IEEJ：October 2022© IEEJ2022

IEEJ
2023
Outlook

Energy, Environment and Economy
Challenges for achieving both energy security
and carbon neutrality

Rejean CASAUBON
Seiya ENDO
Ryou ETOU
Hiroshi HASHIMOTO
Takehiro IWATA
KAN Sichao
Kenji KIMURA
Yoshikazu KOBAYASHIKen KOYAMA
Ichiro KUTANI
Tetsuo MORIKAWA
Soichi MORIMOTO
Taiju MORIMOTO
Tomoko MURAKAMI
Hideaki OBANE
Junichi OGASAWARA
Keisuke OTA
Atsuo SAGAWA
Yoshiaki SHIBATA
Shigeru SUEHIRO
Yukari YAMASHITA
Akira YANAGISAWA
Emiri YOKOTA
Masato YOSHIDAExecutive summary

Executive summary
Global energy supply and demand outlook (Reference
Scenario)
Energy consumption will continue to increase despite energy efficiency that will
improve to address climate change and energy security▌

Under the Reference Scenario, and from the perspective of climate change and energy
security, the rate at which the world’s energy intensity per unit of gross domestic product(GDP) will decline is faster than in the past. However, as the macroeconomy expands
beyond the rate of decline, global energy consumption in 2050 will increase by 1.3 times
from 2020 to 17 649 million tonnes of oil equivalent (Mtoe). The Reference Scenario
incorporates past trends and the expected eﬀects of the extension of energy andenvironmental policies and technologies to date.

▌

The lack of upstream investment and the Russian invasion of Ukraine have raised
concerns about a stable and suﬃcient supply of fossil fuels to meet the overall
consumption which will continue to increase at an annual rate of 0.8%. The use of natural
gas will grow at an annual rate of 1.3%, mainly to supply the power generation sector andwill approach oil which is the largest energy source. Oil will expand at an annual rate of
0.7%, increasing mainly in the aviation, shipping, and petrochemical feedstocks sectors.
Against the backdrop of air pollution and climate change, coal will peak around 2030 and
begin to decline, falling below 2020 levels in 2050.

▌

Expectations for more non-fossil energy are growing as many countries aim to becomecarbon neutral. Solar photovoltaics, wind, and others will see the largest growth,
increasing 3.9 times in 2050 compared to 2020. However, the share of non-fossil energy intotal primary energy consumption will increase only slightly, from 20% in 2020 to 23% in
2050.

▌

Consumption in China, which had until recently driven the global demand growth, will
peak around 2030 before turning downward while demand in India, the Middle East andNorth Africa, and the Association of Southeast Asian Nations (ASEAN) will continue toincrease. India’s consumption will surpass that of the United States and ASEAN’s will
surpass that of the European Union in the 2040s, making Emerging Market andDeveloping Economies in the energy and environmental ﬁelds all the more important.

Middle Eastern oil producers take advantage of their low production costs to lead
crude oil supply. Russia is suffering from a severe shortage of upstream investment
due to embargoes and sanctions, and its rate of decline is accelerating.
▌In the medium-term, until 2030, the Organization of the Petroleum Exporting Countries(OPEC) and non-OPEC will both increase crude oil production. However, in Europe andEurasia, where oil production was expected to decline over the medium to long term even

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before the Ukrainian war, the impact of Western countries’ embargoes and sanctions will
deepen Russia’s lack of upstream investment and accelerate the pace of decline.
Production in North America, led by the United States which increased output
dramatically in the 2010s, will peak around 2030.
▌

From 2030, OPEC, especially the Middle East OPEC members with their abundant oil
reserves and cheap production costs, will become increasingly prominent despite
increases in production from Latin America. The share of OPEC crude oil in the global oil
supply will rise from 34% in 2020 to 44% in 2050.

