measures. Other European countries also earmarked significant
public funds. These national-level spending efforts come in addition to various billion-eurofunding lines set up at the European level, made available as part of the European Green
Deal and the EU’s Global Gateway initiative. Notably, a EUR 300 billion investment planin renewables and decarbonization has been announced as part of REPowerEU, which alsoentails a solar energy strategy aimed at boosting installed capacity.
However, not all of these pledges may materialize, and it remains unclear whether grandpolicy plans will lead to renewable energy infrastructure within a reasonable time frame.
Supply chain bottlenecks may impede rapid renewable energy project implementation anddeployment, and though the REPowerEU Plan entails a permitting initiative, notoriously slow
processes (particularly in Germany but also other European countries) must be significantly
accelerated. Further, not all these pledges represent new money, but rather reshuffled budget
positions. Some of the national-level funds may even be diverted to buffer socio-economic
hardship, potentially in the form of transfers to households and companies amid soaring
energy bills, thus avoiding any changes to the European energy system.
Nevertheless, there are determined policy efforts that presently couple with significant publicfunds, which may eventually enable the structural breaks needed to put the European energy
system onto a sustainable pathway. These measures have emerged against the backdrop of

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the EU Fit for 55 (FF55) package and the EU Green Deal (see box 1). Some observers
have argued that the present crisis and the ensuing policy measures may help achieve thedecarbonization targets ahead of schedule. Section 4.3 explores the impacts of the current
geopolitical situation and its prospects for renewables deployment in depth.

Box 1. EU FF55 package and European Green Deal
The FF55 package is a comprehensive set of policy measures aimed at cutting European
CO2 emissions by at least 55% by 2030. It includes, among other measures, a revisionof the Renewable Energy Directive to increase the share of renewables in the EU energy
mix to at least 40%; an envisaged revision of the Energy Efficiency Directive to increase
the efficiency targets to 36% and 39% for final and primary energy consumption,
respectively; and a Just Transition Fund aimed at alleviating social hardship.
For some industries and sectors, such as the automotive sector, emissions will need toachieve a 100% reduction by 2035. The FF55 package is part of the European Green
Deal, which sets a binding target of climate neutrality by 2050. Approved in 2020, theEU Green Deal comprises a set of initiatives aimed at fostering a resource-efficient,circular economy, a clean energy sector, and a sustainable approach to finance, mobility,
and agriculture. To that end, the EU Green Deal aims to achieve the circular economy
and decarbonize the European economy into a sustainable model based on resourceefficient production.

4.2.4 A Looming Change in the EU Gas Market Model?
The war in Ukraine has triggered debates around the design of the EU gas market, andwhether it will stand the test of the new geopolitical realities. Taking a leaf from the liberal
playbook, the EU gas sector had been an integrated and (largely) privatized market since
the late 1990s (Goldthau and Sitter, 2015). The basic idea of using market competition forenhancing consumer benefit worked well in a market with ample global supply. Once market
started tightening, it cast concerns over the EU gas market amounting to a fair-weather
phenomenon, and whether it warranted a rethink. Indeed, various policy measures adopted
in 2022 already seek to correct some of the incentive problems entailed in the EU gas market
model. For example, mandatory EU-wide refilling targets19 have become better at ensuring
sufficient gas storage regardless of other market circumstances (European Parliament andCouncil of the European Union, 2022).
There also are moves toward a much stronger public ownership of energy infrastructure.
Germany has stepped in and seized control of the national retail subsidiary of PJSC Gazprom,
the Russian natural gas supplier, and by extension of storage facilities (Moussu, 2022). The
Netherlands and the United Kingdom are considering similar steps (Cyrus, 2022; Tan, 2022).
When it comes to gas purchase, States are also resuming a stronger role. For example, Berlin

Mandatory EU-wide storage refilling targets have been set to 85% by October 1, 2022 and 95% by November
1, 2022.
19

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mandated the German Trading Hub Europe – an entity set up by network companies – toprocure around EUR 1.5 billion worth of LNG for the German market (Reuters, 2022b).
In addition, steps have been taken to facilitate joint gas purchase to “secure the EU's energy
supply at affordable prices” (European Commission, 2022d). To that end, European leaders
established the EU Energy Purchase Platform. Currently a voluntary mechanism, theplatform ties into the European Commission’s REPowerEU Plan, seeking to give “support
to coordinated gas refilling operations, for example through joint procurement” (European
Commission, 2022f). A precedent for these efforts can be found in the early 2000s, when
the European Commission explored the option of establishing a joint purchasing vehicle
for Caspian gas supplies (IHS Cambridge Energy Research Associates, 2010), but the plan
faltered due to a lack of political support and practical impediments.
The debate on reforming the EU gas market model must also be seen in the context of soaring
electricity prices, which prompted discussions on revisiting the merit order principle in power
markets and would effectively result in delinking electricity prices from gas prices. It remains
to be seen whether all the above measures are mere reactions to the tight gas market situation
coupled with the economic fallout of the Russian Federation’s invasion of Ukraine, or whether
they amount to a veritable sea change in EU gas market design. However, it can be argued
that the EU’s approach to natural gas has stepped over from a liberal to a geo-economic
reading of supply matters (Goldthau and Sitter, 2020).

4.3 Implications for Renewables of the War in Ukraine
The war in Ukraine and the subsequent sanctions and gas situation threaten to derail energy
transition plans in many parts of the world, at least in the short term. On the one hand, fossil
fuel investments have become attractive again, following several years of low oil and gas prices,
and are being directed toward new countries to fill the shortage resulting from the sanctions
and consequent gas shortages. On the other hand, plans to phase out or phase down coal havebeen delayed to fill the energy gap in the short term.
However, the long-term impacts favour an energy transition based on renewable energy. This
crisis, like the past oil crises in 1973 and 1979, has brought energy security and independence
to the forefront of policy priorities, along with the urgency of tackling pollution and climatechange, as well as water and food security.
The debate no longer centres on whether renewable energy can fulfill those policy objectives,
especially as the cost-competitiveness of renewables has steadily increased compared withfossil fuels, and more so with the recent surge in prices. Instead, as the cost-competitivenessof renewables continues to increase, the debate has shifted toward mounting concerns thathigher costs and supply chain disruptions are placing an unprecedented strain on the industry,
especially as policy instruments continue to focus on constricting prices. As the crisis looms,
some of the most pressing structural changes needed, such as those related to the design ofrenewable competitive procurement mechanisms and power markets, have resurfaced.

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4.3.1 Energy Security and Independence at the Forefront of Policy
Priorities
Following the sanctions and consequent increase in global fossil fuel prices, some jurisdictions
moved to increase their energy independence and security alongside their reliance on
renewables. For instance, the European Commission announced the REPowerEU Plan in
March, in which they set the target of reducing gas imports from Russia by two thirds by theend of 2022, and entirely by 2030. The strategy focuses on three key topic areas: securing
non-Russian suppliers of oil and gas, improving energy efficiency, and expanding the useof renewable energy. The EU’s 2030 target for renewables would increase from the current
40% to 45% in the energy mix. The REPowerEU Plan would bring the total renewableenergy generation capacity to 1,236 gigawatts (GW) by 2030 (including 600 GW of solar
photovoltaics [PV] and 510 GW of wind), 15% higher than the 1,067 GW envisaged under
FF55 (European Commission, 2022a).
Germany has also increased its ambition, aiming to accelerate its shift to renewable power
while seeking a 100% renewable electricity supply by 2035. It is targeting 80% renewable
share in the power mix by 2030, including more than tripling solar energy capacity to 200 GW(up from 58 GW in 2021), doubling onshore wind energy capacity to 110 GW (from 56 GW
in 2021), and more than tripling offshore wind energy capacity to 30 GW (from around 8 GW
in 2021) (Renewable Energy Policy Network for the 21st Century, 2022).
Such ambitions are increasingly achievable with the cost-competitiveness of renewables,
especially compared with fossil fuels.

4.3.2 Increased Cost-competitiveness of Renewables Compared to
Fossil Fuels
Renewables were already more cost-competitive compared to fossil fuels prior to the 2021
increase in fossil fuel prices. Following the sanctions imposed in 2022, fossil fuel prices
increased further, making renewables more competitive, even with the slight increase in costs
observed in the past year, as discussed further in this section.
The global weighted average cost of newly commissioned renewable energy projects continued
its downward trend in 2021 (Figure 4.8), despite rising materials and equipment costs,
primarily due to the delay in these extra costs being passed on to total installation costs. In
many cases, the installed costs of projects completed in 2021 were based on prices that had
been locked in under contracts signed in previous years. As such, the impact of increasing
costs and prices is expected to be felt more strongly in 2022 and beyond. As shown in Figure
4.8, between 2010 and 2021, the global weighted average levelized cost of electricity (LCOE),
an indicator of the cost of producing electricity over a power plant’s lifetime, declined by 88%
for newly commissioned utility-scale solar PV projects, and by 68% and 60% for onshore andoffshore wind, respectively.

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Figure 4.8 Global weighted average total installed cost, capacity factor, and LCOE of
newly commissioned utility-scale solar PV, onshore and offshore wind, 2010–2021
Total installed cost
2021 USD/kW
6,000
5,000
4,000
3,000

Capacity factor
%
50

0.45

40

0.40

35

0.35

30

0.30

25

0.25

20

0.20

15

0.15

10

0.10

5

0.05

2,000
1,000
0
2010

2015

Levelized cost of electricity
2021 USD/kW

2020

Solar photovoltaic

0
2010

2015

2020

Offshore wind0
2010

Fossil fuelcost range

2015

2020

Onshore wind

Source: International Renewable Energy Agency (2022a).

Meanwhile, wholesale prices for gas (and electricity) increased substantially in some parts of
the world as COVID-19 lockdowns and restrictions were easing and demand was surging.
IRENA estimates that with the rise in gas prices in 2021, the new renewable capacity added in
2021 has the potential to reduce electricity generation costs in 2022 by at least USD 55 billion(IRENA, 2022c).

Cost-competitiveness Increased Further in 2022, Making the Case for
Renewables Stronger Than Ever
Following the sanctions and gas shortages, energy prices continued their upward trend. As
fossil fuels become more expensive in 2022, the impact on renewables becomes twofold.
First, renewables have become even more attractive as a more affordable and reliable sourceof energy. Second, there is an opportunity to channel windfall profits and additional revenues
made in the fossil fuels sector toward investments in renewables.
In August, the United Nations Secretary-General António Guterres urged governments toimplement windfall levies and to utilise the revenues to support vulnerable people and fundthe energy transition (Taylor, 2022). The United Kingdom’s Energy Profits Levy applies a
25% tax to profits that companies make from extracting British oil and gas. It is expected toraise around GBP 5 billion in its first year and increase investments in the energy sector, but it
remains unclear how these taxes will support the energy transition (BBC News, 2022).
In the Middle East and North Africa, high oil and gas prices are driving energy investments.
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related20 projects are projected to be exceeded. The region is expected to install around 20
GW of solar power over the next 5 years (Energy Connects, 2022). Moreover, higher petrol
costs are pushing consumers toward electric vehicles in countries where electrical vehicles
and the related infrastructure are already available (and affordable) such as the United ArabEmirates, a major oil-producing country.
Although the increasing cost-competitiveness of renewables has helped advance the case forrenewables and other energy transition-related technologies, there is a risk of backfiring. At
a time when investments in fossil fuels are marked by high returns, investments in renewableenergy technologies are becoming less attractive, and concerns are emerging about the
profitability of the industry in some markets.

