Energy Transition: Gaps in the Pathways

The energy transition is bumping against energy security requirements in the short term as countries try to navigate numerous immediate crises. While the long-term transition continues to accelerate, this is not sufficient to meet Paris Agreement on climate change goals.

S&P Global Commodity Insights analysis suggests a funding gap of almost $25 trillion to meet Paris Agreement goals, but funding alone is not the challenge. We identify key gaps in the transition pathways that need attention if we are to meet warming goals.

Hope vs. Reality

To date, governments and the private sector have not lived up to commitments made at the 2015 COP conference held in Paris or to those made since. Action on decarbonization varies across the world based on country- and region-specific interests and is closely linked to perceptions of (and responses to) the energy security debate.

Governments and the private sector have not lived up to commitments made at the 2015 COP conference, in Paris, or to those made since.

Chart 1

Although a broad range of fundamental changes across policy, technology and markets have accelerated the energy transition, there remains a wide gap between the reference energy transition path and the net-zero goals of the Paris Agreement.

S&P Global Commodity Insights analysis suggests the world is on track to exceed the greenhouse gas emissions required to meet Paris Agreement climate goals of keeping the temperature rise below 1.5 degrees C by more than 8 billion metric tons of CO2 equivalent by 2030 and by 41 GtCO2e by 2050. Since most emissions come from energy usage, it is important to analyze how the share of energy from different fuel sources will change over time.

To meet Paris Agreement climate goals, the global share of energy that comes from renewables needs to increase from 3% currently to 31% by 2050; a tenfold increase. At the same time, fossil fuel (oil, gas and coal) energy usage must decline from 80% currently to 33% by 2050. This outlook assumes significant roles for carbon capture use and storage (CCUS) and direct air capture (DAC). Without these technologies, renewables’ share will need to go up by another 10%, and fossil fuels’ share will need to fall by the same amount. But our reference case forecast suggests that renewables’ growth will fall significantly short of those targets, and fossil fuels will not decline fast enough.

Chart 2

Most countries are falling short of their emissions targets to meet even a 2-degree warming goal. S&P Global Commodity Insights’ base-case forecast suggests warming levels of around 2.4 degrees by 2050.

China’s greenhouse gas emissions are by far the most above the 2-degree target, followed by the Middle East, the U.S. and India. While U.S. and EU emissions are on a steady decline, they are set to miss the 2-degree emissions target by more than 100% by 2050. China’s emissions will not peak until the late 2020s, and those of most other developing nations will not do so until 2050.

The gap between ambition, hope and reality is wide.

Chart 3

Most countries are falling short of their emissions targets to meet even a 2-degree warming goal.

The Pace of Transition Has Accelerated as a Result of Current Crises

The world faces several major crises, including an energy crisis, a food shortage, a global economic downturn, a divided world and increasingly frequent weather disasters. These crises may be setting us further back.

If we look past the current hurdles, however, the transition to a lower emissions energy future is accelerating — just not fast enough to meet Paris Agreement goals.

The three largest energy consumers and greenhouse gas emitters — China, the U.S. and the EU — have all put significant energy transition policies in place in the past year to accelerate their transition pathways.

• The REPowerEU plan put forward by the EU in response to the ongoing energy and geopolitical crisis caused by the Russia-Ukraine war clearly sets the bloc on an accelerated transition to renewable energy, despite increased use of coal, nuclear and imported liquefied natural gas in the short term.
• The U.S. Inflation Reduction Act, which provides nearly $370 billion in federal funding and financial incentives to boost clean energy, also provides long-term incentives for CCUS and DAC, which has reinvigorated enthusiasm for these two critical technologies that can help reduce emissions significantly.
• China has used its manufacturing might to establish itself as a global leader in clean energy manufacturing and supply chains. Despite its reliance on coal as well as oil and gas, China sees the energy transition as a strategic advantage. Reducing this reliance on imported oil and gas and transitioning to clean energy will leverage the strengths of the Chinese economy. There is little economic or strategic reason for China to slow its transition policy despite the geopolitical crisis and economic headwinds.