▌

Total world crude oil trade will increase as a result of rising oil demand. Imports will fallin Organisation for Economic Co-operation and Development (OECD) countries, where
demand will decline, but imports from non-OECD countries will increase at a faster pace.
Asia’s dependence on imports will continue to rise, and while inﬂows from the Americas
will increase, the Middle East will remain the largest supplier. Non-OECD Europe/Central
Asia, especially Russia, will see an accelerated decline in exports to Europe and become
more dependent on the Chinese market.

The LNG market is expanding due to abundant supply potential, but the outlook is
uncertain▌

The United States, the world’s largest producer and consumer of natural gas, will continue
to increase its production of natural gas, especially shale gas. Until about 2030, production
will increase at an annual rate of about 1% and then stabilise.

▌

Australia, which slightly surpassed Qatar as the world’s largest exporter of liqueﬁed
natural gas (LNG) in 2020, will experience steady growth in production. The increase is inpart due to projects centring on the provision of complementary gas to existing LNG
production facilities. The increase will moderate after 2030.

▌

In the Russian Arctic, construction is progressing for a second major LNG export project
which had reached the investment decisions. However, the future of this project is
uncertain due to the Russian invasion of Ukraine in February 2022.

Achieving decarbonisation is, realistically, a long-term commitment▌

Decarbonisation has accelerated faster in Advanced Economies such as the United Statesand Europe. Emerging Market and Developing Economies have announced theirintention to become carbon neutral, despite a long run coal demand that will expand in
Asia, including India and ASEAN excluding China, and Africa. Global coal production
will increase until the early 2030s in response to demand but after that, it will start to
decline; the downward trend will intensify in the 2040s.

▌

Steam coal production will increase from 5 950 Mt in 2020 to 6 537 Mt in 2040 mainly due
to increased demand for power generation. It then begins to slowly decline, reaching
6 311 Mt in 2050. Production of coking coal, used mainly as a raw material for steel
production, will gradually decline from 1 014 Mt in 2020 to 824 Mt in 2050.

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Executive summary

Electricity generation is expanding rapidly in Asia. Natural gas-fired power generationis the biggest source of electricity▌

Global electricity generation will grow at an annual rate of 1.8%, rising to 45 777 TWh in
2050, 1.7 times higher than in 2020. 95% of that increase comes from Emerging Market andDeveloping Economies. Continuing its rapid economic growth, electricity generation in
Asia will increase at an annual rate of 2.1% to reach 23 313 TWh in 2050, roughly half of
the world’s requirements.

▌

Although coal has the largest current share of the global power generation mix, natural
gas will be the largest source of electricity in 2050. With a continuing upward trend inelectricity demand in both Advanced Economies and Emerging Market and Developing
Economies, ensuring a stable supply of natural gas remains an urgent and a long-term
issue.

▌In Advanced Economies, renewable energy will overtake natural gas as the largest sourceof electricity in the ﬁrst half of the 2020s due to its rapid adoption. Of these, solar
photovoltaic and wind, which have output variability, will account for 25% of theelectricity generated in 2050. Measures to deal with these output ﬂuctuations and the
expansion of the network connecting the sites suitable for power generation and thelocation of demand will be issues.

▌

In Emerging Market and Developing Economies, renewable energy, especially wind, willcontinue to increase and replace coal as the largest power source in 2050. However, therole of coal-ﬁred power generation in supporting the robust demand for electricity is nosmall matter, and it is necessary to develop a highly predictable investment environment
and address environmental issues, such as air pollution.

▌

The role of nuclear is being recognised anew in Japan, Europe, and other countries fromthe perspectives of climate change countermeasures and ensuring energy security,especially after Russia invaded Ukraine. However, although new construction starts areunderway, mainly in Asia, nuclear will not grow faster than the rate of increase inelectricity demand through 2050, reducing its share of the power generation mix to 7%.