4.3.3 Emerging Concerns Regarding the Profitability of the Windand Solar Industries in Some Markets
Although renewable energy showed resilience during the market disruption of 2020 and 2021,
dominating the capacities added globally in each year (Figure 4.9), the industry is facing themany challenges brought on by pandemic-driven supply chain disruptions, as well as the spikein energy and commodity prices experienced in the past couple of years. The war in Ukraine
has only exacerbated this.
More than ever, amid the high commodity and energy prices that are increasing the cost of
renewables, while the fossil fuel sector benefits from windfall profits, the renewable energy
industry is voicing its concerns regarding the continued focus of policy on reducing prices.
This continues to be used as the main metric to measure the success of renewable energy
procurement processes such as auctions, which are increasingly being awarded at a negative
price. At the same time, as with the COVID-19 crisis, the limitations of the current power
market design have resurfaced amid high energy prices.

20

Environmental, social, and corporate governance.

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Figure 4.9 Renewable share of annual power capacity expansion

Generating capacity (GW)

300
250
200
150
100
50
0

2001

2003

2005

2007

2009

2011

Renewable share of newly added capacity (%)

Increase in non-renewables

2013

2015

2017

2019

2021

2019

2021

Increase in renewables

100

80

60

40

20

0

2001

2003

2005

2007

2009

2011

2013

2015

2017

Source: IRENA (2022b).

Costs Have Increased but Competition Continues to Press for Low Prices
PV and wind supply chains have suffered delays in shipping and delivery of key components,
as well as rising prices for energy, shipping, raw material, and labour. The cost of shipping
renewable energy equipment and the prices for many of the raw materials used for theirproduction have been on the rise since the beginning of 2021. By March 2022, the price ofaluminum had doubled, copper had risen by 70%, steel had increased by 50%, and freightcosts rose almost fivefold (IEA, 2022g). The price of polysilicon reached USD 40 per kilogramin the first quarter of 2022, up from USD 6.80 per kilogram in 2020 (Fitch Solutions, 2022).
As such, the installation costs of wind and solar have increased for the first time, reversing the

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long-term trend of decreasing costs seen in the past decades. The IEA estimates the overall
investment costs of new utility-scale PV and onshore wind plants to be between 15% and 25%
higher in 2022 compared with 2020 (IEA, 2022g).
The costs of developing projects are on the rise, while developers had committed to prices inpreviously agreed contracts that are no longer feasible. In addition, renewable energy projects
are subject to higher financing costs as central banks tighten monetary policy in response to
the surging inflation, pushing up interest rates (Indo-Asian News Service, 2022). Meanwhile,bidders in auctions have to continue competing fiercely for projects and shrinking their profit
margins to potentially unsustainable levels.
The wind industry has been increasingly struggling, especially in Europe. All five European
turbine manufacturers are currently operating at a loss (WindEurope, 2022a). The solar
industry has also experienced challenges associated with logistics and trade wars that havecaused project delays and even cancellation, with hefty penalties on developers.21
Meanwhile, policy instruments for renewable energy deployment still focus on the price. The
use of zero-bid auctions, where renewable energy projects do not rely on any support andearn their revenues according to the market price of electricity, started a few years back. But
increasingly, even negative bidding is being utilized, whereby the developers are expected to
pay the government for the ability to sell electricity to the grid (while passing on these costs tothe consumers).22
Governments may be enticed to bring in revenues with negative bidding, but this has serious
repercussions on the industry as developers pass on additional costs to their suppliers, byfurther squeezing them for their equipment; and to their consumers, by further increasing
electricity bills. This is not helping the sustainability of the industry nor the political buy-inof consumers.

4.3.4 More Actions Needed to Speed Up Renewable Energy
Deployment
As the urgency of an energy transition based on renewables has increased, some governments
are taking concrete action to speed up deployment on the ground.

Interventions to Reduce Permitting and Licensing Delays
Permitting and licensing delays have long been reported as some of the main challenges
to renewable energy deployment, especially in Europe. The REPowerEU Action Plan
(European Commission, 2022f) sets out to address permitting hurdles that are impeding
the rapid deployment of solar and wind energy. The European Commission has provided

In the United States, Southern Co. announced that almost 1 GW of its planned solar energy projects could bedelayed by a year, due to supply chain issues in addition to possible new U.S. tariffs on imports of solar panelsfrom South-East Asia. NextEra recently announced it expected almost 2.8 GW of its solar and energy storage
projects to be pushed to 2023.
21

To address these issues, IRENA has put forward proposals such as the dual market, making long-term powerpurchase agreements the main pillars of the organizational structure instead of an exception (IRENA, 2022a).
22

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recommendations to tackle slow and complex permitting for renewable projects and has
proposed an amendment to the Renewable Energy Directive.
A new law placing renewables as “overriding public interest” – that is, their deployment can beprioritized on a case-by-case basis – has been proposed, together with recommendations andguidance on how permitting processes can be simplified. The proposal includes renewable goto areas that local governments should designate within a strategic environmental assessment
where projects must be permitted within one year. To help countries identify go-to areas, theCommission is making data sets on environmentally sensitive areas available as part of its
digital mapping tool for geographic data related to energy, infrastructure, and industry . In
addition, existing permitting deadlines of 2 years for new projects and 1 year for repowered
projects are kept, with clarifications provided on which procedures and permits must be
delivered within these timeframes (WindEurope, 2022b).

More Focus on Localizing Renewable Energy Value Chains
Recognizing the importance of energy security, countries are now making efforts to localize
their value chains to be more resilient to trade wars, political conflicts, and price volatility.
Deployment policies such as auctions are being tailored to these objectives, and other policies
that support the development of local industries are being implemented. Among otherstrengths, auctions can achieve objectives beyond price. Selecting winning projects based on
criteria other than price can support the development and sustainability of local value chains,
as in the first rounds in South Africa (IRENA, 2019).
Germany’s Offshore Wind Law (WindSeeG), for example, entails a two-track auction: onefor sites that state authorities do not pre-survey (and where uncapped negative bidding
is allowed), and another for sites that they do pre-survey. For the latter, two auctions arescheduled for June and August 2023, respectively, where the price criterion will account for
60 out of 100 points, and the remaining 40 will be based on the use of green electricity andgreen hydrogen in the manufacturing of wind turbines, a quota for training and education,
the finalization of a power purchase agreement, and the protection of nature and biodiversity
in the installation of wind turbines. The introduction of criteria beyond price was welcomedto account for the added value of wind energy, after having awarded bids solely on theprice until recently, which has strained the industry (Dickson, 2022). Discussions between
major European turbine manufacturers and the EU Industry Commissioner on how the EU
recovery money can support the supply chain and how the EU trade policy can support theircompetitiveness highlighted how renewable energy auctions should be indexed to inflation,and how they should move away from the price-only approach that has increasingly resulted innegative bidding, hurting revenues and feasibility (WindEurope, 2022a).
For solar PV, the need for localizing supply chains has emerged in key regions. Europe, India,
and the United States are all introducing plans and major incentives for vertically integrated
manufacturing at scales comparable to those already developed in China (Hutchins, 2022).
U.S. senators are proposing schemes, including tax credits for materials used to produce
United States-made solar products. One of the European Commission’s industry strategies,
the European Solar Initiative, focuses on developing the solar supply chain across the bloc
to reach an annual production level of 20 GW by 2025. Around EUR 8 to 10 billion would

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be needed, reflective of the EUR 8 billion trade deficit for solar energy (predominantly PV)
imported into the European Union. Incentives will be required to enable bigger market sharesof EU-manufactured solar products (Fitch Solutions, 2022).
While this section highlights some of the challenges for renewables expansion, it also shows
how policy design can be tailored to serve specific objectives and priorities and address
specific challenges to deployment. As shown in Figure 4.9, renewables have continued theirprogress in the past 2 years. But IRENA analysis finds that continuing on this path, if all 2030
targets announced to date are achieved, global installed renewable capacity would only reach
5.4 terawatts (TW) in 2030, less than half of what is required to stay in line with the 1.5°C
pathway, which is 10.8 TW by 2030 and 27.8 TW by 2050 (IRENA, 2022a). As such, a major
increase in ambition will be needed to put the world back on track.
As shown in section 4.3.2, countries and regions have already started raising ambition
to increase their energy security and independence. At the same time, there is a growing
realization that to achieve those objectives, policy instruments need to change their focus fromreducing price to sustaining the industry and supporting local supply chains. This shift in
focus would help achieve climate goals while creating value and maximizing socio-economic
benefits. Finally, international collaboration in terms of financing and technology exchange
will be essential to make the transition universal. In some countries and regions, the energy
transition will only materialize and achieve socio-economic benefits if the support and flow offunds from the Global North increase substantially.

4.4 Opportunities for Developing Countries to Leapfrog
Global South energy systems face great challenges within the emerging green global economy.
For instance, of the 770 million people that live without access to electricity, most reside in
Africa and Asia. The African continent faces the most acute forms of energy poverty in theworld. Approximately 630 million people do not have reliable access to electricity, and over
890 million people are forced to rely on solid biomass for cooking. Compounding thesechallenges is Africa’s vulnerability to climate change, which means that traditional pathways toincreasing energy supply, which rely on burning fossil fuels, are not feasible and sustainable.
There is a growing need for the Global South to co-create new energy systems for the future.
However, the absence of evidence-based research and analysis of the causes of low energy
access or the requirements of an energy transition is undermining key political action andinvestments needed to achieve the much-needed energy transition and enable energy access,especially for the millions of people that lack access. Actions informed by evidence are needed
to underpin the energy system of the future that will help the developing countries meet theirenergy challenges.
Countries in the Global South, and in Africa in particular, need to leapfrog toward renewableenergy in an equitable and just manner that abandons fossil energy such as gas, oil, and coal,and embraces clean energy that is not only compatible with tackling the ongoing climate
crisis but also capable of unlocking Africa’s hidden potential. Africa contains over 39% of
the world’s renewable energy potential. Shifting to 100% renewable energy sources – that is,ones that are just, affordable, and accessible to most Africans and are in line African values,

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while providing improved socio-economic conditions for populations living in energy poverty– will help improve livelihoods where sustainability thrives and grows alongside overcoming
underdevelopment and energy access.
The ongoing climate emergency is calling on Africa to urgently shift away from its dependence
on fossil fuel-based energy generation and transition toward a renewable energy future(African Climate Reality Project, 2021). The just transition to renewable energy has neverbeen more crucial, as Africa needs to immediately move away from further investments that
cement energy poverty on the continent and undermine its prosperity, all while exacerbating
the current climate emergency. This is even more relevant in the current context, where thedash for gas is spurring new or resumed fossil fuel projects in African countries, as outlined in
section 4.1.
Renewable energy provides Africa with a financially cheaper option in comparison to fossil
fuel-fired power options: 62% of added capacity in 2019 had lower costs than the cheapest
new fossil fuel-powered option (IRENA, 2021), while 56% of the hydropower projects
commissioned in 2020 had an LCOE lower than the cheapest new fossil fuel-fired cost option(IRENA, 2022c). In addition, reports indicate that fossil fuel-reliant countries could see adrop in revenue in the coming years as the entire world transitions to low-carbon renewableenergy sources. Leapfrogging to renewable energy would be a sustainable and eco-friendly
development strategy that may be achieved through adopting a fossil-free future that breaks
away from the fossil energy infrastructure that has largely been extractive, exploitative,
dominant, and unjust. The success of leapfrogging toward renewable energy could lead to a
democratically run and socially owned energy system for Africa and by Africa.
Leapfrogging has several forms, but Gallagher (2006) discusses leapfrogging using a termcommonly referred to as path-creating. Path-creating hints toward the idea of late adopters (inthis instance, countries in the Global South) exploring a new path of technology that divorces
itself from the path of initial adopters (Global North). “For instance, if Africa commits to andsucceeds in fulfilling universal energy access by providing the excess market demand withrenewable energy, the continent would become the leader in renewable energy access by shareof total demand” (Gallagher, 2006). This would fulfill Gallagher’s definition of leapfrogging
through path-creating. Key opportunities and barriers for leapfrogging are discussed in moredetail as follows.

