A Funny Thing Happened In Europe On The Way To Net Zero
“Europe has been leading the green energy push. Not all EU members are on board. Some want other options to decarbonize their economy. At Shell, four top green execs have departed over policy differences. ”
Our title borrows from the Broadway musical, which later was made into a movie, "A Funny Thing Happened On The Way To The Forum.” The story of the play and movie was inspired by the farces of the ancient Roman playwright Plautus (251–183 BC). It tells the bawdy story of a slave named Pseudolus and his attempts to win his freedom by helping his young master woo the girl next door. The European climate change movement has been engaging in similar farces when they suggest that restructuring the continent’s economies and societies can be done with little cost and even less disruption. Of course, part of this push necessitates that the oil and gas companies headquartered in Europe shift away from their core business and embrace renewable energy. Surely no one will suffer from that move – right?
On the way to net zero – both for the European Union (EU) countries and its oil and gas companies – inconvenient truths emerged. For the EU, it was that not all countries were willing to tear apart their economies, throwing millions of workers out of jobs, and raise taxes to fund questionable clean energy investments. Two of the EU’s 27 members, Hungary and Poland, who are poorer countries in the organization and depend on fossil fuels not only to power their economies, but also for jobs, people’s incomes, and government taxes, are opposed to increasing the emissions reduction target.
The EU was scheduled to vote late last week on its new 7-year budget, €1.8 ($2.1) trillion, and its €750 ($875) billion pandemic recovery plan, as well as an increase in the emissions reduction target to 55% from 1990 levels compared to the current 40% target by 2030. There is another internal EU battle involving these two countries, which is over the EU’s “rule of law standard.” Hungary and Poland have conservative governments that have taken actions that appear to restrict the freedoms of its courts. The countries cite recent court rulings against the governments as proof this is not an issue. A compromise was negotiated that gained approval of the budget and recovery plan, in return for governments being allowed to challenge the rule of law standard that likely delays its implementation for months or even years.
On the climate front, Reuters reported a softening by the EU about its emissions reduction target. The EU would seek its member countries to endorse the “at least 55%” target. It would ask the European Commission (who administers the EU) to make cash available to help poorer countries to invest in clean energy. Rather than allow countries to “choose the most appropriate technologies” to cut emissions, the EU’s target is to become a collective goal, and not a mandate for each country. These changes will help coal-heavy countries such as Bulgaria, Czechia, Romania, Slovakia, and Poland to deal with the emissions reduction target.
What we are seeing play out in the EU (forget about the Brexit negotiations) is the clash between idealism and reality. The economic cost and social disruption facing countries as they strive to reduce their carbon emissions is often much greater than they can bear. Poorer countries are particularly at risk of needing more help and more time, something the “climate emergency” mindset doesn’t allow. Just as France and Chile have seen riots over small increases in fuel taxes or mass transit fares to battle climate change, we should be prepared for more pushback as the targets force greater changes. This is not only true for countries, but for companies as well.
Moving energy companies from their traditional business focus is a case in point. The first major clash over green energy strategy emerged last week at transnational oil and gas company - Royal Dutch Shell. The media is reporting that the company lost its top four clean energy executives due to internal differences over the pace of the company’s green energy shift.
The departures come less than 60 days before the company’s management is due to spell out how it plans to transition from an oil-and-gas-focused company to one championing green energy. Not only must management show the specific steps they plan to undertake, but also demonstrate the cost. This latter point may be the greatest stumbling block to a rapid transition, which we perceive from the media coverage of the executive departures to be at the heart of the dispute.
According to the Financial Times, “Marc van Gerven, who headed the solar, storage and on-shore wind businesses at Shell, Eric Bradley, who worked in Shell’s distributed energy division, and Katherine Dixon, a leader in its energy transition strategy team, have all left the company in recent weeks.” Reportedly, “Dorine Bosman, Shell’s vice-president for offshore wind, is also due to leave the company.” The newspaper also says that other clean energy top executives plan to depart in the coming months.
