January 9, 2024
Sadek Wahba on the Implications of COP28 for Climate Strategy
COP28 Agreement Highlights Need For ‘All Of The Above’ Climate Strategy
Sadek Wahba, PhD is the Chairman & Managing Partner of I Squared Capital and a member of the Council on Foreign Relations.
The COP28 climate conference ended, surprisingly, with a dramatic declaration. After weeks of controversy over oil industry dominance, diplomats from almost 200 countries agreed at the last minute to a major declaration calling for the world to transition away from fossil fuels and toward renewables.
Media coverage went straight to the drama. For example, The Washington Post noted that unlike the COP28 statement, no past declaration, “not even the landmark 2015 Paris agreement had specifically mentioned fossil fuel use.” But the coverage also captured the complexity: The Post noted that “language calling for a more unequivocal ‘phaseout’ [of fossil fuels] did not survive,” which provides for decades of further consumption.
In fact, COP28 and its final statement perfectly reflect a practical reality: Fossil fuels and renewables are not an either/or. Renewables as well as other technologies are the future, for economic as well as environmental reasons. But the complexity of energy transition is such that fossil fuels will be with us for some time to come. For that reason, and because of current supply constraints, high energy demand from continued growth in emerging economies and the seemingly insatiable appetite for energy to power data and AI, what’s truly needed is an “all of the above” climate strategy.
Why All Energy Producers Need To Be Part Of The Climate Conversation
It is not always easy to keep this complexity clearly in view. In the weeks before COP28, two megamergers—Exxon Mobil’s purchase of Pioneer Natural Resources and Chevron’s acquisition of Hess—led to media coverage focused on the oil giants “doubling down” on fossil fuel. Also in the news was fierce criticism of the appointment of Sultan Al Jaber, CEO of ADNOC (the Abu Dhabi National Oil Company), as COP28 president.
But in fact, none of these developments signaled that the energy transition has changed direction, any more than the COP28 final declaration was a complete rejection of fossil fuel. The best outcome of COP28 was that the oil companies were involved in the discussions instead of being ostracized.
Exxon and Chevron are not betting against renewables. Near-term factors drive industry consolidation. Oil companies are cash-rich thanks to post-pandemic demand and high prices driven by constrained supply—the result of wars in Ukraine and the Middle East. Al Jaber is working to transition not just ADNOC but all of UAE away from fossil fuel. So are Saudi Arabia and other countries that rely principally on oil and gas exports for their economies.
But most fundamentally, the energy industry reflects the reality that the energy transition will be long and drawn out. Put oil aside for the moment and consider: Coal still represents nearly 20% of U.S. energy production. Coal comprises over 60% of China’s power production. China currently has 100 GW of coal generation facilities under construction, with another 50 GW planned.
This continued dependence on fossil fuel is the result of a simple hard set of truths: Energy demand, driven by population and economic growth, is increasing (it is projected to increase from 16% to 57% over 2022 levels by 2050 depending on growth scenarios). Fossil fuels remain among the most efficient sources in terms of energy density, ease of transport and available distribution infrastructure.
While renewable energy remains a critical component of any energy transition path, it is still challenged in this regard. It is relatively straightforward to build a solar array, but not to connect it to the grid. Electric vehicles require batteries containing rare earth materials that are environmentally damaging to mine. They run on roads paved with asphalt, a petroleum product, and over bridges built of concrete and steel, two highly carbon- and water-intensive materials if manufactured conventionally.
Does this mean that the pace of development will slow? Not at all, in my opinion. The same growth in energy demand that drives oil, gas and coal consumption will likely also drive the development and deployment of renewables and new technologies. Over time and once they can be provided at scale, I believe that the superior economics of renewables and the advantages of decarbonization will win out.
Balancing Renewable Investment With Economic Concerns
Industry participants will follow multiple paths. Exxon Mobil CEO Darren Woods recently told Financial Times that the energy transition will include wind, solar and EVs but also biofuels, carbon capture and hydrogen. Exxon Mobil and Chevron, among other oil majors, are continuing to diversify into carbon sequestration and renewables. Similarly, in addition to his role at ADNOC, Al Jaber is chair of Masdar, a state-owned energy company that operates renewable projects in over 40 countries.
What we are really seeing is the emergence of the “All-of-the-Above” energy strategy first championed by President Obama and then-Vice President Biden, focused on economic growth and job creation, enhanced energy security and low-carbon energy technologies.
President Biden’s CHIPS Act is a natural extension of that approach. Its passage was hard-won; its many opponents included countries that have argued for more climate investment. But the war in Ukraine has proven the policy to be on point. The U.S. economy would have suffered a much greater economic supply shock had the U.S. not been the largest oil producer in the world. Obama’s and Biden’s policies also maintained a central role for natural gas—another important hedge.
Inflation Reduction Act and CHIPS Act subsidies are just beginning to impact renewables and decarbonization. But unless we maintain economic growth and job creation, there will never be voter support for climate investment or support from high-growth economies.
Support is growing for these energy transition policies that balance economic priorities. McKinsey, in its 2023 Global Energy Perspective, outlined an “affordable, reliable, competitive path to net zero” that prioritized industrial competitiveness alongside affordability, reliability and emissions reduction.
For investors, there are a number of implications—some obvious but some less so. The obvious: “All-of-the-Above” points to an investment strategy as well as an energy strategy. I believe there is every reason for investors to maintain or expand positions in traditional energy sources, and there is equally strong reason to expand investment in renewables. Beyond that, the scale of investment that renewable projects require, and the uncertainty of government funding, means that new pathways will have to be created that combine private and public investment.
The main takeaway is this: As you review the results of COP28, keep in mind that neither the declarations of victory over fossil fuels nor fears of oil dominance are the whole story. A complex transition continues. But we are on the right track.