4.4.1 Key Opportunities for Leapfrogging
Over 620 million people living in Africa do not have access to electricity, and over 900
million rely on traditional biomass for cooking (IEA, 2019). The demand for more energy has
been increasing and will continue to do so, particularly with the ever-increasing aspirationsof developing countries to develop and meet their socio-economic needs. However,many developing countries have the benefit of being latecomers in building foundational
infrastructure for development. This makes it easier for them to leapfrog to renewable energy
infrastructure and avoid the wasteful and destructive stages that characterized industrializationin the past.

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Improving Innovations in Renewable Technologies and Declining Costs
Advances in renewable energy technologies are making renewable energy competitive in priceand more attractive. The declining costs of renewable energy and improving renewable energy
technology and performance presents developing countries with opportunities to leapfrog
fossil fuels. (Deloitte, 2018). For instance, regions such as Africa contain abundant renewableenergy resources, and so, with improving technology and reducing prices, it is both technicallyand economically feasible for Africa to leapfrog to 100% renewable energy by 2030 and thus
avoid the mistakes made by richer countries during their development processes.

International Interventions, Partnerships and Cooperation
The existing instruments within the United Nations Framework Convention on Climate
Change provide the avenue to help developing countries leapfrog to 100% renewable energy if
properly implemented. Its international climate finance provides an entry point for increased
investment in initiatives that would help developing countries to enable renewable energy
access for much of the population living without access to energy. For instance, initiatives
such as Just Energy Transition Partnerships could help developing countries to leapfrog ifthey consider the element of avoided emissions rather than focus on reducing emissions (UNClimate Change Conference UK 2021, 2022).

Climate Action
The growing concern around climate change, which is disproportionately affecting developing
countries, provides an opportunity not only for developing countries to invest in renewableenergy to avoid emissions, but also to access affordable and sustainable energy for resiliencebuilding. Leapfrogging to 100% renewable energy presents developing countries with anopportunity to avoid carbon-intensive development pathways that are causing the climate
crisis, and also enable them to build resilience to the existing climate-induced challenges.
There is a potential to avoid up to 626 million tonnes of CO2 equivalent emissions over the
next decade, approximately equivalent to the annual emissions of 160 coal-fired power plants(Catalyst, 2021). Wind power and solar energy will reduce 97% of water consumption inelectricity generation. One drop of oil can contaminate 25 litres of water and make it nonpotable (Scott, 2016). To produce 1 megawatt per hour of electricity, wind power uses 1 litre
of water, solar power uses 15 litres, and coal uses 1,476 litres (Reve, 2020).
Energy is the backbone of the socio-economic development of any country. By leapfrogging
fossil fuels to renewable energy, developing countries especially in Africa will fulfill energy
deficiencies without damaging nature. Africa needs alternative energy development pathways.
A rapid rollout of renewable energy that is environmentally and socially appropriate as well as
people-centred provides African countries with the opportunity to address both the climate
crisis and energy access as well as to attain their development aspirations. Leapfrogging to
100% renewable energy will be important in enabling employment opportunities.

Job Creation
Leapfrogging to 100% renewable energy installation, operation, and maintenance offers
employment benefits over fossil fuels in Africa. The renewable energy sector has been shown

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globally to generate much higher employment than that of fossil fuels. The fossil fuel industry
creates 2.7 jobs per USD 1 million invested, whereas the clean energy sector (renewableenergy and energy efficiency) creates between 7.5 and 15 jobs per USD 1 million invested.
Africa’s distributed renewable energy industry therefore has the potential to create millions ofjobs in the continent, where job creation remains low.

Fostering Energy Access
Nearly half of all Africans still have no access to electricity in their homes. Leapfrogging to
renewable energy offers opportunities for African countries to enable universal energy access.
Decentralized renewable energy systems offer a faster and more affordable route to increaseenergy access, thereby further accelerating Africa’s economic growth. Mini grids using solar
and wind can not only power homes but also local hospitals, schools, businesses, and othercritical community resources.

4.4.2 Main Barriers to Leapfrogging
Public Participation
Inadequate public awareness and information barriers may hinder leapfrogging, especiallyin developing countries. The concerns surrounding public understanding of leapfrogging
processes, including information on the benefits of leapfrogging and renewable energy
technologies, may delay leapfrogging. Meaningfully engaging the public is very importantin leapfrogging fossil fuel, especially in developing countries such as Africa (Karakaya and
Sriwannawit, 2015). We need to bridge the growing knowledge gap so that the public canunderstand the issues around fossil fuels and the need for divestment from them. The main
narrative that must be shared includes the dangers of the climate emergency and how thetransition and leapfrogging toward renewable energy in a just and equitable manner cansolve a significant number of issues that have placed Africa in a precarious position regarding
sustainable development. There is a strong need to build an understanding about how
development can be achieved in a manner that does not bring harm to the environment and as
a result unlocks a just, equitable, and sustainable future.
The public, including multistakeholder participation, is closely linked to enabling stakeholder
abilities, building capacity, tapping into local knowledge, and creating spaces for sharing,which includes enabling awareness. An inadequately engaged public creates a barrier toeffective participation and hampers leapfrogging. Access to information, especially on issues
surrounding leapfrogging, is crucial in enabling ownership of the process and fostering
benefits from leapfrogging (Seetharaman et al., 2019).
More instrumentally, social acceptance is important in leapfrogging, without which costs
and disruption will increase. However, a key challenge to engagement is that regions
where public participation is most needed in developing countries are also where access to
civic space to participate in energy decision making, discussion of possible trade-offs, andinformation sharing is closing down. There is a worsening lack of meaningful engagement
grounded in transparency and accountability to participate in decisions, particularly inreference to energy discussions.

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Capacity within Developing Countries to Leapfrog
Leapfrogging fossil fuels requires a solid foundation of a skilled labour force, due to the large
demand for skilled professionals to design, build, operate, and maintain renewable energy
projects. The shortage of trained workers to undertake these projects presents a major obstacle
to fast-tracking leapfrogging in developing countries (Karakaya and Sriwannawit, 2015).
Inadequate availability of technical professionals and training institutes may slow down
leapfrogging, especially in Africa.

Roles of Governments in Developing Countries
Governments have a major role to play in facilitating leapfrogging, which includes putting
in place the necessary policies and enabling required investments in the process, including
capacity building and infrastructure development. Currently, huge amounts of government
subsidies go toward fossil fuel projects (Zhang et al., 2014). This may hinder efforts toleapfrog to 100% renewable energy systems. Studies indicate that subsidies provided bygovernments to the fossil fuel industry overshadow incentives provided to develop renewableenergy systems. For example, it is reported currently that fossil fuel industries received at least
USD 130 billion investment and other sectors such as transport received USD 32.5 billion. A
total of only USD 100 million was to be used under climate adaptation (Guzmán et al., 2022).
International partners, multilateral development banks (MDBs), and development financial
institutions all have a role to play. MDBs and development financial institutions may facilitate
or forestall leapfrogging in developing countries by expressing skewed support for fossil
fuels, including the technology they promote, projects they finance, and actions in theircountries (Oil Change International, 2019). MDBs must prioritize the development andimplementation of a fossil fuel finance exclusion policy that states that the MDBs will notfund or provide financial services or capacity support to any coal, gas, or oil project. This will
provide a unique opportunity for MDBs to influence national and international frameworks
that set ambitious targets with the financial intermediaries (African Climate Reality Project,2021). This is particularly true for the development of a supportive and enabling regulatory
and policy environment, which is crucial to attracting private climate finance.

Climate Finance
Africa needs a robust framework to provide the funding it needs to leapfrog toward renewableenergy. National governments should foster and galvanize funding for a bankable pipeline ofinfrastructure projects that are supported through various actions and support private sector
investment in adaptation, including blended finance, fiscal incentives, green bonds, and so on.
This is imperative as “Current levels of climate finance in Africa fall far short of needs. Africa’s
USD 2.5 trillion of climate finance needed between 2020 and 2030 requires, on average, USD
250 billion each year” (Guzmán et al., 2022).

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Fostering Enabling
Environments to Accelerate
the Transition to Net-ZeroNavigating Energy Transitions

Key Insights•

Enforcing oil and gas phase-out pathways consistent with limiting warming to
1.5°C could cost governments up to USD 340 billion from compensation claims
from cancelled projects under development but not yet producing. Investment
treaties create moral hazard by insulating investors from stranded asset losses
and they push the costs onto the public, diverting resources from the energy
transition.

•

Regulative approaches by governments at the global and national level hold anenormous potential to ensure highly ambitious corporate long-term targets. Suchregulation could provide robustly defined concepts that add substantive criteria
to ensure Paris Agreement compatibility, and mandate comprehensive and thirdparty verified disclosure practices.

•

Investors can help accelerate global decarbonization by ensuring companies’
capital expenditures align with climate goals. To this end, investors and advocatesmust reinforce current standards and frameworks to ensure broader use, greater
accountability, and a decreased risk of greenwashing.

5.1 Legal and Economic Challenges to the Energy
Transition
The transition away from fossil fuel production faces several structural obstacles beyond thecurrent short-term supply crunch and disruptions in the energy markets. Limiting warming
to 1.5 °C while avoiding stranded assets implies that a large share of currently licensed oil andgas reserves will have to remain unexploited. As chapter 3 has shown, the development of new
fields would generate more carbon emissions than the world can afford to achieve the Paris
Agreement temperature goal.
However, oil and gas companies continue to acquire additional licences, explore new
resources, and develop new fields (Rystad Energy, 2022b). Moreover, there are a multitudeof investment treaties that protect the forecasted revenues that oil and gas companies might
generate with their licensed reserves. This creates significant additional legal and economic
barriers for governments to implement 1.5°C-consistent climate policies. These legal
protections could divert significant sums toward oil and gas companies suing governments forlost revenues (Tienhaara et al., 2022).
Meanwhile, several oil and gas companies are now adopting net-zero targets which tend to bevague and non-committal long-term climate intentions. As this chapter will show, corporateset net-zero strategies are often disconnected from climate science, with their emissions
disclosures not sufficiently comprehensive or transparent. However, emissions-reporting
methodologies and net-zero strategies are critical to inform financial institutions’ assessmentof the carbon intensity of their portfolios.
Accordingly, there is an urgent need to bring more coherence to the corporate net-zerotarget methodologies, to reorient capital flows toward actors contributing most to the

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energy transition. This chapter will provide insights on how to overcome existing barriers to
implementing 1.5°C-compatible policies, and ways for governments and non-state actors to
support and accelerate the transition to net-zero.