Advanced Technologies Scenario
Even under the Advanced Technologies Scenario, reaching global carbon neutrality
by 2050 is far from being achieved. Further promotion of energy efficiency andclimate change measures will require the full mobilisation of all means possible.
▌

The “Advanced Technologies Scenario” anticipates maximum carbon dioxide (CO2)emission reduction measures based on the application opportunities and acceptability insociety, including the full-scale introduction of newly factored hydrogen, and enhancedenergy security measures. It should be noted that this outlook is a forecast-type of exercisethat projects in the future based on the premise of the introduction of technology, etc. It
contrasts with a backcast-type analysis that deﬁnes a future “landing point” and charts apossible path to reach it. Global ﬁnal energy consumption under the Advanced

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Executive summary

Technologies Scenario will be reduced by 5.2% in 2030 and 23.5% in 2050 compared to theReference Scenario.
▌

Primary energy consumption will decline by 4.4% relative to the Reference Scenario in
2030 but will increase relative to 2020. After 2030, the reduction will accelerate as energy
eﬃciency continues to improve. The reduction from the Reference Scenario in 2050 will
only reach 18.5%, which is less than that of ﬁnal energy consumption of 23.5%. This is dueto the increased use of electricity and hydrogen, which have energy transformation losses.

▌

Fuel switching will also advance, reducing fossil fuel primary energy consumption by
1.1 Gtoe relative to the Reference Scenario in 2030 and 5.1 Gtoe in 2050. Despite asubstantial growth in non-fossil energy of 0.4 Gtoe in 2030 and 1.8 Gtoe in 2050, the world
cannot continue to maintain and improve its economy, society, and livelihoods without
fossil fuels, even in the Advanced Technologies Scenario.

▌

Energy-related CO2 emissions will be 31.2 Gt in 2030 (down 1.4% from 2020) and 16.9 Gt
in 2050 (down 46.5%). In this scenario, CO2 emissions would signiﬁcantly reduce to levels
equivalent to the Announced Pledges Scenario of the International Energy Agency (IEA)
released in its “World Energy Outlook 2021”. Consequently, such scenario is still far froma worldwide “Net Zero” emissions. The reduction from the Reference Scenario willamount to 20.1 Gt in 2050, of which China and India accounted for 38.1%.

▌

One of China’s 2030 targets for Nationally Determined Contribution is to reduce CO2
emissions intensity per GDP by more than 65% from 2005 levels, which is roughly
equivalent to the Reference Scenario results. India’s target of a 45% reduction in intensity,
in its 2022 update, is roughly equivalent to results in the Advanced Technologies Scenario.
On the other hand, the set targets to reduce emissions by the United States (50% to 52%
reduction from 2005 levels), the European Union (55% reduction from 1990 levels), andJapan (45% reduction from 2013 levels), will fall short of the Advanced Technologies
Scenario results.

▌

As expected, the Advanced Technologies Scenario requires less investment in fossil fuels
than in the Reference Scenario, but further low-carbon investment in renewable energy
and energy eﬃcient equipment is required. The investment required in the 2040s, underthe Advanced Technologies Scenario, is $35 trillion (at 2015 prices), $20 trillion more thanin the 2010s, or an increase of $6 trillion from the Reference Scenario in the 2040s. The
cumulative global energy investment requirement by 2050 will reach $88 trillion, or an
average of $2.9 trillion per year.

Energy security strategy to address the Ukraine crisisand the energy transition▌

A growing number of Asian countries are declaring themselves as also aiming at carbon
neutrality. In addition to building a new energy infrastructure, free of carbon emissions,
the world must focus on big problems that cannot be solved easily in the limited time wehave (between 30 and 40 years). The problems include the mass disposal of existing

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Executive summary

equipment and job displacement, due to reworking the energy system. There is also agreat deal of uncertainty surrounding the speciﬁc means of realisation.
▌

Asia faces a variety of challenges stemming from energy security. In emerging anddeveloping Asia, where high economic growth is expected, it is essential to provide stably
and inexpensively a large amount of energy. Considering the current trend toward a
return to coal due to soaring energy prices, the amount of renewable energy available andtheir integrating costs, the transition from coal to natural gas is the realistic path forward.
In doing so, the ﬁrst phase of switching from coal to natural gas will involve increasing
supply investments outside Russia while presenting a practical solution to the supply andcost problem. In the second phase, decarbonisation will be achieved by adding various
measures, including the use of renewable energy and decarbonised natural gas.

