ICBA ECONOMICS: Checking in on the Energy Transition

By Jock Finlayson, ICBA Chief Economist

When an irresistible force meets an immovable object, conflict typically ensues. So it is with the halting worldwide efforts to come to grips with the challenges posed by climate change at a time when the global demand for energy continues to rise.

While most countries – albeit not Donald Trump’s America – have notionally signed on to the 2015 Paris Agreement goal of holding the global temperature increase to a maximum of two degrees centigrade, few are actually on track to slash their greenhouse gas (GHG) emissions sufficiently for the target to be achieved. Indeed, global emissions are still climbing, driven by growing energy use in China, India and many other emerging market economies. There are few signs that this trend is about to reverse.

Notwithstanding more than three decades of climate change conferences and successive agreements to address the issue, the world remains wedded to GHG-producing fossil fuels, which still meet four-fifths of global primary energy demand. True, a transition to “clean” energy – i.e., energy that doesn’t generate GHGs – is underway, but the pace is slow and the adoption of less carbon-intensive energy is mainly evident in the electricity sector. And electricity, both globally and in Canada, represents less than one-fifth of all energy use.

Outside of the electricity sector, stupendous amounts of energy are needed for heating and cooling, for transportation, for agricultural production, and to support many industrial processes. Fossil fuels remain ubiquitous in all of these areas. Heating and cooling, for example, account for around half of global energy use, and transportation for close to one-third. While there has been significant progress in shifting away from fossil fuels to produce electricity, this is far less true across the other components of energy demand.

A glance at recent projections for energy production and consumption highlights the enduring role of fossil fuels in the world’s energy system -- and the unlikelihood of any rapid-fire “energy transition” – especially one mandated and steered by central planners and international institutions. The latest global energy outlook from energy giant Shell is an example.

Shell’s assessment is instructive, not least because the company has been a leader among large global firms in riding the climate change train and has publicly advocated for aggressive policies to tamp down GHG emissions and accelerate the vaunted energy transition.

According to Shell’s 2025 baseline energy forecast:

• Worldwide demand for “energy services… will continue to increase as the global population grows and living standards rise.” By 2050, “primary energy demand… could be nearly a quarter higher than 2024 depending on economic growth rates, energy efficiency gains and the pace of electrification.”
• Global consumption of oil is expected by grow by another 3-5 million barrels per day into the mid-2030s, confounding earlier forecasts of imminent “peak oil” consumption. Shell notes that “petroleum fuels remain affordable and convenient in transport, particularly in long-distance haulage, aviation and marine.” In the case of petrochemicals – a major source of oil demand – Shell believes the use of petrochemical products will continue “into the 22^nd century".
• Meanwhile, global demand for natural gas is set to increase into the 2040s at least, with liquefied natural gas (LNG) representing a steadily growing share of the overall natural gas market. Underpinning this robust demand scenario is the fact that “natural gas is needed to provide industrial heat, fuel for power generation and heat for buildings and has an important role in helping the world move away from coal.”
• Significant ongoing capital investment in oil and gas exploration and production “will be required for decades to come, as the rate of depletion is… considerably higher than the expected annual decline in demand.” So much for the argument advanced by many Canadian environmental activists that now is the time to starve the oil and gas business of fresh capital.
• The rise of artificial intelligence (AI) and the wider digitization of the economy are fostering significant incremental energy demand and straining electricity grids in many advanced economy jurisdictions.

What are the implications of the evolving global energy landscape for Canada? Our country is endowed with an enviable abundance of energy riches, including the world’s third largest oil reserves and vast amounts of natural gas. Energy plays an outsized role in Canada’s economy, amounting to 10 per cent of GDP and supplying in the vicinity of 25 per cent of all merchandise exports. In the electricity sector, Canada boasts among the highest shares of carbon-free generation (more than two-thirds) in the world – we have done more than most countries to reduce the GHG footprint of electricity.

As an oil and gas producer, Canada has well-respected environmental standards and rigorous project approval processes. Indeed, compared to most other major oil and gas exporting nations – including Russia, Venezuela, Angola, and the various Middle Eastern petro-states – Canada clearly ranks as a responsible supplier. Even as efforts continue to lower GHG emissions and reduce the carbon intensity of energy use, a growing world will continue to demand energy. Canada is well-placed to help meet it. We are hopeful that the Mark Carney Liberal government elected last month understands the opportunity and will work diligently to further develop the Canadian energy sector.