5.2 Investment Treaties and Oil and Gas Phase-out
5.2.1 Asset Stranding
The energy transition is creating stranded assets, which are particularly significant in the oiland gas sector. Carbon Tracker (2022) estimates that over USD 1 trillion of oil and gas assets
risk becoming stranded. Some assets are stranded as a result of changing market conditions(e.g., drop in cost of renewable energy technologies) and the introduction of market-based
policies such as carbon pricing. Governments can also force asset stranding through regulatory
measures such as bans on fossil fuel extraction, revocation of permits for the developmentof fossil fuel infrastructure (e.g., oil and gas pipelines), and early retirement of infrastructure(e.g., coal- or gas-fired power plants). An increasing number of governments are taking or
considering these types of measures (Gaulin and Le Billon, 2020).
Research indicates that, when governments force or accelerate asset stranding, manybusinesses expect to be financially compensated (Sen and von Schickfus, 2020). Whether
or not to pay compensation and how much is appropriate are difficult questions, best left todemocratic decision-making processes. However, in many instances fossil fuel investors cancommence (or threaten to commence) arbitration claims against governments that do notprovide what they consider adequate compensation.

5.2.2 Legal Protections for Investors
When a foreign investor engages in the oil and gas sector, it will have up to three layers of legal
protection: national law, concession/state contract, and one or more international investment
treaties. Each of these sources of law may provide the investor with access to investor–state
dispute settlement (ISDS), a form of arbitration where ad hoc arbitral tribunals, usually withthree members (one chosen by each party to the dispute and the third agreed on or appointed
by an arbitral institution), take a final and binding decision that is internationally enforceable.
While national law and contracts can present obstacles to governments, the focus of thisreport is on treaties.
There are currently more than 2,500 investment treaties in force (United Nations
Conference on Trade and Development [UNCTAD], 2022). The vast majority are bilateral
investment treaties (BITs), but additionally there several hundred trade agreements withchapters on investment, and one sectoral investment treaty, the Energy Charter Treaty(ECT). These treaties contain provisions that can be interpreted broadly to require that astate compensates investors when they are negatively impacted by changes in policy. The
provisions most likely to be employed by investors in cases concerning stranded oil and gas
assets are the protection against (indirect) expropriation, the fair and equitable treatment
standard, and standards preventing discriminatory treatment (most favoured nation andnational treatment) (see further Tienhaara et al., forthcoming). Additionally, many treaties

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have a sunset clause (sometimes also referred to as a survival clause), that provides forcontinued treaty protection for a period (typically 10 to 20 years) after a treaty is terminatedfor investments made prior to termination.
If an investor considers that a state action (or inaction) negatively impacts its investment, it
can launch an ISDS claim immediately, without having to exhaust domestic legal remedies. If
a tribunal finds that a state has breached the treaty, it will determine—with very little guidancefrom the text of the treaty—how much compensation should be awarded to the investor.
Tribunals increasingly award far more than sunk costs (i.e., what was spent by the investor on
the project prior to the treaty breach), preferring to instead base compensation on projectionsof lost future profits. A recent study found that the average award in a case involving a fossil
fuel project was more than USD 600 million (Di Salvatore, 2021), and that 7 out of the 10
largest ISDS awards in history involved oil and gas investments (Bonnitcha and Brewin, 2020;
Tienhaara and Cotula, 2020).
Tribunals have demonstrated a willingness to award very large amounts in compensationeven in cases when the investment in question has not proceeded past the early stagesof planning (Bonnitcha and Brewin, 2020). In the oil and gas sector, this means thatcompanies can launch a claim even if they only have an exploration permit in hand, andpotentially win many times their initial investment. An example is United Kingdom-based
Rockhopper Exploration, which acquired Mediterranean Oil & Gas, a company with apermit to explore for oil off the Italian coast, for GBP 29.3 million in 2014. After the Italian
government banned oil drilling within 12 nautical miles of the coast in response to publicconcerns about the potential environmental impact, the company launched an ISDS claimon the basis of the ECT. In August 2022, the company announced that the tribunal had
awarded it EUR 190 million plus interest.

5.2.3 Treaty Protection of Oil and Gas Assets
In a recent study, Tienhaara et al. (2022) calculated the net present value of upstream oil andgas projects that should be cancelled in line with the International Energy Agency (IEA) Net
Zero Emissions by 2050 (NZE) scenario. They found that at an oil price of USD 100/barrel,
USD 234 billion could be claimed in ISDSs. If governments went further, as the science now
indicates is necessary to stay below 1.5°C (see Trout et al., 2022) and additionally cancelled
projects in development but not yet producing, the potential price tag would rise to a total of
USD 340 billion.
A second article using the same data set demonstrated that more than two thirds of the netpresent value of 1.5°C-incompatible and treaty-protected oil and gas assets are found in lowand middle-income countries, including those highly vulnerable to climate change (Tienhaara
et al., forthcoming). This demonstrates that the distribution of ISDS risk associated withenergy transition is highly unjust. The ECT was identified as the treaty protecting the most
1.5°C-incompatible upstream oil and gas assets.

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5.2.4 Solutions
It is increasingly recognized that it is undesirable for countries to provide fossil fuel investors
with investment protection during a climate emergency; it may even be considered a violationof art. 2.1 of the Paris Agreement (Gaukrodger, 2022). As a form of free political risk
insurance, investment treaties create moral hazard by insulating investors from stranded asset
losses. They push the costs of asset stranding onto the public, diverting resources from theenergy transition. Most concerningly, the threat of ISDS cases may have a chilling effect on
governments, particularly in countries where ISDS risk is high but government capacity torespond to claims and pay awards is low.
There are numerous ways to address the problems posed by investment treaties, some ofwhich can be adopted individually by governments and others which require international
coordination. The first and most immediate task is to stop making the problem worse. A
moratorium on any further licensing or issuing of exploration permits for oil and gas would
achieve this by immediately placing a cap on ISDS liability, limiting claims to those investors
that already have permits and licences in place. Such a moratorium is what energy models
suggest is consistent with limiting warming to 1.5°C, and yet most fossil fuel-producing
countries have yet to commit to one.
To reduce the risk of ISDS claims from existing investors, governments can opt to pay
compensation in return for a waiver of treaty rights. This is, admittedly, a very problematic
solution. Notably, the prospect of an ISDS claim increases the negotiating power of theinvestor, which may result in the government having to pay a large sum (Flues, 2022;
Tienhaara and Cotula, 2020). As such, governments should, if possible, adopt regulatedcompensation schemes rather than negotiated ones. However, regulated schemes may bechallenged in ISDS if the investors believe they have a chance of getting a bigger payout inarbitration (see the example of the Dutch coal phase-out described in Verbeek, 2021).
One option outlined by Pellegrini et al. (2021) is a reverse auction system where investors
voluntarily forgo the right to extract reserves in exchange for compensation. In such a system,
the investors would put forward bids for the amount of compensation they would accept in
return for relinquishing their licences or curtailing production. Competitive bidding would
ensure the lowest possible amount of public funds would be expended to achieve the desired
amount of asset stranding. An international fund could support these reverse auctions incountries in the Global South. As participation in a reverse auction is voluntary, it cannot bechallenged in ISDS. However, the voluntary nature of the scheme is also a downside—there
may not be much interest from investors in participating if oil prices are high and/or if they
are aware that they have a chance of obtaining greater compensation in arbitration if thegovernment switches to a mandated phase-out.
Therefore, an additional third strategy, terminating investment treaties, is critical. There are
numerous proposals to reform investment treaties to align them with the Paris Agreement(see, e.g., Organisation for Economic Co-operation and Development [OECD], 2022).
While many of these proposals have merit (those on capping compensation are particularly
worth consideration), it is worth noting that recent experiences with piecemeal reform havedemonstrated that it is of limited effect and too slow for the abovementioned scenarios to be

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met. A recent study concludes that “Changes in investment treaty design have failed to changeinterpretive outcomes in investment arbitration as new treaties are being interpreted like oldones in practice” (Alschner, 2022).
Investment treaties do not have proven public benefits, such as facilitating foreign investment
flows in sectors like renewable energy, that would be lost through termination (Bonnitcha,
2017; Pohl, 2018). Indeed, several countries have unilaterally terminated investment treaties,
without experiencing any negative impacts (Public Citizen, 2018). However, given theprevalence of sunset clauses, and the limited time remaining for action to avert catastrophic
climate change, investment treaties should be terminated by mutual agreement, which allows
the sunset clauses to be invalidated, whenever possible.
European countries have already accomplished this for intra-European Union BITs
(European Commission, 2020b). Considering this, as well as international commitments on
climate finance, European countries should immediately accept (and even initiate) any BIT
termination request from a developing country that is concerned about potential investor
claims arising from measures to address climate change. Europe could also take the lead indeveloping an international treaty that would terminate all BITs between the parties (Johnson
et al., 2018).
As this section has shown, the protection of fossil fuel companies’ investments and theirforegone revenues poses a significant threat to the energy transition. While these companies
are suing governments for their plans to reduce fossil fuel production on their territory inline with their commitment to the Paris Agreement, some of them are also adopting net-zerostrategies in an attempt to showcase their climate ambition. However, corporate net-zerotargets are often disconnected from climate science, while their emissions disclosures areeither not sufficiently comprehensive or transparent. Accordingly, the next section will provide
an assessment of the current state of the target-setting methodologies and suggest ways
forward to improve corporate climate reporting.

5.3 Corporate Net-zero Targets: An inadequate state ofplay entering a crucial decade
5.3.1 Corporate Net-zero Target Setting in the Context of Missing
Regulation
Since the launch of the United Nations Framework Convention on Climate Change(UNFCCC)’s Race to Zero campaign at COP 25 alongside other engagement initiatives,
the world has seen a surge in corporate net-zero targets. In the run-up to COP 26 in 2021,
the number of businesses that announced net-zero or carbon neutrality targets (hereafterreferred to as net-zero targets) increased at an ever-accelerating pace. For instance, over 5,000
businesses had joined the Race to Zero campaign by August 2022 (UNFCCC, 2022).
This unprecedented wave of corporate net-zero target setting, however, has happened against
a backdrop of non-standardized definitions and a lack of independent scrutiny to ensure thistarget setting is in line with the Paris Agreement.

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There currently exists no clear and consistent definition of corporate net-zero targets.
Several ongoing regulatory and voluntary initiatives aim to better harmonize the concept and
set robust criteria. For example, the United Nations Secretary-General António Guterres
established a High-Level Expert Group on the Net-Zero Emissions Commitments of NonState Entities to “develop stronger and clearer standards for net-zero emissions pledges by
non-State entities—including businesses, investors, cities and regions” (United Nations
Secretary-General, 2022). Other regulatory initiatives, such as the forthcoming European
Sustainable Reporting Standards initiated by the European Commission (European Financial
Reporting Advisory Group Project Task Force on European Sustainability ReportingStandards, 2022) or the Net-zero Guiding Principles of the International Organization forStandardization (forthcoming), are in the process of developing more binding principles
and regulations on corporate long-term target setting. Voluntary initiatives such as the Netzero Standard by the Science Based Targets Initiative (SBTi) propose their own criteria toverify corporate net-zero targets (SBTi, 2021). It remains to be seen whether and how theseregulatory and voluntary initiatives will align their definitions and criteria for corporate netzero target setting.

