Chatham House has published a report on carbon risk in lower-income countries, produced in collaboration with reseachers from UCL-Energy.
‘Carbon Risk and Resilience: How Energy Transition is Changing the Prospects for Countries with Fossil Fuels’ explores the risks faced by emerging producers of fossil fuels who may be banking on export revenues to drive development but without full consideration of future market uncertainty.
The report sets out some of the key global uncertainties around future fossil prospects, due to the acceleration of renewables and low carbon vehicles, emerging climate policy, both on the demand and supply side, through to the change in the investment environment shifting from fossils to lower carbon energy. At the same time, many lower income countries are pressing forward with plans to develop and expand extractive industries to help meet development objectives. The choices made are critical, as they will focus investment on long-lived assets, and into a specific development pathway.
This report uses country-scale and global modelling undertaken by UCL, in close collaboration with Chatham House, to explore the implications of future uncertainties under climate policy, testing the impact on future fossil prospects under different climate ambition, with and without carbon capture and storage, or CCS (an option that allows fossil fuel use to continue), and under accelerated low carbon technology costs assumptions.
The insights of this modelling on the country case studies of Ghana and Tanzania suggest a potentially wide gap between revenue expectation in-country and what might actually be delivered under necessary climate ambition. It also shows that increasing domestic oil and gas demand is likely to exacerbate the fiscal stress of falling revenues as reserves for export are depleted, and that re-investment in the sector and replacement of reserves will become increasingly challenging in a declining market, particularly for higher-cost, marginal producers.
Taking all factors together, it is clear that energy and industrial infrastructure choices and financing require greater attention in strategy discussions around the development of expansion of the oil and gas sector, given that they will affect a country’s energy and emissions pathway over decades.
The report recommends improved understanding of carbon risk so that it can be carefully considered in development strategies, alongside the opportunities from lower carbon development pathways. This means building in analysis capacity within key ministries, which allows for integrated thinking across different sectors of the economy. Finally, development agencies and banks have a key role in helping facilitate this process, recognising the development needs of countries alongside the wider shift to a lower carbon economy.
Steve Pye, report author and Principal Research Associate at the UCL Energy Institute highlighted the importance of this report in the context of the international climate agenda:
Many lower income countries are looking to use their fossil fuel resource base to drive development. It is crucial that full consideration of the carbon risks of such strategic decisions are undertaken, given the shifting position in investment decisions by multilateral development banks and other financial institutions, and the rapid cost reductions in low carbon technologies.
Aid organisations need to be in a position to assist countries in working through such choices, particularly as they look to meet their sustainable development goals and strengthen NDCs.