Shell Management Brief Climate Change 1 February 1995 Main points 0 The possibility of climate change caused by an enhanced greenhouse effect could have major business implications for the fossil fuel industry. Global warming could have major consequences; equally, ill-advised policy measures could have serious economic impacts. 0 All signatory governments to the Framework Convention on Climate Change must produce national inventories of greenhouse gas emissions and removals and take measures to anticipate, prevent or minimise the causes of climate change and mitigate its adverse effects. 0 There is a general consensus that human activities have contributed to an increase in atmospheric greenhouse gas concentrations. This must have some effect on the radiation balance which ultimately determines global climate. However, it is not possible to quantify the consequences for global climate with respect to timing, magnitude or regional distribution nor to specify their significance in comparison with natural climate variation. 0 A Group Planning study uses two scenarios to examine alternative energy futures and their likely impact on carbon dioxide (C02) emissions. It concludes that overthe next decades renewable forms of energy can gradually become competitive through market mechanisms while existing energy producers and users will continue to improve their ef?ciency. As a result CO2 emissions could peak at about 10 gigatonnes of carbon a year before the middle of the next century and decline. 0 The Shell review of the scienti?c uncertainty and the evolution of energy systems indicates that policies to curb greenhouse gases beyond ?no regrets? measures could be premature, divert economic resources from more pressing needs and further distort markets. 0 In considering future policy, governments should recognise that the market will drive the energy industry towards improving supply costs and energy ef?ciency, including renewable technologies, to meet long term demand. ?the maximum concentration level is to be achieved within a time Background frame which allows ecosystems to adapt naturally to climate The possibility of climate change brought about by global warming via man?made increases in gases such as carbon dioxide (C02) and methane - the enhanced greenhouse effect - is probably the most prominent global environmental issue of today and could have major business implications for the fossil fuel industry. Action to strengthen efforts to combat the rise in greenhouse gas concentrations was taken in 1992 at the Earth Summit in Rio de Janeiro with the signing of the Framework Convention on Climate Change. The Convention - which has the objective of ?stabilising atmospheric greenhouse gas concentrations at a level that will prevent dangerous anthropogenic interference with the climate system? - came into force in March 1994, having been rati?ed by the requisite 50 signatories. The Convention states that change, avoids disruption to food production, and enables sustainable economic deve10pment to proceed?. All signatories are required to produce national inventories of greenhouse gas emissions and removals and to take precautionary measures to anticipate, prevent or minimise the causes of climate change and mitigate its adverse effects. Developed countries are committed to producing national plans to stabilise/reduce greenhouse gas emissions, and to return to 1990 levels of man-made emissions of C02 and other greenhouse gases by the year 2000. Some countries have already set themselves more ambitious targets. Developed countries are also required to provide ?nancial resources to permit developing countries to meet their obligations under the Convention, and to transfer or give them access to environmentally-sound technologies and know-how. The first meeting of the Conference of the Parties (COPI) to the Convention (Berlin, March 1995) will review progress regarding these objectives. Key objectives/topics for discussion at COPI include: 0_ How to assess countries? contributions to greenhouse gas concentrations in the atmosphere, including common methodologies for measuring and reporting them. 0 A review of the adequacy of developed countries? existing commitments to stabilise/reduce greenhouse gas emissions; several OECD governments consider them to be inadequate. 0 Calls by some countries for commitments to be increased or extended. A draft protocol to the Convention proposed by the Alliance of Small Island States (AOSIS), supported by Germany, calls for developed countries to reduce their C02 emissions by at least 20% from their 1990 levels by 2005. While this is unlikely to be agreed at COPI, it is possible that a process and timetable for developing 'a protocol will be established. 