▌

The so-called “4R technologies” is a tool to realise the decarbonisation of fossil fuels.
Among them are the use of blue hydrogen produced by capturing CO2 generated during
manufacturing, the introduction of carbon capture and storage (CCS) technology inmanufacturing plants and power plants, and carbon recycling technology that uses thecaptured CO2 for other purposes.

Response to strengthening stable power supply andimportance of nuclear power generation▌

Under electricity deregulation, power generation facilities that are used infrequently inthe market – with fewer generating opportunities – will be suspended anddecommissioned. The introduction of renewables power generation has been expanded
based on government support measures and in part caused the suspension and abolitionof thermal power generation in many developed countries due to the decline in operating
rates and the deterioration of proﬁtability. As a result, the remaining power supply
capacity of the entire electricity system declined. With a sudden surge in demand forelectricity triggered by extreme heat or severe winter, combined with output declines andoutages of power generation facilities (also caused by heat and cold waves), there aresituations in which the balance between supply and demand becomes tight.

▌

Until now, the assessment of a stable supply of electricity has been to evaluate thepossibility of a shortage of generating capacity (kW shortage) in response to increased
demand. As decarbonisation policies proceed in the future, it is expected that dependence
on a small number of power sources will increase. Another major issue is how to assess
the risk of a shortfall in the amount of electricity generated (kWh shortage) when facing
unforeseen events in a power source that the system heavily depends on.

▌

In a climate dominated by low-carbon arguments, the sharp rise in global fossil fuel prices
since around 2021 and the Russian invasion of Ukraine in February 2022 put greater
emphasis on securing a stable supply of energy. The role of nuclear in energy security is
once more being recognised in Japan, Europe and elsewhere. The importance of its
utilisation as a stable large-scale baseload power source under fossil fuel-ﬁred power
generation constraints has been highlighted anew.

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Executive summary▌

France and other countries announced ambitious nuclear targets while analysing the best
mix with renewables. Plans to build new nuclear power plants are also underway in the
United Kingdom and Eastern European countries. Expanding the operation of existing
nuclear power plants and restarting them in Japan attract global interest. Attention is
being paid to initiatives such as the introduction of a Regulated Asset Base (RAB) model,
which is under consideration in the United Kingdom and can be considered as providing
regulated returns to secure new investment in nuclear that will simultaneously achieve
decarbonisation and stable supply.

▌

Nuclear is considered important from the standpoint of energy security, but it is also
important for companies and countries in which nuclear is developed. A series of new
projects by Western companies have faced delays in construction times and higher costs
that far exceeded their original estimates. In one instance, it was pointed out that thecompany lost its construction know-how and was forced to change its design after
construction began, due to regulatory requirements.

Critical mineral issues and energy, and economic
security▌

To achieve carbon neutrality, a massive adoption of renewable energy, electric vehicles,
hydrogen and other low-carbon technologies is necessary. A new energy security
challenge is emerging, caused by tight supply and demand for rare minerals (criticalminerals), which are considered essential for these technologies. Like for fossil fuels, theseresources are unevenly distributed around the globe.

▌

In the Advanced Technologies Scenario, the supply and demand for lithium, cobalt,
neodymium, and dysprosium will be tight by the mid-2030s, mainly due to the increased
penetration of electric vehicles. For nickel and cobalt, there are concerns that the
cumulative demand by 2050 will exceed the sum of the total recycled supply and theresource reserves to cover long-term demand.

▌

Resources are concentrated in Chile, Argentina, Australia, and China for lithium,
Indonesia and the Philippines for nickel, the Democratic Republic of Congo for cobalt,
and China for the rare earth’s neodymium and dysprosium.

