By Jeanne Martin, Senior Campaign Manager and Lydia Marsden, Project Officer, ShareAction

The International Energy Agency (IEA) has published its much awaited 1.5C scenario – the IEA “Net Zero” scenario.

It states the new scenario is “the most technically feasible, cost‐effective and socially acceptable” way to stay below the 1.5C limit.

This follows years of pressure from academics, business leaders, financial institutions, and civil society organisations, including ShareAction. Together we asked the Head of the IEA to publish a 1.5C scenario and make it central to its World Energy Outlook in 2019 and 2020.

With a clear signal that there can be no new investments in fossil fuels, the new scenario will make uncomfortable reading for many companies – and those that finance them.

But used right it could provide an opportunity to these actors to get ahead of the curve, and set a more meaningful road to net-zero.

Why does this matter?

IEA scenarios have weight. Governments, companies, and financial institutions, alike, rely on the agency’s scenarios to justify their spending decisions and emission trajectories.

A growing number of asset owners, asset managers, banks and corporates have committed to net-zero by 2050 at the latest.

Yet until now many of them used scenarios that were not aligned with their own ambitions. Take Barclays for example. The bank derived its power and energy portfolio targets from the IEA SDS. This scenario reaches net-zero 20 years after Barclays has pledged to do so.

Whilst Barclays recognised the IEA SDS is “an imperfect benchmark”, it argued “it is the best available option because it is the only scenario that offers a sufficiently high-resolution dataset to meet our analytical needs.”

Due to their granularity, the IEA’s scenarios also form the basis of most efforts to benchmark companies on their plans to support the goals of the Paris Agreement. This is especially true when deep-diving into specific sectors.

Methodologies by the Transition Pathway Initiative; World Benchmarking Alliance; Science Based Targets initiative; and investor-led coalition Climate Action 100+ all, to varying extents, rely on the IEA to make their assessments.

Whilst most of the biggest emitters in the corporate sector are failing even when compared to the less ambitious IEA Sustainable Development Scenario (SDS), the continued absence of a 1.5C-aligned scenario suite has offered high-carbon companies a potential shield from scrutiny. For example, Total used the SDS to justify its substantial investments in natural gas.

No more.

What does the new scenario say?

1. 1.5C means no new fossil fuels

According to the IEA, there can be no more new investments in fossil fuel supply beyond that already committed as of 2021.

This is an uncomfortable finding for the likes of BP, Shell and Total. – all of which are betting on natural gas to decarbonise their activities - as well as for the banks that finance them.

The IEA Net-Zero scenario also assumes methane leaks will decline by 75 per cent, which will require the elimination of all technically avoidable methane emissions from fossil fuel infrastructure by 2030.

This together with the use of unabated gas falling 88 per cent by 2050 should make banks think twice before financing the EACOP pipeline and companies betting on natural gas growth to decarbonise their activities.

Instead, the IEA says that the world needs a “radical” shift towards renewables to reach net-zero by 2050.

It estimates that the power sector needs to have zero-emissions electricity globally by 2040 and in OECD countries by 2035. 75 per cent of this electricity will be from wind and solar.

These are significant admissions for an agency with a long history of massively under-estimating the growth of renewable energy and over-estimating fossil fuel growth.

It will send shockwaves to the financial and oil and gas sectors.

2. Gambling on negative emissions technologies (NETs) and Carbon Capture Storage (CCS) presents risks

The IEA Net Zero scenario reaches net-zero by 2050 without use of offsets from land use or forestry.

The scenario has stronger energy efficiency and behaviour change, wider electrification, more wind and solar, less bioenergy, less carbon capture and storage (CCS), less negative emissions and lower fossil fuel use, relative to most IPCC “no or low overshoot” 1.5C pathways. The decision to rely less on negative emissions is welcome given the risks of relying excessively on technologies that either do not yet exist or have major social and environmental implications.

However, despite these improvements relative to other scenarios, the IEA Net-Zero scenario still makes important and questionable assumptions about the future use and availability of CCS and bioenergy.

This allows for artificially higher levels of fossil fuel consumption than other scenarios such as in the 2020 UNEP Production Gap Report.