0 The scope for using ?joint implementation? projects (by which countries would be able to implement measures to reduce greenhouse gas emissions together and to share the credit), and whether a pilot phase should be started. Currently there is a wide gulf between developed countries (mostly in favour) and developing countries (largely against). The functions of the two subsidiary bodies to be established under the Convention (one on implementation and the other providing scienti?c and technical advice). The way in which business can become more closely involved in the Convention process. Prior to and parallel with preparatory work for the ntergovemmental Panel on Climate Change established )y governments in 1988, has produced in?uential views on climate :hange in reports published in 1990, 1992 and 1994. Further reports will be produced in 1995. l?he enhanced?greenhouse effect [he natural greenhouse effect is not in dispute and is essential for maintaining life on earth. The so-called greenhouse gases, which nclude water vapour, C02, methane, nitrous oxide and ozone, tllow the free passage of incoming sunlight but re-re?ect part of he outgoing infra-red radiation (so-called radiative forcing). As a ?esult, the Earth?s average surface temperature is some 35 higher han it would otherwise be. Man?s activities have contributed to' :missions of these gases from the use of fossil fuels, particularly :ince the Industrial Revolution, and have more recently added .ynthetic greenhouse gases such as chloro?uorocarbons (CFCS). Yhe increase in concentrations of greenhouse gases has caused 'oncem that this will give rise to an enhanced greenhouse effect esulting in global warming. What makes this such a controversial ssue is the substantial uncertainty around each of the elements in he Figure and the interactions between them. Atmospheric greenhotse gas concentration Man-made greenhouse gee emisslom Global the circle 0! uncertainty Global warming could have major consequences; equally, ill-advised policy measures could have very serious economic impacts. Notwithstanding this controversy, there is agreement on the following scientific fundamentals: 0 The major greenhouse gas is water vapour, which could account for three-quarters of the natural greenhouse effect 0 The concentrations of other greenhouse gases have increased rapidly since the Industrial Revolution - by about 40% (expressed in terms of their C02 equivalent) over pre-indusuial levels. This has led to an increase in radiative forcing of about one percent of the total incoming radiation. (While this may appear small, it is important, since living organisms can tolerate only a relatively ?small range of temperature.) 0 This increase in radiative forcing will have some effect on the processes which determine global climate. 0 The rate of increase of atmospheric greenhouse gas concentrations is faster than previously experienced during the history of civilisation (although not unprecedented on a geological time scale). 0 Natural factors such as volcanic activity, solar orbit, patterns of ocean circulation and human activities other than fossil fuel consumption (eg deforestation and urbanisation) can also significantly affect climate, causing warming or cooling. Starting from this broad area of agreement, the controversies arise from differences about the potential consequences of the increases in concentrations of atmospheric greenhouse gases and the interpretation of past and present climate observations. Although the IPCC position is often referred to as the scienti?c consensus, there is a range of views about the magnitude of the threat from global warming and its causes. Furthermore, there are a significant minority outside IPCC who take a contrary view, believing the concerns over global warming to be exaggerated and misguided. The main conclusions of the IPCC to date can be summarised as follows: 0 Global mean surface temperature will increase by between 1.5 and 4.5 (depending on the model used) if the equivalent C02 concentration were doubled - which would occur in about 2030 if present trends were to continue unaltered. 0 There are many uncertainties with regard to the timing, magnitude and regional patterns of climate change. 0 Global mean surface air temperature has increased between 0.3 and 0.6 over the last 100 years. This warming is consistent with model predictions, but is also within natural climate variability. Conversely this variability could have offset a larger, human induced greenhouse warming. 0 The unequivocal detection of an enhanced greenhouse effect is not likely for a decade or more. 0 Depletion of ozone in the lower stratosphere results in a decrease in radiative forcing comparable in magnitude to the contribution of CFCs. 0 Cooling by sulphur dioxide (802) aerosols may have offset'a significant part of greenhouse warming in the Northern Hemisphere. 0 Rates of increase of methane and CFC concentrations in the atmosphere have decreased - the latter attributable to international agreements; the reason for the former is unknown. 0 The anomalously high global temperatures of the late 19803, which were the warmest years on record, continued into 1990 and 1991. 1992 and 1993 were more in line with longer term means. 0 The major volcanic eruption of Mount Pinatubo in 1991 caused signi?cant interference to short term climate, with emitted particles having a cooling effect that masked global warming for a limited period. 0 There has been an unexplained and unpredicted slowing in the rate of increase of atmospheric C02 concentrations since 1992 - although this was reversed in late 1993. 