5.3.2 Evidence of Shortcomings in Net-zero Target-setting Practice
Existing corporate net-zero targets typically suffer from a lack of ambition and have othersevere shortcomings (Day et al., 2022; Mooldijk et al., 2022; NewClimate Institute et al.,2022; Shugar, Myers and Fugere, 2022). An emerging body of literature assessing a rangeof different company samples emphasizes four common shortcomings in corporate net-zerotarget setting at present (see Table 5.1 for detailed assessment, including an oil and gas sector
deep dive):
1. Incomplete emissions disclosure and emissions coverage across all scopes
2. Inadequate specification of own emission reductions alongside net-zero pledges
3. Insufficient implementation of key emission reduction measures
4. Reliance on contentious offsetting practices to meet net-zero pledges
These recent findings indicate that corporates tend to use their net-zero targets as vehicles
for vague and non-committal long-term climate intentions, or even greenwashing. Few
corporate net-zero targets at present reflect true climate leadership. Ambitious companies
and frontrunners in corporate decarbonization efforts thus struggle to differentiatethemselves from those taking limited action while announcing untransparent and nonscrutinized net-zero pledges.

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Table 5.1 Shortcomings of existing net-zero pledges across sectors identified inrecently published literature, and of net-zero pledges and related transition plans in
the oil and gas sector
Incomplete emissions disclosure and emissions coverage across all scopes
Corporate net-zero targets often exclude certain emissions sources within
their value chain, especially upstream and downstream scope 3 emissions
along their value chain.
Recent analyses on global company samples, and country-specific analyses
for the United States and the Netherlands, find that many corporates do
not disclose large shares of their value chain emissions from their net-zerotargets (Day et al., 2022; Mooldijk et al., 2022; NewClimate Institute et al.,2022; Shugar, Myers and Fugere, 2022). Corporates might only cover certain
emissions scopes under their net-zero target, for example exclusively focusing
on emissions of their operations and from purchased energy (scope 1 andscope 2 emissions), or simply not communicate at all which emissions arecovered by their net-zero targets.
The incomplete disclosure of emissions originating in companies’ upstream
and downstream supply chains (scope 3 emissions) remains particularly
problematic. These emissions oftentimes represent the largest shares of acompany’s emissions profile (Day et al., 2022; Mooldijk et al., 2022), goingwell above 80% to 90% for some. Companies in the aviation and shipping
industries generally fail to adequately report on non-greenhouse gas (GHG)
climate impacts, such as the formation of contrail cirrus clouds (Mooldijk etal., 2022). The exclusion of large emission scopes—either through incomplete
disclosure or explicit exclusion from the target’s coverage—undermines theambition and integrity of net-zero pledges.
Oil and gas sector deep diveCompanies in the oil and gas sector typically commit to net-zero targets
that exclude large shares of emissions in their value chain.
This becomes particularly problematic if oil and gas companies deliberately
exclude upstream scope 3 emissions (e.g., emissions from the extraction of oil
and gas purchased from other producers) and downstream scope 3 emissions(e.g., emission from the use of oil and gas by end consumers). For example,
ExxonMobil explicitly excludes all of its scope 3 emissions under its net-zerotarget (Mooldijk et al., 2022). For this reason, Exxon Mobil’s target only covers
around 20% of their 2019 emissions disclosure, and likely a much smaller
share of ExxonMobil’s entire emissions footprint.

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Inadequate specification of own emission reductions alongside net-zeropledges
Many existing targets lack a specific commitment to reduce a corporation’s
own emissions across its entire value chain alongside net-zero pledges.
For example, 12 out of 25 assessed multinational corporations do notprovide any details on what their headline pledge means in terms of own
emissions reductions (Day et al., 2022). Even if companies specify intended
emissions reductions across their value chain, these often do not reflect
deep decarbonization in line with Paris Agreement objectives. The other13 companies of this sample of 25 commit to reduce their full value chain
emissions from 2019 by only 40% on average in the net-zero target year
(Day et al., 2022). Targets aiming for deep decarbonization would, for example,
reflect commitments to reduce 90% to 95% of all GHG emissions acrossthe entire value chain (Day et al., 2022; SBTi, 2022). Without explicit andtransparent commitments for deep emissions reductions in line with the Paris
Agreement, the concept of corporate net-zero become meaningless and canlead to greenwashing and unambitious corporate plans.
Net-zero pledges are inadequately substantiated by transparent, credible,
and ambitious interim targets toward 2030 in line with the Paris Agreement.
For example, only around half of the 702 companies in the Forbes Global
2000 with net-zero targets have any type of interim GHG emission
reduction target (NewClimate Institute et al., 2022). Even if corporates
set interim GHG reduction targets, as for example 19 companies do inan assessment of 20 Dutch corporates, these only represent an average
emission reduction commitment of 19% by 2030 across the full value chain(Mooldijk et al., 2022).
These interim targets thus often do not reflect the urgency to decarbonize
business activities in the context of global and sector-specificdecarbonization milestones in line with limiting global warming to 1.5°C.
According to recent findings of the Intergovernmental Panel on Climate
Change (IPCC)’s Sixth Assessment Report, global CO2 emissions must be
reduced by net 48% by 2030 compared to 2019 levels (range of 36% to 69%)
to limit global warming to 1.5°C (IPCC, 2022). The IPCC further concludes
that global GHG emissions must decrease by 43% (range of 34% to 60%).

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Oil and gas sector deep dive
Oil and gas companies often avoid underpinning their net-zero pledges byspecific commitments on how much they plan to reduce their own emissions
across their entire value chain alongside the net-zero pledge.
For example, neither ExxonMobil nor BP communicate an emissions reduction
target alongside their net-zero pledges by 2050 (Mooldijk et al., 2022). It
remains entirely unclear what share of their own emissions along the value
will be reduced by the target year, leaving the door open for contentious
neutralization measures to achieve the targets.
Oil and gas companies’ long-term targets—regardless of being a net-zeropledge or another target type—collectively do not meet decarbonization
milestones in line with 1.5°C or 2°C of global warming at present. Out of 58
oil and gas companies’ 2050 targets assessed by the Transition Pathways
Initiative (TPI) as of August 2022, for example, only three companies met TPI’s
definition of a 1.5°C benchmark, and only one met TPI’s definition of a below
2°C benchmark (TPI, 2022).
The use of interim targets focusing on the reduction of emissions intensity(intensity targets) rather than emissions reductions in absolute terms(absolute targets) might further enable companies to prolong the use ofoil and gas in the foreseeable future, instead of effectively reducing the
exploration and use of fossil fuels.
For this reason, intensity targets inherently face the risk of being decoupledfrom finite limits of the carbon budget (O’Connor and Coffin, 2022). Oiland gas companies generally fail to explain how their intended emission
reductions in the interim relate to decarbonization benchmarks andpathways identified in the literature. For example, the IEA (2021) concludes
that governments should not approve any new oil and gas fields fordevelopment from 2021 onwards for the global energy sector to align withthe 1.5°C temperature limit. UNFCCC (2021) specifies that global oil and gas
production levels must decrease by 40% below 2019 levels by 2030.
In this context, The Hague District Court considered Shell’s intensity targets
by 2030 at the time of the court ruling in 2021 as not sufficiently ambitious
to reduce its emissions in absolute terms. The court mandated Shell to reduce
CO2 emissions across all emission scopes in absolute terms by net 45% below
a 2019 baseline by 2030, informed by IPCC’s Special Report: Global Warmingof 1.5°C (The Hague District Court, 2021).

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Insufficient implementation of key emission reduction measures
While a few companies already implement ambitious and deep emissions
reduction measures to achieve their net-zero pledge and interim targets,
most others do not publicly announce such measures across all emission
scopes or transparently explain their estimated impact and implementation
timeline.
The implementation of credible and far-reaching measures constitutes
the backbone of ambitious corporate net-zero pledges and fosterstransformative change. However, for example, an assessment of 20 Dutch
companies shows that none of the net-zero targets included publicly
communicated reduction plans considered sufficient to place them on a
Paris-compatible trajectory (Mooldijk et al., 2022).
Oil and gas sector deep dive
Oil and gas sector companies show little progress in reducing their emissions
along the entire value chain and transitioning their business models awayfrom fossil fuels.
For example, recent analyses of BP, Chevron, ExxonMobil, Shell, Equinor andTotalEnergies conclude that existing decarbonization strategies are notunderpinned by concrete actions while the companies’ business models
continue to rely on fossil fuels (Li, Trencher and Asuka, 2022; Liauw et al.,2022a).
The lack of progress in decarbonizing their emissions along the value
chain casts severe doubt on the companies’ prospects to achieve deep
decarbonization as suggested by their net-zero targets.
For example, both ExxonMobil’s and BP’s publicly communicated emission
reduction measures underpinning their net-zero pledges have been evaluatedto have “very low integrity” as they are insufficient to place them on a Pariscompatible trajectory (Mooldijk et al., 2022). Despite its net-zero target for
2050, Shell states that its operating plan, planned portfolio changes andpricing assumptions do not reflect its 2050 commitment (Shell, 2021). Shell
instead argues that any fundamental changes of its underlying business
operating plans remain conditional on societal progress toward a net-zerosociety (Shell, 2021; ClientEarth, 2022b). Recent estimates indicate that Shellmight only reduce 38% of its emissions below 2019 levels in absolute terms by
2050 (Liauw et al., 2022b).

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Reliance on contentious offsetting practices to meet net-zero pledges
Many corporates intend to rely on contentious offsetting practices to achieve
their net-zero targets, emphasizing the net more than the zero in theircorporate pledges.
In the most problematic cases, businesses claim to simply offset large partsof their emissions in the net-zero target year instead of reducing their own
emissions along the value chain. This offsetting practice implies that theclimate impact is the same as if these emissions were never released in thefirst place. For example, 19 of the 25 multinational corporations will rely on
offsetting for their future pledges, with some corporates offsetting more than
80% of all emissions in the target year (Day et al., 2022).
These offsetting claims are particularly problematic when relying oncarbon dioxide removals from forestry and other biological-related
carbon sequestration. These carbon dioxide removals are generally neither
permanent nor additional, which make them unsuitable for any compensation
claim. For example, nature-based solutions can easily be reversed throughexternal events such as forest fires releasing the captured carbon back in theatmosphere. Only a few companies with net-zero pledges intend to only use
higher-quality offsets for a limited number of residual emissions or rule out
the use of offsets entirely (Day et al., 2022; Mooldijk et al., 2022). Althoughmany corporates rely on offset credits, businesses provide little informationon these offsets to allow for independent review. Only 11 out of 55 U.S.
corporations with net-zero targets, for example, provide basic information
about the type, volume, and third-party verification of offset credits (Shugar,
Myers and Fugere, 2022).
Instead of relying on offsets to achieve net-zero emissions, companies couldcommit to deep and ambitious emission reduction targets across their fullvalue chain. This would be more transparent and constructive, as it highlights
the feasible prospect—or the lack thereof—of full decarbonization in a
respective industry.
These more transparent reduction targets can be combined with climate
contributions beyond the company’s own value chain (NewClimate Institute,
2020, 2022; Schallert et al., 2020). Such climate contributions would not claim
to neutralize a company’s own emissions while reflecting responsibility for its
unabated emissions today and in the future.

