IEA forecasts $250 carbon price under Paris-aligned climate scenario

The International Energy Agency has said that carbon prices in developed countries will rise to an average of $250 per tonne of CO2, and $200 in China, Brazil, Russia and other major economies, under a scenario in which the world achieves Net Zero emissions by 2050.

For the first time, the intergovernmental body has included a fully-fledged Paris-aligned climate scenario within the core scenarios used for its World Energy Outlook (WEO), released today. The annual report is seen as the ‘gold standard’ for business planning, and shapes expectations over the share of coal, oil, gas and renewables in the global energy mix.

The IEA’s so-called ‘Net Zero Emissions by 2050 Scenario’, or NZE, was unveiled in May as part of a Paris-aligned decarbonisation roadmap, after investor groups petitioned the energy watchdog to develop such a scenario. While the NZE scenario made headlines when it launched for stating that no further investments would be allowed in new oil and gas, the IEA’s annual outlook has historically been criticised for being overly fossil-fuel friendly and undermining the goals of the Paris Climate Agreement.

Today’s WEO, however, has been styled as a policy “guidebook” for world leaders ahead of COP26 next month. The climate summit, to be held in Scotland, will see leaders gather to negotiate the next phase of global decarbonisation – with more ambitious climate targets expected as a result. 

The IEA warned that “a lot more needs to be done by governments to fully deliver on their announced pledges”. According to its analysis, global temperatures will rise to 2.6°C above pre-industrial levels in 2100, based on energy and climate measures currently in place, but that figure would be 2.1 °C if governments’ net zero pledges are implemented in full.

Both scenarios fall significantly short of Paris Agreement and will see an increased frequency of extreme heat events and rising numbers of premature deaths from air pollution

Scenarios developed by the IEA are key inputs into some of the most popular climate scenario analysis tools used by investors to assess their long-term portfolio exposure to climate risks. 

The IEA’s carbon price forecast could increase traction around efforts to develop a more robust carbon price. The topic was recently the focus of a roundtable hosted by the OECD, the global organisation that houses the IEA, and will be examined in detail under a soon-to-be-launched OECD initiative.

This year alone, the world’s largest carbon market by volume was launched by China, while Austria has introduced a new carbon tax to fund tax breaks and ‘climate bonus’ payments. Investors are also starting to look into voluntarily offsetting portfolio emissions through the use of carbon credits and using credits as a way to generate investment returns – Canadian pension fund CPPIB recently announced a $20m investment into one such project.

But current carbon prices – $73.18 and $6.93 per tonne under the European and Chinese emissions trading systems as of last month, respectively – are considered inadequate to influence the business decisions of big emitters. 

Under its NZE scenario, the IEA said that renewable energy players including the manufacturers of wind turbines, solar panels, lithium‐ion batteries, electrolysers and fuel cells will have an annual market opportunity of well above $1trn by 2050 – comparable in size to the current global oil market. Fossil fuel producers will also have opportunities to supply low-carbon gas such as hydrogen, at volumes estimated at half of today’s global natural gas market, it said.

The IEA also called for an “international catalyst” to accelerate private and public investments in clean energy among developing countries, noting that 70% of an estimated $4trn in global spending on transition‐related energy investment will need to be directed to developing economies. However, the UN’s Green Climate Fund which was set up for this purpose, is largely seen as ineffective, and has wrestled with allegations of political interference and internal misconduct since its 2010 inception.

Emerging markets are also underrepresented within ESG funds – accounting for less than 5% of total investment flows in Q3 2021.

Commenting on the IEA’s outlook, Jakob Thomä, Director of think-tank 2 Degrees Investing Initiative, which uses IEA scenarios for its banking analysis, said: "For the better part of the last decade, oil majors have been able to hide their oil expansion plans behind the IEA scenarios.”

“But the tables may have finally turned and they are now forced to face an uncomfortable truth about the incompatibility of new oil developments with net zero and climate aligned pathways. Importantly, the WEO has recognised the key role of the finance sector as a potential catalyst.

"2DII has already integrated the IEA NZE scenario in its PACTA bank tool and will integrate the scenario in its online investor tool by the end of the year."

Tim Buckley, Director at the Sydney-based Institute for Energy Economics and Financial Analysis, told RI: “Policy uncertainty is really the key obstacle preventing large-scale investment in clean energy, particularly in emerging economies, and the report provides clarity on the measures which need to be adopted by governments to facilitate this.”