Fossil fuel companies risk wasting trillions in continued spending, especially on mid and higher cost projects

Energy groups risk wasting $1.6 trillion of investment by assuming that current emissions-cutting policies will not be tightened up in the light of the latest science and international climate change goals, according to the think tank Carbon Tracker.

In a new report, Mind the gap: the $1.6 trillion energy transition risk, it warns that there is “a yawning gap” between the Paris Agreement, which pledges to keep climate change well below 2°C above pre-industrial times and aims for 1.5°C, and government policies, which are consistent with 2.7°C of warming.

“At present, governments’ policies fall a long way short of the ultimate goal committed to at Paris, but we should expect a ratcheting up of international efforts. Companies that misread the signals and overinvest in marginal oil, gas and coal projects based on a false sense of security could destroy shareholder value worth billions of dollars,” said report author Andrew Grant, senior analyst at Carbon Tracker.

The group says the study is the first to model demand for oil, gas and thermal coal under the International Energy Agency’s Beyond 2 Degrees Scenario introduced last year, aligned with 1.75°C, the mid-point of the Paris Agreement, and compare it with the IEA’s New Policies Scenario, aligned with 2.7°C, consistent with the emissions policies announced by global governments.

Even in the Beyond 2 Degrees Scenario, some $3.3 trillion of investment on new and existing projects will be needed between now and 2025 but, with supply outstripping demand, the report assumes that the lowest-cost projects are most likely to be needed, while high-cost projects relying on higher prices are most likely to be uneconomic.

By comparing fossil fuel demand in a 2.7°C world with that of a 1.75°C world – the mid-point of the Paris Agreement – Carbon Tracker found that the oil sector would be hardest hit, with $1.3 trillion of future spending at risk. Projects that are inaccessible and/or technically difficult and therefore costly, are most at risk. “New oil sands investments will be uneconomic, and only a minority of potential new Arctic and extra heavy oil investment will go ahead,” the report said.

The US, with its extensive, relatively high-cost shale oil sector, is most exposed with $545 billion at risk, followed by Canada, the home of the world’s largest oil sands reserves ($110 billion), China ($107 billion), Russia ($85 billion) and Brazil, which has extensive reserves off its eastern coast that lie under 2km of salt that itself lies under 2km of ocean, hundreds of kilometres offshore ($70 billion).