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Oil and gas sector deep dive
The use of contentious offsetting practices enables oil and gas companies toclaim so-called neutralization of continuous emissions from the use of theirmarketed fossil fuels.
The use of low-quality offset credits carries the risk of enabling oil and gas
companies to continue—or even expand—highly emission-intensive activity
while wrongfully covering up how polluting their activities are. This can drive
attention away from the fact that oil and gas companies need to rapidly
decarbonize toward 2030 and beyond. The practice of offsetting remains
particularly dubious if oil and gas sector companies neither limit offsets
to a restricted amount of residual emissions (e.g., a maximum of 5% ofemissions across the entire value chain below a given base year), nor provide
transparency on the volume, type, and quality of offsets used today and in
the future. For example, existing net-zero targets by BP and Shell heavily
rely on carbon offsets, while neither of them have committed to absoluteemissions reduction targets for their scope 3 emissions (Shugar, Myers andFugere, 2022).
Sources: Day et al. (2022); Li, Trencher and Asuka (2022); Liauw, et al. (2022); Mooldijk et al. (2022); Net
Zero Tracker (2022); O’Connor and Coffin (2022); Shugar, Myers and Fugere (2022); Tong and Trout (2022)

5.3.3 The Risk of Misleading Promises in Net-zero Targets in the Oil
and Gas Sector
Emerging evidence indicates that larger-scale and publicly visible companies with substantive
emission footprints are likely to set net-zero targets (NewClimate Institute et al., 2022). As
of May 2022, for example, fossil fuel industry companies had the second highest percentageof net-zero targets (49%) among those industries with more than 10 companies in the Forbes
Global 2000.
Among companies operating in the fossil fuel sector, several publicly listed oil and gas
companies have announced net-zero targets over the last few years. In-depth assessments of
their net-zero pledges and transition plans identify several shortcomings, summarized in Table
5.1, such as the exclusion of emissions from the end use of marketed fossil fuels.
The above findings highlight a key risk of recently announced net-zero targets in the oiland gas sector: unsubstantiated promises with a high potential to mislead consumers,
investors, and regulators. Net-zero targets of oil and gas companies predominantly focus
on decarbonizing the production of fossil fuels, thus neglecting their actual use by end
consumers and associated emissions that constitute the vast amount of emissions acrosstheir value chain (Shugar, Myers and Fugere, 2022). Net-zero pledges of such inherently
low integrity may give external stakeholders an inaccurate and unjustified impression on theprospects for decarbonizing an emission-intensive industry such as the oil and gas sector
from production to final use (Mooldijk et al., 2022, p. 25). This misleading practice can

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directly lead to continued investments in energy infrastructure not compatible with the Paris
Agreement. Unsubstantiated net-zero targets hold the potential to nullify drivers of climate
action, for example, as regulators would be more active in introducing regulation that leads tocorporate decarbonization, and shareholders would be more active in requiring companies todecarbonize, without them.
Regulative approaches by governments at global and national levels hold an enormous
potential to ensure highly ambitious corporate long-term targets. Such regulation could
provide robustly defined concepts that add substantive criteria to ensure Paris Agreementcompatibility, and mandate comprehensive and third-party verified disclosure practices.

5.3.4 Legal Action on Net-zero Claims
Consumers, investors, and civil society increasingly emphasize the urgent need forindependent scrutiny of existing corporate net-zero pledges and their implementation, andhave pursued legal action in pursuit of this. Businesses face an increasing number of legal
court cases focusing on inadequate corporate climate targets and misleading product claims.
For example, charges haven brought forward against Shell in the Netherlands over theirinsufficient 2030 climate targets (The Hague District Court, 2021), Santos in Australia overtheir misleading net-zero target by 2040 (Australasian Centre for Corporate Responsibility,2022), automobile manufactures BMW and Volkswagen in Germany on mandatory phase-out
dates for internal combustion engines in newly sold vehicles (Deutsche Umwelthilfe, 2022;
Greenpeace Germany, 2022), and on product line-specific net-zero claims such as against
Arla in Sweden on their “net-zero climate footprint” claim, and KLM Royal Dutch Airlines in
the Netherlands on their “Fly responsible” campaign (ClientEarth, 2022a, Konsumentverket,
2021). This trend might even accelerate further given that more businesses are making netzero claims, especially if more and more courts agree with the plaintiffs’ concerns.

5.4 Institutional Investor Tools and Strategies: A growing
movement, with a need for reliable information
To thrive in the global energy transition, businesses and financial institutions must align theirstrategies with an equitable, decarbonized economy. A stable climate enables effective risk
management and value creation, and institutional investors are increasingly setting climate
targets for their own portfolios or assets under management while pushing companies todisclose and mitigate emissions.
Institutional investors’ increased interest in corporate climate action is partially attributable
to a substantial and growing share of global equities held by large institutions and in index
funds, particularly following the 2008 financial crisis. Such funds hold investments in virtually
all major companies and, in the case of passive investors, are required to hold them as longas they remain in the relevant index. This means that engagement, rather than divestment, isthe only tool such investors have to manage company-specific risk. It also naturally results ininvestors becoming less concerned with individual corporate performance and more attentive
to systemic risks, such as climate change, that threaten full portfolio value (Condon, 2020).
Motivated asset managers, asset owners, and other financial institutions have substantial

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power to hold companies they own accountable to meaningful climate targets, but need robust
information to engage effectively.
Investors are supported by a growing range of climate-focused coalitions, initiatives, ambitious
corporate clients, and reporting frameworks. Scenario analysis, a core element of many
frameworks, is of particular use to investors seeking to analyze how portfolio companies are
positioned to respond to the risks and opportunities of various climate and energy systemfutures. Investors need standardized disclosures to make direct company comparisons, and areincreasingly calling for scenarios discussed in narrative elements of a company’s annual report
to be integrated into the audited financial statements (Ross, 2021).
None of the current frameworks alone is sufficient to fully enable investors to assess
corporate climate performance, and a lack of mandatory national and international
standards limits comparisons (Day et al., 2022). Some countries, including France, New
Zealand, and the United Kingdom, have led in mandating corporate climate disclosures,but it will take the broad adoption of national-level regulations to ensure that investors haveconsistent, necessary access to corporate disclosures that address the full range of material
impacts from climate change.
The diversified portfolios of institutional investors, and passive funds in particular,
increasingly resemble one another. While this provides investors with common incentives toact, it can also allow inactive asset owners and managers to free ride in the push for corporate
emissions reductions. However, collaborative investor initiatives are viewed as a top promising
trend for improved shareholder engagement (Ringe, 2021).
In this context, it is encouraging that investor participation in Climate Action 100+, now
the world’s largest investor initiative on climate, rose 170% over the first four years after
the initiative’s 2017 launch (Climate Action 100+, 2022a). In the same time frame, theNetwork for Greening the Financial System (NGFS), a voluntary forum of central banks andsupervisors where authorities exchange information related to the risks and opportunities ofclimate for the financial sector, expanded its founding membership of eight to 116 (NGFS,
2022a). One of six dedicated workstreams at NGFS is dedicated to refining and promoting
the use of scenario analysis within the financial system. Still, these collaborative efforts areultimately only significant if they lead to real changes in corporate behaviour, and so there
will continue to be scrutiny both of the overall impact of these programs and of whether all
signatories are meaningfully contributing to the overall goals (Majority Action, 2022).
Other initiatives have arisen supporting investors’ portfolio goals. The Investor Agenda wasfounded to accelerate and encourage investor action on corporate engagement, investment
in low-carbon assets, policy advocacy, and investor disclosure. Asset managers with targets
aligned to 1.5°C came together under the Net Zero Asset Managers initiative, while theParis Aligned Asset Owners initiative and the Net Zero Asset Owners Alliance emerged tosupport asset owners. In 2021, these united with other specialized financial groups into a loose
coalition known as the Glasgow Financial Alliance for Net Zero, under the umbrella of the
UN Race to Zero campaign.

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Figure 5.1 Climate initiatives for financial institutions: A landscape
UNEP FI

PRI

AIGCC

CDP

Ceres

IIGCC

IGCC

Climate Action
100+
2017

The Investor
Agenda2018

Paris Aligned
Investment
Initiative
2019

NZAOA
Net Zero Asset
Owners Alliance
2019

GFANZ* 2021

NZAM
Net Zero AssetManagers
2020

NZBA
Net Zero Banking
Alliance
2021

NZIA
Net Zero
Insurance Alliance
2021*Glasgow Financial Alliance for Net Zero.
As a coalition, GFANZ includes NZAM,NZAOA, NZBA, and NZIA.

Initiative

Founding/supporting organization

Notes: AIGCC: Asia Investor Group on Climate Change; IGCC: Investor Group on Climate Change; IIGCC:
Institutional Investors Group on Climate Change.
Source: Author’s calculations.

5.4.1 The Landscape of Reporting Frameworks
Investors influence companies using a spectrum of tools including engagements, shareholder
proposals, and board votes, either against current directors or for alternative slates, alongside
campaigns to pressure companies using tools such as public letters or joint investor
statements. Companies do respond—one 2020 analysis found companies fully met therequests of 94% of shareholder proposals that received a majority vote (Blackrock, 2020),

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though majority votes are still not the norm and are highly dependent on the perceived
ambition of the proposal ask. Analysis shows that as the ambition of shareholder resolutions
evolves year to year, the number of majority votes changes (Ceres, 2022). In some cases,
a company’s persistent failure to respond will result in divestment, in line with standards
developed by investors (Office of the New York State Comptroller, 2022).
The climate disclosures requested by investors rely upon an evolving and growing series ofreporting frameworks—the number of ESG reporting instruments has globally accelerated
over the past decade (Woods et al., 2022). In 2021, the International Financial ReportingStandards Foundation launched the International Sustainability Standards Board (ISSB)
with the goal of establishing global sustainability reporting standards. ISSB now encompasses
several pre-existing initiatives, including the Climate Disclosure Standards Board and theValue Reporting Foundation. It released its first standards for consultation in March 2022.
Investors support the development of strong international standards. In 2021, investors
representing more than USD 52 trillion called on global leaders to set mandatory climate
risk disclosure requirements (Investor Agenda, 2021). For now, reporting largely remains
voluntary, and not all standards include comprehensive metrics analyzing alignment with
1.5°C, although most recommend some form of scenario analysis. Many of these resources
and frameworks are connected to or rely upon one another in a web of relationships detailedin Figure 5.2.
Some of the most influential include:• Global Reporting Initiative (GRI): Established in 1997, GRI provides broad global
disclosure standards designed to present a comprehensive understanding of economic,
environmental, and societal impacts.
• CDP: CDP questionnaires are intended to help investors, companies, and regulators
measure corporate impacts and risks related to climate change, deforestation, andwater security, with questions that facilitate assessment of alignment with the 1.5°C
scenario. CDP has released specific guidance aimed at enhancing scenario analysis
disclosures (Tucker, 2021). The first round of CDP disclosures in 2002 garnered 245
company responses. By 2020, more than 10,000 companies, cities, states, and regions
had disclosed through CDP (CDP, 2022).
• Sustainability Accounting Standards Board (SASB): Specialized standards from
SASB, established in 2011, specifically focus on the financially material impacts ofsustainability-related risks and opportunities, with 77 sector-specific sets of guidelines.
SASB standards recommend scenario analysis disclosures for certain industries inwhich climate impacts are most likely to be material. In 2021, SASB merged with theInternational Integrated Reporting Council, forming the Value Reporting Foundation.
• Task Force on Climate-related Financial Disclosures (TCFD): A voluntary
framework developed in 2017 by the Financial Stability Board to standardize corporate
climate disclosures and help investors assess whether climate risk is priced into
valuations. Scenario analysis is a key recommendation of TCFD, generally referencing
disclosures in line with a 2°C scenario, though updated implementation guidelines
direct organizations to “consider” analysis aligned with 1.5°C (TCFD, 2021).