Key Challenges to Closing the Energy Transition Gap to Net-Zero

• The need for cooperation in an increasingly fractured world. Russia’s invasion of Ukraine has left the world considerably more fractured. In addition, the standoff and tensions between China and the U.S. make global cooperation to reduce emissions challenging. But reducing emissions needs a global solution. Even if emissions in the U.S. and the EU decline to zero, emissions from the rest of the world would still need to fall 65% from current levels by 2050 to reach a global 2-degree target.
  
  

• A transformation of energy systems, in which equipment and capital last for decades, that is by nature complex and slow — as can be seen in the current energy crisis. To have any hope of approaching net-zero targets by 2050, the world needs to:

1. 1. Meet all incremental energy demand with clean energy sources on the supply side and install clean technologies (e.g., electrification) on the demand side. Even with the strong uptake in renewables and clean energy over the past 20 years, fossil fuels’ share today is 80% of total primary energy consumption.
   2. Supplement fossil fuel consumption with widespread use of CCUS and DAC to limit emissions. Ideally, this will be accompanied by large and efficient global voluntary carbon markets and nature-based carbon offset solutions.
   3. Accompany the addition of new energy supplies by efforts to replace existing energy, industry, transportation and building/housing capital stock with cleaner alternatives — or to find ways to repower/retrofit or fuel switch these existing assets to low-emitting and zero-carbon alternatives. 
      
      

• The need to implement new technologies at scale quickly. Solar power, wind power and electric vehicles offer some solutions for the energy and transportation sectors. Other technologies such as hydrogen fuels, biofuels at scale, long duration energy storage and heat pumps for buildings are currently more expensive and need to come down in cost. Sectors such as high-temperature industrial heating, long-haul trucking, maritime shipping and aviation are particularly challenging to decarbonize. Technologies around carbon capture and DAC can prove particularly impactful in driving solutions in these areas, but they remain in very early stages of adoption.  
  
  

• The large financing gaps. S&P Global Commodity Insights analysis suggests a $25 trillion cumulative funding gap between forecast spending and the investment needed to achieve net-zero by 2050. The challenge lies in raising and directing the necessary investment, considering that broad swathes of the population are still relatively energy-poor. Driving these large investments will be more challenging in a world of higher interest rates and inflation.        
  
  

• The need for oil and gas companies to be part of the solution. Strong balance sheets, project management skills and multiyear investment horizons are needed to deploy large-scale energy transition strategies. Major oil and gas companies typically have all of these but are under pressure to balance competing priorities from activists, investors and policymakers. While high commodity prices have significantly boosted cash flows at oil and gas producers, those companies are under pressure from investors to return excess cash instead of investing in fossil fuels (due to fear of stranded assets) or clean energy (due to relatively low returns compared with fossil fuels). Hence, only some global firms have started to allocate capital toward low-carbon technologies, and spending is limited to 20% to 30% of their total annual organic investment.
  
  

• The need for the cost of carbon to be better captured. To stimulate the competitiveness of low-carbon technologies and attract more investment and financing, the cost of externalities needs to be better anticipated and reflected in product and service prices. Whether this is by way of regulation, taxes or a carbon price may vary across regions.  
  
  

• The need to use new and different materials and to establish new supply chains, many of which will need to scale up to unprecedented levels. The energy transition over time will disrupt current geopolitical energy-related dependencies and create new ones. Geopolitical tensions can heighten the shift in focus away from global efforts and cooperation toward protectionist policies, friendshoring and trading among smaller clubs of nations, and smaller-scale efforts.

Government and industry responses to these key challenges will significantly impact how successful we are at closing the energy transition gap. All credible solutions will require global cooperation with an eye toward security and affordability of energy for all.

Learn more

COP27 Special Report: Advancing Climate Objectives Amidst Conflict
Inflation Reduction Act: Landmark Legislation Supercharges U.S. Clean Energy Effort
Atlas of Energy Transition™

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