Why carbon intensity ambitions are welcome, but strict limits on future project sanction remain the route to Paris alignment

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Three European oil and gas producers (Repsol, Shell and Total) have set long term goals relating to the relative carbon intensity of their output, in terms of CO2 emissions per unit of energy produced.

These include emissions defined as scope 3 – those released when the oil and gas products are actually used, and the large majority of emissions related to fossil fuels. These goals are then framed relative to low-carbon scenarios, suggesting pathways that the companies might follow to claim compliance with the climate change imperatives agreed at Paris in 2015.

This represents a fundamental development in an industry looking to dispel investor pressure on climate issues and positions these companies at the more progressive end of their peer group. It also demonstrates that investors have the power to influence corporate behaviour. However, crucial pieces of the puzzle are still missing.

Key takeaways:

  • The inclusion of scope 3 emissions in oil and gas company strategy is an important step forward. Shell’s linking them to short term targets and management pay further focuses attention on practical implementation.
  • However, by framing the emissions ambitions in relative terms, companies leave themselves free to chase ever greater fossil fuel output. This is at odds with the finite limits on carbon emissions inherent to our climate system and reflected in our international commitments.
  • Strategies that allow investment in future stranded assets are insufficient from both environmental and financial value perspectives. If companies are still growth-oriented, they continue to run the risk of investing in projects that may destroy value in low carbon outcomes. The specific economic attributes of a company’s portfolio remain paramount.

Climate change mitigation requires falling emissions in absolute terms, not just relative, yet the idea of an investment strategy that countenances lower oil and gas output remains anathema. We think that capital planning will need to fully incorporate absolute emissions limits (and the company’s competitive positioning within those limits) before companies can truly consider themselves “Paris compliant”.

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