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Navigating Energy Transitions• SBTi: SBTi defines best practices for corporate climate target-setting, offers resourcesand guidance, and independently certifies targets against specific, science-based criteria.
SBTi provides stakeholders with independent analysis of whether corporate targets arealigned with a 1.5°C or 2°C pathways. In 2021, SBTi launched its net-zero standard,
initiating a phase-out of verification for commitments not aligned with 1.5°C scenarios.
• Climate Action 100+ Net Zero Company Benchmark: The Benchmark assesses
companies against the initiative’s high-level goals on indicators material to financial
performance, equity, and emissions reductions. Indicator 10 assesses commitments
to align disclosures with TCFD recommendations. To fulfill all Indicator 10 criteria,
companies must explicitly include a 1.5°C scenario analysis (Climate Action 100+,2022b).

5.4.2 A Growing Need for Stronger Tools
Investors can help accelerate global decarbonization by ensuring companies’ capital
expenditures align with climate goals. In 2021, IEA found that clean energy investments
must triple by the end of the decade in order to attain net-zero by 2050 (IEA, 2021a). Clear
corporate alignment of climate commitments with capital expenditures can give investors
confidence that targets will be achieved and risks mitigated.
To this end, investors and advocates seek to reinforce current standards and frameworks
to ensure broader use, greater accountability, and a decreased risk of greenwashing. One
strategy aims to ensure that companies’ narrative climate disclosures are consistent with theirfinancial reports, with a focus on third-party audit and expanded assurance (IIGCC, 2020;
Principles for Responsible Investment [PRI], 2020). Assumptions, such as future commodity
prices, are embedded in cash flow estimates and must be present in financial statements forinvestors to accurately assess risks and opportunities. Although global standards state thatmaterial climate-related risks should not be ignored in accounts or audits, a 2021 report foundthat 70% of corporate emitters analyzed did not disclose the impacts of climate risk in theirfinancial statements (Davidson and Schuwerk, 2021).
Support for this strategy is accelerating. In 2022, a shareholder proposal at ExxonMobil, filedby Christian Brothers Investment Services, Inc., calling for detailed reports on how applying
the assumptions of the IEA NZE scenario would impact company financial statements andpositions, earned majority support, in just the second year such a proposal was introduced.
Sector-specific analysis and guidance on this issue is also emerging (Ross, 2021).
ExxonMobil had already been the subject of a significant successful campaign in 2021 by
impact hedge fund Engine No. 1, in partnership with the United States’ second-largest
pension fund, California State Teachers’ Retirement System, that successfully replaced threemembers of the company’s 12-member director board with candidates with climate andclean energy experience. This campaign is cited as an example of the critical role that hedge
funds can play in monitoring companies and initiating campaigns that motivate the pivotal
support of the increasingly dominant “Big Three” asset managers, BlackRock, State Street
and Vanguard. The campaign at ExxonMobil was well timed, occurring as those funds wereincreasingly making public commitments to sustainable investing, including pledges to voteagainst directors who fail to adequately address climate change (Christie, 2021).
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Figure 5.2 Map of climate reporting frameworks and resources
GRI

GRI and CDP havecollaborated to ensurealignment between
GRI standards andCDP’s framework.

GRI and SASB released guidancein 2021 on how the standards
work together. GRI serves as a
general disclosure guideline; SASB
provides data-driven information
aimed at financial institutions.

SBTI’s sector
classifications
are based on theBusiness Activity
Groups classifications
developed by GRI.

CDPOne Climate
Action 100+Net Zero Company
Benchmark draws on
information fromexisting disclosure
platforms, such as CDP.

Climate Action
100+ Benchmark

One Climate Action 100+ Net Zero
Company Benchmark indicator assesses
companies’ TCFD disclosures.

SASB
The Value Reporting
Foundation, parent organizationof SASB, was consolidated into
ISSB in June 2022.

The initial ISSB drafts were intended,according to IFRS, to build upon TCFD
recommendations and SASB standards.
GRI and ISSB
began work in
May 2022 to harmonize
work programs andstandard-setting activities.

CDP is committed to fully aligning its
platform with TCFD recommendations
and released a TCFD-aligned
questionnaire followed by a seriesof aligned sector-specificquestionnaires.

TCFD

ISSB
The initial ISSB drafts
were intended, according
to IFRS, to build upon
TCFD recommendations
and SASB standards.

SBTi
In 2022, SBTi released arequest for proposals aimed
at providing guidance on
how SBTi and TCFD can beused together.

Source: Author’s calculations.

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Institutional investors are also advocating for greater insight into business strategy bydemanding time-bound transition plans that detail how climate targets will be achieved.
Transition plan recommendations vary across frameworks, and a range of analytical guidanceis available to investors (Pinko and Pastor, 2022). For companies, the Climate Action
100+ decarbonization strategy emphasizes that companies should assess and quantify thecontribution of each action. However, most transition plans fall short of standard-setter
recommendations: in 2021, just 1% of more than 13,000 companies with CDP disclosures
met all 24 of the organization’s key transition plan indicators (Bartlett et al., 2022).
For investors, the Investor Agenda established the Investor Climate Action Plan selfassessment tool, designed to both help users map out participation in the net-zero transitionand provide accountability to stakeholders, governments, and the public. The Investor Climate
Action Plan’s Expectation Ladder meets investors at their starting point of climate ambition,and highlights specific actions that will strengthen their approach and ensure progress toward
short- and medium-term goals.

5.4.3 The Power of National-level Mandatory Disclosure
Investors can effectively wield their influence, through engagements and shareholder votes,
to move companies toward improved management of climate risk. This can take the formof setting reliable targets, such as those verified by SBTi, and providing detailed scenario
analysis, as recommended by TCFD. The resulting disclosures can help ensure that investors
are able to make informed decisions and maximize value, and that companies are held
accountable to their climate commitments.
Yet due to the largely voluntary status of today’s reporting frameworks, data is not always
released publicly and can be treated as proprietary, while disclosures cannot be easily analyzed
or compared. Without national-level regulation, even the impending ISSB standards, aimed atcreating a unifying framework, will face slow adoption. Rigorous mandatory standards would
help ensure material information is consistently disclosed within and across countries.
Some regulations are emerging, many resting on the strength of the TCFD framework. France
moved early: art. 173 of the 2016 French Energy Transition Law was the first to enshrine suchclimate-related rules for investors on a comply-or-explain basis. A 2021 replacement law added
requirements for investors, banks, and insurers to report not only on climate-related but also
biodiversity-related risks. The European Union’s Sustainable Finance Disclosure Regulation was
launched in spring 2021. In early 2022, the U.S. Securities and Exchange Commission (SEC)
released a draft rule that would require public companies to release climate risk disclosures. For
over a decade, the U.S. National Association of Insurance Commissioners has required climate
risk disclosure from most insurers, and recently has moved to align its requirements with TCFD
(National Association of Insurance Commissioners, 2022). Nonetheless, the SEC’s proposed
rules have faced some controversy, including suggestions of legal action by Republican Party
leaders and trade associations like the American Petroleum Institute, while supporters maintainthat the proposed rules fall within the SEC’s statutory authority. Letters submitted when the
public was invited to comment were broadly supportive of the draft rules, though an analysis
from KPMG indicated that general approval should not be interpreted as wholesale support forthe specific proposal elements (KPMG, 2022).

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A regulatory approach can accelerate action. In 2022, the United Kingdom became the first
G20 country to mandate corporate reporting of climate-related risks and opportunities inline with TCFD recommendations; a subsequent analysis found a significant increase in thenumber of premium-listed companies making disclosures that were either partially or mostly
TCFD-consistent (Financial Conduct Authority, 2022). In turn, investors can speed adoptionof regulations through advocacy.

5.4.4 A Focus on Oil and Gas
For investors, lack of ambition by many oil and gas companies threatens global progress to
reduce emissions, increases the risk of stranded assets, and undermines the industry’s social
licence to operate. The industry will need to transform, and do so rapidly—no new oil andgas fields are approved for exploration in a net-zero by 2050 scenario according to the IEA,
a finding confirmed in chapter 3 of this report (IEA, 2021a). This report follows the 2019
publication of the One Earth Climate Model (OECM), a 1.5°C-aligned scenario model
without overshoot. An updated version of the OECM commissioned by the Net Zero Asset
Owners Alliance was released in 2022 with detailed sectoral decarbonization pathways (Teske
et al., 2022).
The March 2022 Climate Action 100+ Net Zero Company Benchmark shows how far oil andgas companies are from achieving that transformation. Only three of 39 oil and gas companies
assessed had transition pathways aligned with 1.5°C, and only one was assessed to have capital
expenditures in line with such a scenario. Attaining a net-zero goal requires a comprehensive
business model transformation for oil and gas companies. Analyzing their transition plans iscomplex, and the optimal path will be different for each company (Gardiner, 2021).
The IEA’s unequivocal findings challenge financial institutions to evaluate their policies
and strategies for the oil and gas industry. In 2022, SBTi released guidance on net-zerotarget setting for financial institutions, with 19 initial certified targets, including from La
Banque Postale, which committed to a complete withdrawal from oil and gas upstream
and midstream activities by 2030 (SBTi, 2022). Shareholders and asset owners are now
using the IEA Net Zero and OECM pathways as an alignment metric, in engagements andresolutions (Ceres, 2022).
“It is essential that oil and gas company boards know that those with credible independently
verified net zero strategies will be supported by their investors”, notes the IIGCC Net Zero
Standard for Oil and Gas Companies. “Equally important is that those without will bechallenged” (Gardiner, 2021).
Chapter 5 has demonstrated the need to bring more coherence to the landscape companies’
climate disclosures. Corporate climate reporting is instrumental to the financial sector’sability to channel capital where it is most needed to accelerate the energy transition. Rigorous
mandatory standards would enable the production of standardized information, disclosed
consistently within and across countries. Governments have an important role to play insetting up mandatory requirements for reporting methodologies. However, until a unified
framework emerges, companies can contribute to positively bridging the information gas byadopting some of the voluntary reporting methodologies available.