Oil Price International raises alarm bells about the scenario’s reliance on CCS. The IEA assumes that CCS projects will wipe out 1.6 Gt of CO2 as soon as 2030. At present they only have capacity to capture 0.04 Gt of emissions. 

In other words, the IEA assumes CCS capacity will increase by 4000 per cent in the next nine years. This, argues Oil Price International, allows it to make room for “dangerous levels of natural gas”, with gas declining only six per cent below 2020 levels by 2030.

In contrast, the 2020 UNEP Production Gap Report shows gas declining by a median of three per cent per year between now and 2030 in 1.5°C-consistent pathways.

The IEA identifies bioenergy as a “pillar of decarbonisation”, expanding the range of land used for bioenergy crops by roughly 25 per cent. This is equivalent to an additional 102 exajoules provided by bioenergy in 2050.

Despite the IEA acknowledging concerns such as ‘food insecurity’ in its calculations, the level of reliance on bioenergy still raises important questions about land grabs, human rights violations, food insecurity and biodiversity losses.

All of these have been linked to bioenergy production – which many scenarios, including the IPCC rely on.

3. New milestones for assessing climate claims in corporate sectors

The new scenario sets out more than 400 sector-specific milestones to ‘guide the global journey to net zero by 2050’. It gives a clear indication of what companies need to do to achieve their net-zero commitments.

For example, the IEA confirms there should be no sales of new internal combustion engine passenger cars by 2035 to meet net zero by 2050.

This is a crucial milestone to assess the preparedness of automakers for the energy transition, which ShareAction highlighted earlier this year and continues to push at the AGMs of some of Europe’s largest auto manufacturers.

The outlook for the industry sector, notoriously thorny to decarbonise, merits a closer look.

Three industries – steel, cement, and chemicals – currently emit 70 per cent of industrial emissions and the main drivers for continued fossil fuel use at net zero.

The IEA estimates that 50 per cent of fossil fuels remaining by 2050 will be used as chemical feedstocks, with a further 30 per cent used in industrial plants fitted with CCS.

The agency has stumbled on its renewable energy forecasts in the past, and there is a chance it is again underestimating the role that electrification, recycling, and green hydrogen could play in decarbonising ‘hard-to-abate' sectors like chemicals.

ShareAction will be delving into these sectors more in the coming months to set out expectations for companies and for investors engaging with them.

The IEA’s Net Zero scenario is a timely wake-up call for high carbon companies – and those who invest in and finance them

The IEA’s new scenario provides clear and meaningful milestones for each sector to reach net zero by 2050. We will be calling on financial institutions to take these into account in their investment strategy and decisions. For example:

Banks that have committed to net-zero must update their fossil fuel policies and take a clear stance on fossil fuel expansion – and quick.

Banks that are members of the Net-Zero Banking Alliance – including Barclays, Credit Suisse and Deutsche Bank – have committed to using scenarios that are not overly reliant on negative emissions technologies.

HSBC also committed to doing so following pressure from shareholders. These banks must swiftly update their baseline scenario, targets and sectoral policies to reflect the IEA’s latest findings.

Investors that have joined the Net-Zero Asset Manager Initiative or the Net-Zero Asset Owner Alliance must review their climate strategies to reflect the IEA’s latest findings.

Signatories to these initiatives have committed to publishing targets by the end of the year. These should be based on the IEA’s Net-Zero scenario – or another 1.5C scenario – or risk being called out for greenwashing.

The IEA’s main findings, including sectoral milestones, should also form the basis of key engagement questions that investors ask companies. It should help them to establish how companies are positioning themselves in the energy transition, and any frameworks they use to assess alignment – such as the CA100+ Net Zero Company Benchmark.

And importantly – the IEA must make it central to its World Energy Outlook – both in the narrative and data tables. If it doesn’t, billions of pounds worth of investments will continue to be misdirected.

It is also crucial to acknowledge that this new scenario is a snapshot of one possible path to net zero emissions. If broadly met, the IEA estimates a 50 per cent chance of staying below the 1.5C goal – the flip of a coin.

Companies, investors, and governments would do well to consider taking a precautionary approach to improve this probability.

History will reward those who moved faster when they could.