BP believes that climate change is an important long-term issue that justifies global action
According to the Intergovernmental Panel on Climate Change (IPCC), warming of the climate system is unequivocal, and is in large part due to an increase in greenhouse gas (GHG) emissions from human activities. The IPCC believes that warming of the climate will probably lead to extreme weather events becoming more frequent and unpredictable. Its latest report makes clear that limiting climate change will require substantial and sustained reductions of GHG emissions.
The climate challenge
BP’s analysis suggests that global carbon dioxide (CO2) emissions from fossil fuels may be 29% higher in 2035 than they were in 2012, partly as a consequence of coal use in rapidly growing economies. This is a projection of what we think is likely to happen, not what we would like to see.
More aggressive energy policies and technologies could lead to slower growth in CO2 emissions than expected but this would still not be enough to limit warming to no more than 2°C, the threshold recognized by governments as limiting the worst impacts of climate change. The International Energy Agency has acknowledged that its 450 scenario, which would put the world on a lower-carbon trajectory, looks increasingly unlikely.
There are several reasons, in addition to growing energy demand, why achieving substantial and rapid GHG emissions reductions will be challenging. Some potentially important lower-carbon technologies – including nuclear energy, carbon capture and storage, and electric vehicles – still face significant technology, logistical, political, infrastructure and cost challenges. And worries about the cost of renewable technologies have led some governments to reduce their levels of support. In the meantime, the GHG intensity of oil and gas extraction and production looks set to increase, with the move towards resources that are harder to access.
The scale of this challenge is such that governments must act by setting a clear, stable and effective carbon policy framework. A clear framework is necessary if energy companies are to limit GHGs while providing energy competitively. Global economic challenges have reduced the focus of some governments on climate policy, at least in the short term. That said, carbon regulations continue to be introduced and strengthened; and the commitment made in Durban in 2011 by both developed and developing countries to negotiate an agreement by 2015 that requires action from all countries by 2020 suggests that an emphasis on carbon policy may return.
We also believe that putting a price on carbon – one that treats all carbon equally, whether it comes out of a smokestack or a car exhaust – will make energy efficiency and conservation more attractive to businesses and individuals and lower-carbon energy sources more cost competitive. A global carbon price should be the long-term goal, but regional and national approaches are a good first step, provided temporary financial relief is given to sectors that are exposed to international competition.
Investors in 2013 raised a concern about unburnable carbon – the argument that the carbon dioxide from burning all known fossil fuel reserves would raise global temperature by more than 2°C – and that potential greenhouse gas regulation to prevent this from happening could reduce the value of some of these reserves and the companies that own them.
We agree that burning all known reserves would probably cause global temperatures to rise by more than 2°C – and that addressing this issue will require the efforts of governments, industry and individuals. However, we believe that the unburnable carbon approach to assessing the impact of potential climate regulation on a company’s value oversimplifies the complexity of the issue and overstates the potential financial impact.
BP considers a wide range of factors that may affect the price and demand for our products when making investment decisions including:
- Potential GHG regulation: We assess carbon policy at a regional level, and we apply a carbon price to larger projects and those for which emissions costs would be a material part of the project.
- Changes in demand: We make regional and global assessments of energy supply and demand, and we undertake detailed demand modelling for the transport sector, to assess the risk of shifting demand for our products.
- Fluctuating oil prices: We use a range of oil price sensitivities to manage commodity price risk and we prioritize value over volume for new upstream projects.
- Evolving technology: We undertake deep dives into potential innovation in the 2030-2050 timeframe and we collaborate with external technology-focused bodies.
This approach enables us to optimize our portfolio to meet the world’s energy needs and to alter our investments to reflect changing policy, market and technology conditions.
"In the transition to a low-carbon future, oil and gas companies will need to innovate and have portfolios which are resilient to sudden changes in public policy or technological breakthroughs. This is why both companies in this sector and their long-term investors are increasingly engaging with policy makers whilst innovating themselves. We encourage these companies to publish information on future energy scenarios which highlight critical uncertainties, while building a coalition of the willing to bring carbon capture from gas to economic scale. BP's focus on value not volume is a welcome strategic discipline in this context."
Helen Wildsmith, Head of Ethical & Responsible Investment, CCLA.