▌

There are short-term and long-term perspectives on energy security. Unlike “ﬂow-type”
commodities such as oil and natural gas, which can face a signiﬁcant impact in the eventof a sudden supply disruption caused by some disturbance, “stock-type” materials are
more resistant to short-term risks because even if a supply disruption occurs, the portion
already imported can be incorporated into renewable energy facilities to provide energy.
On the other hand, from a long-term perspective, it will be diﬃcult to achieve carbon
neutrality based on renewable energy, electric vehicles, hydrogen, etc., unless measures
are prepared in advance to address the tightening of global supply and demand anduneven distribution of resources for critical minerals. While it will be essential to increase
production at existing mines and promote the development of new mines for those typesof ore that are feared to be in short supply, there are concerns that resource development

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Executive summaryand export controls will be tightened in supplier countries in the future. Therefore, it goes
without saying that demand countries are required to not only strengthen resource
diplomacy aimed at securing interests, but they are also required to reduce importdependency and increase recycling rates to diversify sources of procurement, and topromote the development of technologies for non-use and reduced usage, as well as
alternative technologies.
▌

On the other hand, supplier policies and the prospects for developing recycling, shifting
and alternative technologies all involve uncertainty. Therefore, from the perspective ofenergy and economic security, consideration should also be given to balanced technology
choices aimed at avoiding excessive reliance on speciﬁc carbon-neutral technologies 1.

Economic impact of green investment▌

When investments in climate change measures create a virtuous cycle of emissions
reductions and economic growth, it is called “Green growth”. The results, however, may
not be realised or they may appear diﬀerently in diﬀerent economies and entities. It could
create new disparities – (1) among developed economies and emerging/developing
economies, (2) between developed and emerging/developing economies, (3) between
economies that rely on fossil fuel exports and those that do not, and (4) within the
population and citizens of the same economies.

▌

The cumulative additional green investment and consumption to realise the Advanced
Technologies Scenario amounts to $14 trillion (at 2015 prices). If this green investment andconsumption were carried out in a “No Financial Constrained” situation where the total
amount of funds available could be increased at will, the GDP in 2050 would increase by$20 trillion (11.2%, an annual average of 0.4%). On the other hand, under a “Financial
Constrained” situation in which the total amount of funds cannot be changed due tolimited economic and ﬁnancing capacity, GDP would be reduced by $6.2 trillion (3.5%, anannual average of 0.1%). “Financial constrained” means that incremental green
investments will be oﬀset by declines in investment and consumption in other areas.

▌

Under the No Financial Constrained Case, GDP and output would increase in many
economies, but would decrease in economies such as those in the Middle East and theformer Soviet Union that are highly dependent on mining (fossil fuels). In the Financial
Constrained Case, GDP and output will decrease in many economies. However, in somedeveloped countries and China, the decrease in the value of energy imports due to green
investment and consumption is signiﬁcant and GDP and output will increase,outweighing the decrease in investment in other sectors due to ﬁnancial constraints.

▌

Investment is a new demand and a source of growth. However, if other investments are
reduced in proportion to new investments in a situation of ﬁnancial constraints andWith the permission of the Japan Oil, Gas and Metals National Corporation (JOGMEC), this article
presents a part of the results of its commissioned study, “Survey of Mineral Resource Supply and
Demand to Achieve Carbon Neutrality” (FY2022), and details of the results will be reported at aseminar scheduled to be held by JOGMEC on 10 November 2022.
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budget constraints, no new demand is created as a total amount. In addition, green
investment is unlikely to be a source of growth because it is not itself an investment toexpand production capacity. Relaxing ﬁnancial constraints and providing suﬃcient funds
are the key to achieving green growth.
▌

For smooth ﬁnancing, it is necessary to use not only government budgets but also green
ﬁnance, which is mainly funded by the private sector. It is important to clarify the
direction of the environmental policies to limit risks and encourage investment. How tolimit negative economic impacts and how to even out the diﬀerent impacts between
economies and industries is important.

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The tables for IEEJ Outlook 2023 are currently available athttps://eneken.ieej.or.jp/en/whatsnew/442.html.
The full text will be available early 2023 at the same URL.

IEEJ Outlook 2023
October 2022
The Institute of Energy Economics, JapanIEEJ © 2022
Contact: report@tky.ieej.or.jp