Picking up the gauntlet
Shell is implementing the Kyoto Protocol and its commitment to developing renewable sources of energy
Companies can take the lead in practical action to combat climate change. The Third Conference of the Parties to the United Nations Framework Convention on Climate Change in Kyoto in December 1997 concentrated minds in the business world. Industry in general, the energy sector in particular - and we at Shell - must now play our part in helping the process to move from sensible words to
Industrialized countries made a legally binding commitment at Kyoto to reduce overall greenhouse gas emissions by an average of around 5 per cent compared to 1990 levels, over the first commitment period from 2008 to 2012. The aim of the Convention on Climate Change is to stabilize greenhouse gas concentrations in the atmosphere at a level which would limit the impact on the Earth's climate. But this needs to be done in a manner, and over a timescale, that will allow ecosystems to adapt while encouraging sustainable economic development.
We at Shell believe that Kyoto drew attention to this issue as never before - though the issues are undoubtedly complex and the detail may not engage the wider public. But if governments are seen to be more prepared to commit to controlling greenhouse gas emissions, people expect action to match that commitment. We think that economic development can only be sustainable in the long term if it balances growth alongside environmental risk. The key challenge is to explain how we propose to achieve that balance. Such explanation is necessary. As we said in The Shell Report, Profits and Principles 1998, published earlier this year, a sophisticated population looking towards the 21st century demands a 'show me' approach, having grown sceptical of the 'trust me' version offered by institutions in the past.
We believe that Shell's withdrawal from the much-criticized Global Climate Coalition in April this year is indicative of our commitment to this aim. It had become clear that our views and those of the Coalition were too divergent to warrant continued mutual involvement. The focus of the disagreement was the Coalition's active campaign against both ratification of the Kyoto Protocol by the United States Government and its opposition to targets and timetables generally accepted by Parties to the Protocol.
Shell, like every other publicly owned company, must protect shareholders' investment and provide an acceptable return. It must continue to win and maintain customers but, of course, it has responsibilities to other stakeholders too. We must also ensure that our businesses are run in an ethically acceptable manner and in accordance with specific environmental responsibilities. We are proud of our formal Statement of business principles and our formal Commitment to the management of health, safety and the environment. These ensure a consistent approach in all of our Group of companies to these worldwide responsibilities.
According to the scientists of the Intergovernmental Panel on Climate Change, the balance of evidence suggests that there is a discernible human influence on global climate. In spite of the considerable scientific uncertainties which remain about the nature, process and impact of climate change, Shell believes there is sufficient evidence to support prudent precautionary action. Prudence does not mean delay but equally it does not mean precipitous action. Taking measures so hasty that they threaten the stability of the energy industry, and therefore its vital, current and ongoing contribution to the economic development of societies, could be as damaging as doing nothing. Practicality is the watchword.
Fossil fuels currently supply about 85 per cent of global primary energy needs, and the continued use of oil, gas and coal is inevitable for the foreseeable future. More reserves will have to be found to sustain population growth and improve living standards over the next few decades, particularly in developing countries. Although there are currently no generally available alternatives to fossil fuels at acceptable cost, we do expect renewable sources to become cheaper and more widely available during the next half century. Greenhouse gas emissions could peak in the period 2020-2030, leading to eventual stabilization of atmospheric carbon dioxide (CO2) levels - close to the European Union target of double pre-industrial levels.
Our vision for the future includes radical changes in energy supply and consumption. That is why we have decided to invest $500 million to establish renewables as a core area of Shell's business. We have created Shell International Renewables (SIR) - a separate business unit - and have given it the same status within our Group as our traditional oil and gas exploration and production business. SIR will devote most of its efforts to biomass power generation, solar electricity and forestry - while keeping an open mind on other renewable energy possibilities such as wind power. These sources of renewable energy could be providing between 5 and 10 per cent of the world's energy needs within 25 years, possibly expanding to 50 per cent in 2050. Make no mistake: Shell is committed to renewable energy as a business opportunity, not as a publicity exercise. We are preparing now to be able to take advantage of the very different energy market that will be in place in 50 years' time. It would have been a foolish carriage maker who did not, at the turn of the last century, embrace the internal combustion engine.
In the more immediate future, though, the Kyoto Protocol provides three flexible mechanisms for implementing the agreement reached last December, which should eventually be joined together through a system of linked credits:
- Emissions trading, which will create an international market in permits to emit CO2-equivalent emissions.
- Joint implementation, through which projects to reduce emissions or enhance carbon sinks such as forests will be organized cooperatively amongst Annex 1 (industrialized) countries.
