Slipping climate targets and the “energy addition”

The global push to tackle climate change has slowed. Ten years on from the Paris Agreement, no major G7 country appears on track to meet its 2030 emissions reduction goals. Announced goals for 2035 lack ambition, suggesting too many governments are kicking the can down the road. It is increasingly acknowledged that the world will not achieve net zero emissions by 2050. With COP30 about to begin, our seventh annual Energy Transition Outlook (ETO) reveals the world is on a 2.6 °C pathway, marginally above our base case prediction a year ago.

The Wood Mackenzie ETO is a holistic, integrated analysis of the energy and natural resources sectors based on our latest strategic planning outlooks across 35 commodities. Prakash Sharma and his Energy Transition Service colleagues shared some of the key takeaways.

The barriers to progress

Geopolitical and economic challenges, from the Covid-19 pandemic to wars in Ukraine and the Middle East and unpredictable trade tariffs, have emerged as barriers to the Paris climate goals. At the same time, rising population, economic growth and societal aspirations, particularly in developing countries, are driving energy demand ever higher and outpacing gradual improvements in energy efficiency. ​

It is clear that we cannot quickly swap the current fossil fuel-based energy system for a new, low-carbon one. Renewables’ share of global power supply increased from 5% to 20% over the past decade, but that barely met incremental demand growth. Scaling up low-carbon supply faster than demand growth and building a new, deeply decarbonised, resilient energy system is proving far tougher than envisaged.

As a consequence, governments in many developed countries have chosen to secure affordable energy over sustainability goals. The withdrawal of the US from the Paris Agreement sent a stark message about its own priorities, while the exit of the US and some European banks from the Net Zero Banking Alliance is another sign of the times. Meanwhile, trade wars and the race towards an artificial intelligence (AI)-enabled future are altering the shape of energy demand. ​

An interconnected energy system

At Wood Mackenzie, we expect energy addition, an evolution towards a new energy system in which fossil fuels remain the bedrock of supply for decades to come. They will be complemented by low-carbon fuels that will gain market share and play a critical role in meeting surging global energy demand. The evolving energy system, built around multiple fuels and technologies, will become more interconnected and increasingly complex.​

Companies navigating market uncertainty, complexity and commodity price volatility must strengthen planning to ensure effective capital allocation. Governments, in turn, will need a deft touch in policymaking to support the flow of capital.

​Electricity is reshaping the global energy landscape 

Power’s share of energy consumption will increase from one-fifth today to over one-third by 2060 in our base case, the largest share and eclipsing oil. Low-carbon supply is racing to keep pace. Variable renewables will surge from 20% of generation today to 60% by 2050, with solar power alone doubling by 2030 and overtaking coal by 2034. Yet dispatchable fossil fuels remain essential. Coal, in the main, is powering developing economies, and gas turbines are providing critical backup where renewable infrastructure struggles with massive new loads. The surge in power demand from the AI boom will strain global power markets throughout the rest of this decade and perhaps beyond.

Critical minerals are a geopolitical choke point 

Supply chains are highly concentrated: China dominates the refining of lithium and rare earths, the Democratic Republic of Congo controls most cobalt supply, Indonesia similarly for nickel. Concentration on this scale gives resource holders new leverage. Importing countries, in turn, are racing to secure offtake deals, diversify supply and build stockpiles.

Fossil fuels’ long goodbye 

Oil demand now peaks in 2032 in our base case, reflecting both continued resilience in transport sectors and growing petrochemicals demand. Natural gas maintains its footing as a foundation fuel and peaks in the 2040s. Structural inertia is a key factor, with oil, gas and coal essential for governments’ energy security and affordability goals.

Emerging low-carbon technologies require support 

Carbon capture, utilisation and storage, hydrogen and advanced bioenergy are among the technologies that will be key to decarbonisation. Supportive policy is required to crowd in investment, drive costs down and generate the project pipelines to build out each at scale.

Investment will determine the pace of decarbonisation 

The financial challenge is substantial. A 2 °C goal is plausible if net zero emissions are achieved by around 2060. To scale up the full suite of low-carbon technologies, from renewables to nuclear, hydrogen and carbon capture, annual investment from public and private sources must increase by 30% from current levels to average US$4.3 trillion between now and 2060. That translates to energy sector capex rising from 2.4% of global GDP today to around 3.5% within the next decade, a stretch for many economies.

However, failure to seize the moment on mitigation will require exponentially higher investment in the future to adapt and manage the physical risks of a warming world. It’s either pay now or pay more later.

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