Energy and Commodities Outlook 2022

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Carbon-neutral initiatives: The view from Europe, the United States and Asia

As the driving force behind the energy transition, Europe seeks to become the first continent to achieve carbon neutrality by 2050. The European Commission has released the “Fit for 55” package to facilitate the green transition. It includes stricter regulations and emissions standards for industry, carbon pricing and related taxes, as well as rules to promote investment in low-carbon fuels, technologies and infrastructure. In parallel, the European Union is developing a Carbon Border Adjustment Mechanism, which is expected to come into effect in 2023. Under the CBAM, importers will be required to pay for carbon-intensive products imported into the European Union, to ensure carbon emissions embedded in imported goods are taxed equally, as compared to similar products produced within the European Union.

In the United States, the Biden administration has likewise made reduction of carbon emissions a key pillar of its overall policy. On the first day of his presidency, President Joseph Biden brought the United States back into the Paris Agreement, a legally binding international treaty on climate change. He issued executive orders establishing a task force to improve the government’s sustainability efforts and creating a plan to achieve a carbon pollution-free electricity sector by no later than 2035. The executive orders have also sought to curb carbon-intensive power (e.g., coal, oil and natural gas) projects abroad. In addition to the executive actions, he has championed two large spending bills that include substantial incentives for renewable energy and carbon emissions reductions.

Energy-efficient countries in Asia, such as Japan and South Korea, have also set ambitious goals to further reduce greenhouse gas (GHG) emissions by 2030 and achieve carbon neutrality by 2050. Indonesia and Singapore have similarly agreed to implement bold clean energy initiatives. However, perhaps most significantly, China, one of the largest global consumers of energy, has announced its plans to reach peak emissions by 2030 and carbon neutrality by 2060. China, like South Korea, has prioritized hydrogen as an emerging industry, aiming to have 5 percent of China’s energy consumption met by hydrogen by 2030.

Massive ramp-up required

Achieving a smooth and cost-effective energy transition will require an “all-tools-in-the box” approach, including an increase in liquefied natural gas (LNG) to support and underpin the transition to a renewables and hydrogen based economy. To successfully navigate the energy transition, producers, policymakers and customers will need to move in step, which will require global cooperation, consistent policy development and regulatory frameworks to provide the certainty required for investments to build the necessary energy infrastructure. Like anything in its infancy, the opportunities are great but so are the risks, due to the regulatory and policy uncertainty.

Russia’s invasion of Ukraine and its impact on the global energy transition

Before the Russian invasion of Ukraine, global energy markets were already supply constrained due to the steady reopening of markets following the lifting of COVID-19 restrictions. Energy prices were becoming unsustainably high and rising. The Russian invasion has exacerbated the situation, with significant further increases in LNG and gas prices, which have now decoupled from equivalent crude oil prices. It is a troubling scenario.

Global LNG markets do not seem to have any spare capacity, which could be used to displace Russian gas supplies to Europe. To increase LNG supplies to Europe will require the diversion of supplies from other markets, primarily Northeast Asia and Indo-Asia. As a result, the focus in Europe in the short term will likely be on securing spot or short-term quantities which are uncontracted, before then seeking to secure long-term future supplies from Africa and the United States. In turn, as we have seen recently with Russian crude oil sales, Russian gas and LNG in the future may be diverted to Asian markets, potentially at a discount.

Key takeaways
  • The transition to a carbon-neutral economy will require energy producers, policymakers, and customers to coordinate market developments
  • A clear regulatory framework is required to support infrastructure investments
  • The energy transition is a great opportunity, and a global imperative, which will require an “all-tools-in-the-box” approach to be successful
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