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6.0
Conclusions and Key Policy
Recommendations

Navigating Energy Transitions

In this report, we have for the first time analyzed and compared the findings of energy
scenarios compatible with the 1.5°C goal, across the full body of published global modelled
pathways. We selected scenarios which do not exceed IPCC judgements of feasible andsustainable levels of carbon capture and storage deployment. The report focused on pathways
for the phase-out of oil and gas, and for the expansion of wind and solar, required for global
temperatures to have a good chance of staying within the 1.5°C limit. For both, we founda high degree of alignment between scenarios, suggesting that a common set of actions isrequired. Based on these findings, and on an analysis of the current opportunities and barriers
to policy change, we have derived a number of policy recommendations, for governments,
investors, and financial institutions, to enable concerted efforts aligned with the goals of theParis Agreement.
1. Governments should prevent the development and licensing of any new oil
and gas fields. Developing any fields beyond those already in operation or underdevelopment would pose substantial risks of either not meeting the 1.5°C target or
creating stranded assets, because those fields would have to be decommissioned before
the end of their lifespan, unless currently producing fields’ operations are significantly
curtailed.
2. Governments must provide more and better support to wind and solar
deployment. They need to improve current policies and put in place new ones, toincrease solar and wind capacity worldwide. These should include policy frameworks
aimed at reducing permitting and licensing delays for renewables’ installation, as well
as localizing renewable energy value chains to make them more resilient to trade wars,
political conflicts, and price volatility.
3. Governments should create enabling environments for redirecting both public
and private capital flows toward the clean energy transition including the
deployment of additional solar and wind capacity. The forecasted investmentsin the exploration and development of new oil and gas fields – incompatible with the
1.5°C pathways – are higher than the investment gap for wind and solar deployment.
4. The current energy crisis, experienced by Europe in particular, should not
be tackled by increasing the continent’s reliance on gas. Doing so would risk
putting the 1.5°C goal even further out of reach, or creating stranded assets for newly
built infrastructure both in Europe and in gas-exporting countries, while not solving
the short-term crunch. Governments and investors should instead view the crisis as
an opportunity to further step up Europe’s clean energy ambition, by strengthening
existing frameworks such as the EU Fit for 55 package and the European Green Deal.
5. Investment treaties need to be urgently and radically reformed or repealed
to allow governments to enforce 1.5 °C-compatible oil and gas phase-out
pathways. Governments can tackle this issue by pursuing one or a combinationof existing solutions, namely a moratorium on any further licensing or issuing of
exploration permits for oil and gas, setting up systems to pay out compensationin return for a waiver of treaty rights, and eventually reforming and terminating
investment treaties.

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6. Governments should better regulate the long-term targets of the corporate
sector, at both the global and national levels, to ensure that they support thegoals of the Paris Agreement. Regulative approaches by governments hold criticalpotential to ensure highly ambitious corporate long-term targets. Such regulation
could provide robustly defined concepts that add substantive criteria to ensure Paris
Agreement compatibility, and mandate comprehensive and third-party verified
disclosure practices.
7. Governments should set up mandatory requirements for companies’
reporting methodologies. Until then, investors can fill the gap by adopting
voluntary reporting methodologies. Corporate climate reporting is instrumental
to the ability of the financial sector to channel capital where it is most needed toaccelerate the energy transition. Rigorous mandatory standards would enable theproduction of standardized material information, consistently disclosed within andacross countries.

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Appendix
Scenarios Filtering Methodology
The selection of the 26 1.5°C-consistent scenarios from those published by theIntergovernmental Panel on Climate Change (IPCC) was made through the AR6 Scenarios
Explorer hosted by the International Institute for Applied Systems Analysis (IIASA) (Byers
et al., 2022). To address concerns over the feasibility and sustainability of the deploymentof carbon capture and storage (CCS) and carbon dioxide removal (CDR) technologies, weselected a subset of scenarios that met certain criteria aligned with the IPCC assessment ofthese technologies. The IPCC Sixth Assessment Report (AR6) Working Group 3 assessmentof the scale-up potential of new technologies offered thresholds for the onset of medium
concerns over their feasibility (IPCC, 2022, Annex III, Table II.1).
Accordingly, and based on the analysis of potential risks posed by overreliance on fossil
CCS and bioenergy and carbon capture storage (BECCS) in energy/climate scenarios (fordetails, see chapter 2 of this report), we excluded those scenarios that relied on sequestering
CO2 above the thresholds where medium concerns over their feasibility by 2050 were raised.
The data on the amount of sequestered carbon was extracted for all the 97 scenarios that
limit warming to 1.5°C with no or low overshoot in the AR6 Scenarios Explorer. To prevent
irregularities in deployment in the second half of the century, the carbon sequestration by
2050 was measured as the average between 2040 and 2060.
The maximum scale-up potentials were limited to the thresholds of their sequestration
potential, which was limited to 3 Gt CO2/year for BECCS and 3.8 Gt CO2/year for fossil CCS
by 2050. See Table A.1 below for a summary of the filtering criteria used for 1.5°C-compatible
scenario selection.
Table A.1 Scenario filtering criteria based on IPCC feasibility and sustainability
assessment for CCS and CDR
Carbon sequestration
methodFeasibility/sustainability
dimension

Sequestration thresholds by
2050

Fossil CCS

New technology

3 Gt CO2/year

BECCS

New technology

3.8 Gt CO2/year

Afforestation andreforestation

Sustainable potential

3.6 Gt CO2/year

Moreover, the selected 1.5°C-compatible scenarios also reflected the IPCC’s stated concern
regarding the sustainable use of afforestation and reforestation as carbon sinks. Accordingly,
the total sequestered carbon through these means was constrained to the maximum estimateof the total sustainable potential. In the IPCC Special Report on 1.5°C, based on the analysis
provided by Fuss et al. (2018), the maximum sustainable potential for afforestation andreforestation is estimated as from 0.5 to 3.6 Gt CO2/year. The upper end of this range was

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applied to the total sequestered carbon in the agriculture, forestry, and other land use sector
in order to ensure greater data availability (there are inconsistencies in how afforestation andreforestation are accounted for in different models) (Warszawski et al., 2021).
This filtering method provided a subset of 26 scenarios from three integrated assessment
models and their variations, which were used to extract the data supporting the findings in thisanalysis. See Table A.2 for the complete list of models and specific scenarios retained for thisreport. These models are:
1. MESSAGEix-GLOBIOM model, a dynamic systems-optimization modelling
framework developed by the IIASA Energy, Climate, and Environment program.
2. REMIND (Regional Model of Investment and Development) model, a numericalmodel that represents the future evolution of the world economies with a special focus
on the development of the energy sector and its implications for global climate. It isdeveloped and maintained by the Potsdam Institute for Climate Impact Research.
3. WITCH model, a global dynamic model integrating the interactions between theeconomy, technological options, and climate change. It was developed at the RFFCMCC European Institute on Economics and the Environment.
Table A.2 List of the 26 IPCC 1.5°C pathways limiting CDR and CCS deployment
Model

Scenario

MESSAGEix-GLOBIOM 1.0

LowEnergyDemand_1.3_IPCC

MESSAGEix-GLOBIOM_1.1

EN_NPi2020_450

MESSAGEix-GLOBIOM_1.1

EN_NPi2020_500

MESSAGEix-GLOBIOM_1.1

EN_NPi2020_600_COV

MESSAGEix-GLOBIOM_1.1

EN_NPi2020_600_DR1p

MESSAGEix-GLOBIOM_1.1

EN_NPi2020_600_DR2p

MESSAGEix-GLOBIOM_1.1

EN_NPi2020_600_DR3p

MESSAGEix-GLOBIOM_1.1

EN_NPi2020_600_DR4p

MESSAGEix-GLOBIOM_1.1

NGFS2_Divergent Net Zero Policies

MESSAGEix-GLOBIOM_1.1

NGFS2_Net-Zero 2050

MESSAGEix-GLOBIOM_1.2

COV_GreenPush_550

MESSAGEix-GLOBIOM_1.2

COV_NoPolicyNoCOVID_550

MESSAGEix-GLOBIOM_1.2

COV_Restore_550

MESSAGEix-GLOBIOM_1.2

COV_SelfReliance_550

MESSAGEix-GLOBIOM_1.2

COV_SmartUse_550

REMIND 2.1

LeastTotalCost_LTC_brkLR15_SSP1_P50

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Model

Scenario

REMIND-MAgPIE 2.1-4.2

CEMICS_SSP1-1p5C-minCDR

REMIND-MAgPIE 2.1-4.2

CEMICS_SSP2-1p5C-minCDR

REMIND-MAgPIE 2.1-4.2

EN_NPi2020_600f_COV

REMIND-MAgPIE 2.1-4.2

SusDev_SDP-PkBudg1000

REMIND-MAgPIE 2.1-4.3

DeepElec_SSP2_ HighRE_Budg900

WITCH 5.0

EN_NPi2020_400f

WITCH 5.0

EN_NPi2020_450

WITCH 5.0

EN_NPi2020_450f

WITCH 5.0

EN_NPi2020_500

WITCH 5.0

EN_NPi2020_500f

Regional Disaggregation
Regional data on wind and solar annual capacity additions were extracted using the selected
IPCC 1.5°C scenarios shown in Table A.2. However, from this subset of 26 selected scenarios,
only 11 included regionally disaggregated data. The analysis of the regional deployment ofwind and solar capacity is based on the data provided by the REMIND and WITCH models.
As the MESSAGEix model does not include regionally disaggregated data for wind and solar
capacity addition for the region selected, it was excluded from this part of the analysis.
It should be noted that the estimates from wind and solar deployment in the REMIND and
WITCH models are smaller than those in the MESSAGEix model. This skews the regional
estimates, such that the sum of all the capacity deployment for the regionally disaggregateddata is smaller than the total estimates presented in section 3.3 of chapter 3. For this reason,
the regional estimates represent more reliable assessment when it comes to the relative size ofthe future capacity needs between regions and the indicative scale of the gap in capacity needs
over the forthcoming decade, but are likely to be an underestimate of wind and solar capacity
deployment needs in absolute terms.

Wind and Solar Capacity Additional Investment Costs
The investment costs shown in chapter 3 for wind capacity addition are estimated based on theInternational Renewable Energy Agency (IRENA)’s forecasts of the evolution of total capitalcosts of a wind power plant over the coming decade (IRENA, 2019b). These estimates werethen multiplied by the annual capacity addition for wind energy. The capital cost generating agigawatt of wind power includes an assessment of the cost of four main categories:

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1. Wind turbine cost: rotor blades, gearbox, generator, power converter, nacelle, tower,
and transformer
2. Civil works: construction works for site preparation and foundations for tower
3. Grid connection costs: transformers, substations, and connection to the local
distribution or transmission network
4. Planning and project costs: development cost and fees, licences, financial closing costs,
feasibility and development studies, legal fees, owners’ insurance, debt service reserveand construction management
The investment costs shown in section 3 for solar capacity addition are estimated based on
IRENA’s forecasts of the total capital costs of a gigawatt of solar generation capacity (IRENA,
2019a). It includes an assessment of:
1. Cost of non-module hardware: cabling, racking, and mounting; safety and security;
grid connection, monitoring, and control
2. Installation: mechanical and electrical installation, inspection
3. Soft costs: incentive application, system design, permitting, customer acquisition,
financing costs, and margin
These costs for wind and solar capacity addition reflect a large range of considerations andreflect a realistic estimate of the full deployment costs associated with these technologies.
However, there are several additional costs associated with the full integration of renewables
into the energy systems. Transmission lines and storage units are also necessary to balance theintermittencies of renewable energies. These later costs are not considered in this report, as
they go beyond the scope of our analysis.

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