0 New information suggests that substantial changes in climate occurred more frequently and rapidly in the past than previously realised and that ocean circulation patterns may play a greater role than is currently understood. Areas of uncertainty and alternative scientific views Scientific criticism of the IPCC conclusions, reviewed recently by Group HSE Division, falls under 5 headings: 3. Understanding the carbon cycle Man-made C02 emissions are small (5.5 from fossil fuels and 1.6 from deforestation a year) compared with the total ?ows of carbon into and out of the atmosphere and marine and terrestrial reservoirs due to natural processes (estimated to be 190 a year). A small short term shift in the balance of processes goveming this cycle could therefore overwhelm any effects from human activity. Only the amount of carbon in the atmosphere and the amount released from fossil fuels is known with any degree of accuracy. Understanding of other greenhouse gases such as methane and nitrous oxide and the complex role of water vapour is even less well developed. b. Temperature records Measuring global average temperatures is notoriously dif?cult and coverage of the Earth?s surface by reliable measuring stations is insuf?cient. Surface temperature records do not agree well with satellite measurements. Sceptics argue that other factors such as urbanisation and desertification could have made a signi?cant contribution to the observed temperature increases. They claim that if such factors are subtracted, the rise due to greenhouse gas effects is at most 0.3 over the last century, and could be negligible. c. Understanding climate processes The General Circulation Models (GCMs) which attempt to describe and predict climate behaviour are impressive but the task is immensely complex and the modellers themselves recognise their limitations. While such models help in our understanding of climate processes there are serious limitations in using them for making predictions. d. Consequences of global warming GCMs and other projections predict various consequences in addition to temperature rise, including increased precipitation and cloudiness, increased frequency and severity of storms and decreased diurnal temperature variations. Secondary consequences include sea level rise, retreat of glaciers and disturbance of ecosystems. The sceptics argue that there is no statistically signi?cant evidence that climate has been affected in the way predicted and that progressive re?nement of the models has led to less alarming predictions. e. Ecosystem responses to climate change For terrestrial ecosystems, raised C02 concenn?ations would probably increase plant growth which could give a net gain to agricultural output. Changes in the distribution of vegetation in the higher latitudes are reasonably well understood but in the tropics the changes would depend on moisture rather than temperature. Estimates of such changes vary widely and the impact on ecosystems is most uncertain. The Shell position The Shell position is founded on a two part analysis which looks on the one hand at the scienti?c case, and on the other uses the techniques of scenario building to explore the evolution of the world?s energy system. The latter explores two alternative energy futures leading to conclusions on their likely impact on C02 emissions. The science of climate change The arguments outlined in the last section may appear to represent a formidable case against the global warming hypothesis or at least in favour of a well-grounded scepticism. However, many of them raise questions or point to uncertainties rather than offer convincing alternative positions. Those who conclude that global warming is likely argue that uncertainty applies both ways - the effects could be larger than predicted. Nonetheless a definitive, unequivocal position on the science of global warming would require an understanding of the complex systems which determine the world?s climate and bio-geochemical cycles. This quite simply is beyond current capabilities. It is not surprising therefore that there should be controversy, given the matters at stake. The only statements which can be made with con?dence relate to the fundamentals stated above, which may be summarised as follows: 0 Human activities have contributed to an increase in atmospheric greenhouse gas concentrations. This must have some effect on the radiation balance which ultimately determines global climate. However, it is not possible to quantify the consequences for global climate with respect to timing, magnitude or regional distribution nor to specify their signi?cance in comparison with natural climate variation. It is thus not possible to dismiss the enhanced global warming hypothesis as scientifically unsound; on the other hand any policy measures should take into account explicitly the uncertainties in the science. Evolution of the world?s energy system Group Planning has carried out a study which has sought to identify sharacteristics shaping the evolution of energy systems over the very long term and from this has derived two scenarios: Sustained Growth and Dematerialisation. The analysis of the evolution of energy systems and related iiscoveries/inventions over the last century shows a complex picture of progress (with the inevitable aborted developments) in Jerms of costs, quality, variety and use of energy, shaped by market forces. A hundred years ago the world?s energy needs were met largely by coal and wood; oil?s market share was just two percent in 1890. In order to meet the underlying growth in energy demand 1nd supply - driven by population growth, industrialisation and economic development - productivity increased, affecting both 3upply and demand, stimulated by competition and market nechanisms. New needs developed (eg for increased mobility - met ?rst by rail and then by the car and the aeroplane), resulting from he convergence of technologies and social developments. They were enabled by a wider diversity of energy sources. The price of )i1 fell by eight percent a year over 20 years and production .ncreased ?fty fold from 1870 to 1910. Today, several renewable :nergy technologies - wind, biomass, solar photovoltaics - are ?ollowing a similar path down their learning curves. Over time, najor shifts can thus be observed, resulting from