- The Clean Development Mechanism, which will assist developing economies (non-Annex 1 countries) to achieve emissions reduction and support sustainable development. It will also help Annex 1 economies to meet their quantified emission targets.
Together these mechanisms, soundly designed, should provide the least costly way of achieving the Kyoto targets. To make it work, business must be encouraged to play a full part and unnecessary bureaucracy must be avoided. If these conditions can be met, one of the keys to managing economic development and the risks of climate change may have been found. Let me deal with each mechanism in turn.
Emissions trading will operate by creating a new commodity - a permit to emit a unit of CO2-equivalent emissions. A similar, successful system for trading sulphur oxide permits already exists in the United States, although an international carbon trading system will be much more complicated to implement. In order to make greenhouse gas trading equally successful a number of problems will need to be resolved.
How should these emission trading permits be allocated? Ideally, Annex 1 countries should be able to distribute a proportion of their permits to companies or citizens within the system. A precise mechanism for making permits and credits interchangeable between parties needs to be developed. Eventually, it should be possible to allow credit trading between all three flexible mechanisms. If the system is to win the confidence of companies, governments and the public, there must be effective procedures to regulate, monitor and enforce trading integrity and transparency.
If these specific requirements can be met, companies and countries that exceed their greenhouse gas reduction targets would be able to earn cash by selling permits to countries that find it more difficult to reach them. In this way, emissions trading could offer an efficient, market-driven method of reducing greenhouse gas emissions.
The aim of joint implementation is to help host countries meet their own commitments and create surplus allowances that can then be used as credits. Joint implementation
aims to encourage Annex 1 countries, or companies authorized by them, to establish cooperative ventures in emission reduction and sink enhancement. Business has a role to play in helping to get these mechanisms off the ground, and the provision of early credits would be a powerful stimulus.
Provided sufficient attention is paid to its design, joint implementation could achieve several important goals:
- Technology transfer between participants.
- Capacity-building in countries with economies in transition, such as Russia and Ukraine.
- Provision of a pool of credits which will ultimately lower the cost of reducing emissions.
The private sector will propose and fund joint implementation projects if they are commercially viable. Low transaction costs, minimum project delays and the protection of confidential information will all be essential. The credit system needs to be based on actual emissions reduction and must allow individual businesses to negotiate project by project.
The Clean Development Mechanism is designed to help non-Annex 1 countries to reduce their greenhouse gas emissions and achieve their sustainable development objectives, as well as assisting Annex 1 countries to fulfil their commitments. Transactional costs and the time needed for approval must be minimized to ensure that such projects are economically viable.
Of course, ultimately, we must be able to prove that these measures make a difference. Critical to the success of both Clean Development Mechanism and joint implementation projects will be quantifying emission reduction over and above what might have occurred without such initiatives. Only then can we be sure that the flexible mechanisms are achieving their objectives. If these complex issues can be addressed, the transfer of technology will help to raise standards at the same time as enhancing our ability to meet targets for greenhouse gas reductions.
Dialogue and debate
If the momentum of Kyoto is to be maintained, governments will need to make progress at the Fourth Conference of the Parties in Buenos Aires in November.
Government and industry must keep talking. Only through dialogue can we ensure the appropriate dissemination of information and experience. Shell companies, like other multinationals, believe that their knowledge of energy markets, project execution, technology transfer and oil trading enables them to contribute to this debate and to discuss practical measures with governments in countries where they operate.
Shell companies will also play their part directly in making the energy savings needed to meet the Kyoto targets - and helping customers to play theirs. All Shell companies set themselves environmental targets. Total emissions of
CO2 from Shell operations are projected to fall by 26 per cent between 1997 and 2002. Emissions of volatile organic compounds and methane are projected to drop by 22 per cent. A major factor in these reductions is the target set by our Exploration and Production business to reduce flaring from 9 million tonnes of gas today to some 5 million by 2002, and to eliminate the disposal of gas through continuous flaring by 2008.*
Climate change is a long-term issue - far longer term than the first commitment period which ends in 2012. If a workable framework for the flexible instruments can be put in place in Buenos Aires then the conditions will have been created to address climate change over the long term. Shell has picked up the gauntlet of implementing Kyoto. Will governments?.
Mark Moody-Stuart is Chairman of the Committee of Managing Directors of the Royal Dutch/Shell Group
* Further details of Shell companies' performance and objectives can be found in the Royal Dutch/Shell Group Health, Safety & Environmental Report 1998 available from Group External Affairs, Shell International, Shell Centre, London SE1 7NA, United Kingdom, or on www.shell.com