A FRAMEWORK FOR 2 DEGREES SCENARIO ANALYSIS: A Guide for Oil and Gas Companies and Investors for Navigating the Energy Transition - Ceres

 
A FRAMEWORK FOR 2 DEGREES SCENARIO ANALYSIS: A Guide for Oil and Gas Companies and Investors for Navigating the Energy Transition - Ceres
A FRAMEWORK FOR 2 DEGREES
SCENARIO ANALYSIS:
A Guide for Oil and Gas Companies and
Investors for Navigating the Energy Transition
A FRAMEWORK FOR 2 DEGREES SCENARIO ANALYSIS: A Guide for Oil and Gas Companies and Investors for Navigating the Energy Transition - Ceres
ABOUT CERES
Ceres is a non-profit organization that is mobilizing many of the world’s largest companies and
investors to take stronger action on climate change, water scarcity and other global sustainability
challenges. Ceres directs the Investor Network on Climate Risk, a group of 124 institutional investors
managing $15 trillion in assets focused on the business risks and opportunities of climate change and
water scarcity. Ceres also engages with 100-plus companies, many of them Fortune 500 businesses,
committed to sustainable business practices and the urgency for strong climate and clean energy
policies. For more information, visit www.ceres.org or follow on Twitter@CeresNews.

ABOUT AMY MYERS JAFFE
Amy Myers Jaffe is a leading expert on global energy policy, geopolitical risk, and energy and
sustainability. Jaffe serves as executive director for Energy and Sustainability at University
of California, Davis, and as senior advisor, energy and sustainability to the Office of the Chief
Investment Officer of the Regents, University of California. She is associate editor (North America)
for the academic journal Energy Strategy Reviews and serves on the editorial board of the Journal of
Economics and Energy and Environmental Policy. Jaffe’s research focuses on sustainable investment,
corporate investment strategies in the energy sector, and oil and gas geopolitics. Jaffe is also a
global fellow at the Woodrow Wilson International Center for Scholars in Washington D.C.

ABOUT CERES’ CARBON ASSET RISK (CAR) INITIATIVE
Persistently low oil prices, the success of the Paris Agreement, and the rapid evolution of clean
energy technologies have combined to present the oil and gas industry with a significant risk to its
business model. Ceres’ Carbon Asset Risk Initiative (CAR) aims to improve long-term shareholder
value by encouraging fossil fuel companies to adapt their strategies to take carbon risk into account.
Learn more by visiting www.ceres.org/carbonassetrisk or by contacting Shanna Cleveland at
cleveland@ceres.org.

Graphic design by Sarah Mahoney.

© Ceres 2016
A FRAMEWORK FOR 2 DEGREES SCENARIO ANALYSIS: A Guide for Oil and Gas Companies and Investors for Navigating the Energy Transition - Ceres
TABLE OF CONTENTS
EXECUTIVE SUMMARY.. ................................................................................................... 3

INTRODUCTION.............................................................................................................. 6

WHY SCENARIO PLANNING IS ESSENTIAL FOR EXAMINING CLIMATE RISKS............................ 9

A PRIMER ON SETTING UP A SCENARIOS ANALYSIS EXERCISE............................................. 13

THE SCENARIO CREATION PROCESS................................................................................. 15

    Basic Components of a Scenario Exercise Process.. ................................................................................ 15

    Establishing a Base Framework for 2 Degrees C Scenarios.. .................................................................... 17

    The Elements of a Best Practice 2 Degrees C Scenario .. ......................................................................... 18

    Understanding the International Energy Agency (IEA) Reference Case .................................................... 18

    Conceptualizing Abatement Opportunities, by Category of Emissions Reduction Strategy ......................... 19

    Consideration of Emissions and Abatement Potential, by Sector.. ............................................................ 22

UTILIZING KEY 2 DEGREES C SCENARIO INDICATORS AS GUIDEPOSTS IN
CORPORATE PLANNING . . .............................................................................................. 23

    Case Study: ConocoPhillips …………................................................................................................. 26