sustained :volution and converging developments. Based on these observations, two scenarios (Sustained Growth 3: Dematerialisation) have been developed, both with a similar )opulation (10 billion by 2060) and economic growth (three percent )er year), but with two different ways of meeting energy needs. In )0th scenarios, new renewable sources continue to progress along heir learning curves, ?rst capturing niche markets and then gradually expanding, but with varying degrees of success. Some of hese new sources may well become commercially competitive >ver the next decades and start to be visible by around 2020, earning heir share through market mechanisms - like oil did at the end of he last century. This allows energy supplies to be sustained at the ime when the contribution from fossil fuels reaches a plateau. It is rot necessary, for this argument, to determine which renewable echnology has the best prospects; technologies will compete but he market will decide. The future energy mix is, however, likely 0 become more diversi?ed. In Sustained Growth, productivity improvement in supply eads to energy being abundant at competitive prices and gives imited incentive for energy conservation. Energy use keeps growing at about two percent a year (or more, depending on the iegree of abundance) reaching an average per capita consumption of 25 boe a year, the level of Japan today, by 2060. In Dematerialisation, human needs are met through technologies and systems requiring a much lower energy input, as productivity in use strongly improves. In this scenario, energy conservation has a signi?cant impact and the growth in energy use drops below one percent a year by 2030, declining to 0.5% by the end of the century. By 2060, energy use is about 15 boe per capita a year - the Italian level in 1970. Because the amount of fossil fuel economically recoverable is limited, supply from fossil fuels by 2030 reaches and maintains a plateau for some time and then declines as new renewable and other energy sources take an increasing share. Even under relatively optimistic assumptions about fossil fuel resources, CO2 emissions would peak in both scenarios at about 10 GtC/year before the middle of the next century as a result of this natural evolution. This contrasts with the IPCC scenario (reference case) which shows C02 emissions continuing to increase to some 20 GtC/year by 2100 (although the plausibility of this scenario is questionable and it is not adequately documented). An alternative IPCC scenario assumes accelerated policies and would achieve stabilisatim. earlier, but at a high economic cost. From these observations we conclude that: 0 Hydrocarbons will continue to be needed for economic development, particularly in developing countries. 0 Existing energy producers and users will continue to improve their ef?ciency. 0 Energy needs will be met by more diverse sources. 0 ?Carbon-free? newcomers can become competitive through market mechanisms; the market will decide which technology is best. 0 C02 emissions could peak at about 10 GtC/year and decline. Policy options While there is enough indication of the potential risk for governments to address the issue, the Shell review of the scienti?c uncertainty and the evolution of energy systems indicates that policies to curb greenhouse gases beyond ?no regrets? measures could be premature, divert economic resources from more pressing needs and further distort markets. Future policies should therefore: 0 Recognise that the market will drive the energy industry towards improving supply costs and energy. efficiency, including renewable technologies, to meet long term demand. 0 Foster, not sti?e, that commercial drive and innovation. 0 Be based on sound science. 0 Take account of the needs and aspirations of the developing as well as the developed world and provide a favourable climate for Foreign Direct Investment and technology cooperation. 0 Include a cost-bene?t analysis, whenever possible. 0 Be bene?cial in themselves, such as cost-effective energy ef?ciency measures (ie ?no regrets?). 0 Remove distorting energy subsidies. We? Provide limited support for demonstration plants and Shell reference sources market stimulation programmes, without introducing long . Selected Paper. term market distortions. - Energy for development (P Kassler 1994) Shell companies are: . Special Project Brief: . - Brazrlran biomass demonstration project Developing clean/efficient uses of fossil fuels, driven by the (1) Elliott Booth 1993) market. . 0 Management Bnef: Seeking continous improvement in ef?ciency of use of natural Renewable energy (1994) resources and energy. . . 0 Bnefmg Note: Phasmg out use of CFCS. - The future for fossil fuel energy (1994) Contributing to climate change research. 0 Speech: Developing selected renewable sources of energy, such as . photOvoltaics and biomass, which have early commercial potential. Contributing to understanding of the world?s energy system and to the public policy debate on climate change. - The energy industry and govemment- partners in progress (C A 1995) Copies of this Management Brief are available from Shell International Petroleum Company Limited, Shell companies have their own separate identities, but in this publication the collective expressions ?Shell? and ?Group? are sometimes used for convenience in contexts where the reference is to companies of the Royal Dutch/S hell Group in general, or where no useful purpose is served by identifying the particular Shell company or companies. Shell International Petroleum Company Limited, 1995.