Guest Blog from Greg Rogers, Co-founder, Eratosthenes LLC
In a classic scene from the 1976 American comedy, The Gumball Rally, about an illegal cross-country road race, Franco Bertollini (played by Raúl Juliá) explains to his co-driver, as he rips off and discards the rearview mirror, that the first rule of Italian driving is “what’s behind me is not important.” The same is figuratively true for greenhouse gas (GHG) emissions in relation to the remaining carbon budget. Those in the rear view mirror don’t much matter. Those ahead do.
The central aim of the Paris Agreement is to limit global temperature rise this century to below 2°C above pre-industrial levels by a peaking of global GHG emissions as soon as possible followed by rapid reductions thereafter. The International Panel on Climate Change (IPCC)’s Fifth Assessment Report estimates that post-2011 anthropogenic carbon dioxide emissions should be limited to 1,000 GtCO2 for just a “likely” chance of limiting warming to 2°C. This 1,000 GtCO2 is the world’s remaining “carbon budget”.
The World Resources Institute estimates that potential CO2 emissions from fossil fuel reserves currently held by the largest 200 public companies (by reserve size) is at least 1,541 GtCO2, far exceeding the remaining carbon budget. These sobering estimates are driving some oil companies to set ‘science-based’ targets in alignment with the Paris goals.
For example, last year Shell announced a “net carbon footprint reduction ambition” covering both emissions from its own operations and those from the energy products it sells (which are called ‘scope 3 emissions’). Shell’s stated aim is to reduce the overall footprint of its energy products by “around 20% by 2035 and by around half by 2050”. Shell has committed to measure its performance “every five years to ensure progress is in line with wider society’s progress towards the reductions required to meet the Paris goals.”
For Shell, past emissions are irrelevant. It’s future emissions that count. And because emissions produced by Shell’s customers when they use the energy products it sells account for 90% of the company’s total emissions, future emissions from its existing fossil fuel reserves are a critical factor, if not the critical factor, in Shell’s climate strategy.
Estimating and monitoring future emissions will be essential for Shell to meet this ambition. For the same reason it will be critical for Shell’s investors. How can investors reach informed judgments about Shell’s performance in executing its climate strategy without the ability to compare actual emissions reductions against forecasted reductions (budget vs. actual)?
In Gumball Rally terms, how can one reasonably assess Franco’s odds of winning the race without knowing the destination, the course, and his current position on the roadmap relative to the other racers? How can Franco know if he’s on course to win or even to reach the finish line?
Today, no oil company publicly reports estimated future emissions from existing reserves. (See Working Paper: A Recommended Methodology for Estimating and Reporting the Potential Greenhouse Gas Emissions from Fossil Fuel Reserves – Dec. 2016). Indeed, the corporate reporting focus on historical emissions fails to address the real issue—future emissions from the use of fossil fuels—and thus “neglect[s] the most material portion of fossil fuel companies’ climate impact.”
This issue will only become more important as companies like Shell, look to add to their reserves. In the past week, Shell has been associated with new oil prospecting in the North Sea, and confirmed an offshore oil production sharing agreement with the Government of Mauritania to find and develop new reserves. Faced with mandatory or self-imposed constraints on GHG emissions, an increasingly important question is whether such exploration activities will add to the firms’ existing asset base or will new discoveries necessarily displace existing reserves with higher production costs?
Going forward, as oil companies announce science-based ambitions and targets, they will need robust and continuously updated estimates of both the amount and timing of future GHG emissions. Firm managers will need this information to ensure that capital allocation and budgeting decisions align with the organization’s climate objectives. Investors will need it to reach informed judgments about the reasonableness of announced climate strategies and to gauge company performance against them. Like the first rule of Italian driving, what’s behind me is not important.
Greg Rogers – Co-founder, Eratosthenes LLC