Getting to Net Zero: balancing security of supply with rapid decarbonization

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I recently attended CERAWeek in Houston, one of the world’s premier energy conferences (March 7-11). One of the things that struck me most forcibly was the contrast between the strict social distancing and masking protocols announced in advance and the free-and-easy behavior in the actual conference including at lunch and evening gatherings - where the atmosphere evoked Munich’s Oktoberfest more than a sober networking event.

Clearly the 5,000 in-person delegates wanted to do the right thing; but they also wanted to get on with their business and their lives.

Key themes at CERAWeek

So it is with the actual subject of CERAWeek: the Energy Transition. There is no doubt that the world must strive with all its might to reach net zero carbon dioxide emissions by 2050 to mitigate climate change. Recent geopolitical events and the surge in energy prices have not changed that imperative. They have, however, reminded us that pursuing decarbonization at the expense of everything else - ensuring energy security, achieving reasonable economic returns and protecting daily lives - is itself an unsustainable approach. Achieving a balance between all these objectives is key.

With the right approach, these goals can go hand in hand. Replacing coal with natural gas, as the US power industry is doing so successfully, creates sharp cuts in emissions. In turn, that natural gas will be replaced by blue hydrogen (produced with CO₂ capture technology) and then green hydrogen (generated from renewables). But for many years to come, natural gas will remain an essential transition fuel that, moreover, meets demand for secure and affordable energy. Refusing to acknowledge this reality and pushing for an overhasty switch to zero carbon fuels is simply counterproductive. I was reminded of this on my return to Japan, when a recent earthquake on March 17 caused power plants around Tokyo to shut down and nearly led to widespread blackouts.

Missing pieces on the energy transition

Having said that, it is clear from my conversations in Houston that the US and global oil & gas industry will invest a significant portion of the profits resulting from current high energy prices into accelerating the Energy Transition rather than, say, into simply handing money back to shareholders. That is an encouraging sign of longer-term thinking that will pay dividends far into the future. In general, funding for the required investment to get to net zero – which McKinsey puts at $275 trillion by 2050 globally, or about $1 trillion more per annum than currently planned – is available.

What is missing, at least to date, are enough specific projects and detailed business plans to get us there, particularly when it comes to building ecosystems around hydrogen and CO₂, that span their production (or capture), transport, trading, storage and utilization. The necessary technologies mostly exist. What we require are regulations and/or (tax) incentives that can set standards, provide predictability and help to foster end markets. With the right environment, we will see more projects that move us closer to net zero and meet investors’ goals.

No one-size-fits-all rule

Such rules need not be global – but need be fair. In fact, in the interests of simplicity and time and also to acknowledge that countries are decarbonizing at different speeds, regional or even national standards are probably the best way forward. Still, policymakers, in conjunction with industry and other stakeholders, have work to do here. It is what Mitsubishi Heavy Industries Group (MHI)’s CEO Seiji Izumisawa and I, along with many of our peers, are currently discussing in the B20, a global business forum that mirrors the G20 and is being hosted by Indonesia.

Despite such laudable initiatives, my feeling is that while discussions between the private sector and governments are increasing, the two sides will need greater effort to solve the globe’s monumental net zero challenge. That is not to blame policymakers or industry. There are many opinions about the merits of carbon trading schemes and about the “right” price for carbon, to take just one example.

We can also do more to prepare society at large for the changes that are coming. It is highly likely that as we get closer to 2050, the need to eliminate emissions will confront consumers with restricted choices or higher prices and, likely, both. Yet the willingness to pay a “greenium” for environmentally friendly energy and products is not in evidence outside certain parts of Europe. I did not see it much in America, nor do I see many instances in Japan – where people have generally been more resigned to climate change due to frequent natural disasters, such as typhoons and flooding.

Companies, not just governments, can and must play a role here, I believe. We should encourage our employees, suppliers and customers to inform and educate themselves in order to accelerate social acceptance of what it will require to successfully fight climate change. We should be considered not hasty in our approach; and we must balance energy security and sensible economics with decarbonization. But we must press on.