The challenge seems to be that these executives see the potential for clean energy, but don’t find that the mindset exists among senior executives for a radical restructuring of Shell. Ben van Beurden, Shell’s chief executive officer, has said investment into lower-carbon businesses such as biofuels and solar power “needs to accelerate,” but he has also said that oil will continue to be a huge cash generator and the company will expand its natural gas division. His statement at a recent financial conference probably rankled the clean energy executives. He reportedly told the audience, “There is going to be a place for our upstream [oil and gas] business for many decades to come.”
The Financial Times article contained quotes from anonymous executives about the internal upheaval. “I don’t know how we are going to transition without wholesale change at Shell.” “We don’t have the culture or that level of flexibility to do it.” “I wouldn’t be surprised if we see more high-profile departures.” These quotes suggest a much more deeply divided management team, raising questions about how rapidly Shell can move forward transitioning.
The article offered the following commentary. “Some top executives at Shell are concerned about investing larger sums into greener businesses that are not as lucrative as traditional fossil-fuel divisions. They also believe that the company has already moved aggressively and only needs to communicate better.” The latter point is an opinion open to interpretation. The former point about investment returns echoes comments made earlier this year by Bernard Looney, CEO of BP plc, when he was introducing the new clean-energy strategy for his company. He specifically warned pensioners, presumably loyal retired BP employees, who own BP shares for its dividend payments that green energy businesses have financial returns that are roughly half those of oil and gas, thus it will be a challenge for management to raise returns as it invests in these new businesses. The message to investors, in other words, is don’t expect dividend payments to grow (this was before the cuts due to the impact of Covid-19 on the business).
Finally, as we reach the five-year anniversary of the Paris Agreement, a study by Climate Action Tracker, an organization monitoring the progress of 32 countries that signed onto the Paris Agreement as they establish and work toward the Agreement’s goals, shows disappointing progress. The current levels of emissions would result in a temperature increase of between 2.4° and 4.3° Celsius (4.3° to 7.7° Fahrenheit), with the most likely outcome about 3.2°C (5.8°F) by 2100 without any intervention — more than double the actual goals for global warming limits set forth by the Paris Agreement. Not a good anniversary present.
Only two African countries - Morocco and Gambia – have efforts that would be sufficient to keep global temperature increases under 1.5°C. Maybe these countries have succeeded because they don't have nearly the infrastructure of a developed industrial nation, thus minimizing the effort needed to curb carbon emissions. Morocco is building the largest concentrated solar power plant in the world, while also weening itself off fossil fuels. The country projects getting 42% of its energy from renewables this year. Gambia, meanwhile, has established a plan to limit its emissions, as it develops a reforestation project to combat soil erosion.
A handful of countries are on a pace to limit global warming to 2°C. None of them - Bhutan, Costa Rica, Ethiopia, and the Philippines - are major polluters. There is optimism about the success of India in reducing its emissions, which would be significant, as the country is the world’s biggest polluter. But much remains to be seen about India’s success going forward in curbing emissions.
Maybe the lack of progress by the signatories to the Paris Agreement is due to countries awaiting the U.S. jumping back on board and beginning to fund its share of the $100 billion a year in transfer payments to poorer countries committed by developed countries. The problem is that none of the developed countries that pledged the financial support has made a payment.
The 11th annual Emissions Gap Report from the United Nations Environment Program offered good and bad news. Although from 2010 to 2019, greenhouse gas emissions grew by an average of 1.4% a year. The wildfires in 2019 caused emissions to increase at a faster pace. Despite a 7% reduction in emissions this year, the report found it will have a “negligible” impact on the global warming trend. The report is optimistic that many large polluters are seemingly getting on board with net zero emissions goals.
The polluting rich countries need to reduce their carbon footprints by a factor of 30 to avoid the worst of the climate forecasts. The report says it can be done, but it means reducing food waste, making buildings more energy efficient, and taking public transit rather than cars, and trains instead of planes. Will these large polluters walk the walk after talking the talk?
We will be watching with great interest to see the outcome of the EU meeting, as well as next February’s Shell presentation on its strategy to become a green energy company. In the meantime, we expect to be barraged with media stories about the U.S. re-entering the Paris Agreement, and our government’s commitment to decarbonizing our electrical system. We don’t expect many solid cost estimates about these moves.