CLIMATE RISK DISCLOSURE CONTEXT AND BEST PRACTICES.. ............................................. 28

COMPANY CLIMATE CHANGE READINESS: WHAT ARE INVESTORS LOOKING FOR?................. 31

APPENDIX: SEC CLIMATE DISCLOSURES OF MAJOR OIL & GAS COMPANIES.......................... 34

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A FRAMEWORK FOR 2 DEGREES SCENARIO ANALYSIS: A Guide for Oil and Gas Companies and Investors for Navigating the Energy Transition - Ceres
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A FRAMEWORK FOR 2 DEGREES SCENARIO ANALYSIS: A Guide for Oil and Gas Companies and Investors for Navigating the Energy Transition - Ceres
EXECUTIVE SUMMARY
For decades, investors have been engaging with fossil fuel companies around the risks and
opportunities associated with climate change. These investor-led initiatives have ranged from
efforts to increase company investment in renewable energy to improving operational efficiency to
addressing methane emissions and beyond.

However, for much of that time, companies           to include policymakers, analysts, and other
largely dismissed investor concerns about           market actors. The goal of this initiative has
the potential for dramatic shifts in business-      been to ensure that the fossil fuel industry,
as-usual market dynamics due to global              in which these investors hold major stakes, is
action on climate change. Fossil fuel               prepared for the transition to a low-carbon
companies expressed skepticism about                global economy.
the need to factor in the possibility of a
                                                    Key among the steps that investors called
broad, global set of initiatives that would
                                                    for is an assessment of the impacts on a
lead to meaningful policy intervention on
                                                    company’s portfolio and business strategy
climate change. Nearly without exception,
                                                    of policies and restrictions consistent with
the world’s leading oil and gas companies
                                                    achieving the globally agreed upon target
have based long term business planning
                                                    to limit global average temperature rise to
on a business-as-usual, rising oil demand
                                                    no more than 2 degrees Celsius above pre-
outlook. Given that the industry regularly
                                                    industrial levels. This request achieved new
invests in projects with multi-decadal time
                                                    urgency when the 21st Conference of the
horizons, the decisions companies make
                                                    Parties to the United Nations Framework
today will help determine their financial
                                                    Convention on Climate Change achieved
viability far into the future. Widespread
                                                    unanimous agreement and outlined a
assumptions that the future would resemble
                                                    clear path to achieve this target in Paris
the past created a false sense of certainty
                                                    in December 2015. On the corporate level,
and optimism regarding technology and
                                                    pressed by shareholders and governments,
climate risk, leading, in cases, to inefficient
                                                    a group of European and international
deployment of capital.
                                                    companies has formed the Oil and Gas
In 2013, a global coalition of investors            Climate Initiative (OGCI) to “catalyze
representing $3.5 trillion in assets raised         collective action by those most committed
the stakes. Convinced of the growing global         to climate change action and to advance
consensus for action on climate change and          technological solutions through collaborative
informed by the work of academics and               programs.” The group’s priorities include
analysts, these investors joined with Ceres,        creating a shared roadmap for reducing
the Institutional Investors Group on Climate        emissions in line with a 2 degrees C target,
Change and the Carbon Tracker Initiative            including controls on methane leakage from
to outline the concept of “Carbon Asset             oil and gas production, and conducting
Risk” and set forth steps that fossil fuel          research and development (R&D) on carbon
companies should take to assess, disclose           capture, use and storage. The group recently
and mitigate vulnerabilities. Investors initially   announced a commitment to create a ~$1B
sent letters to 45 of the world’s largest fossil    joint fund for R&D on carbon capture and
fuel companies and have since broadened             storage and energy efficiency.
and deepened their engagements with
companies and expanded their dialogues

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A FRAMEWORK FOR 2 DEGREES SCENARIO ANALYSIS: A Guide for Oil and Gas Companies and Investors for Navigating the Energy Transition - Ceres
In 2015, buoyed by the success of
         shareholder resolutions in Europe that
         included, among other things, a request for
         scenario analysis consistent with achieving
         2 degrees, investors formed a transatlantic
         partnership to file 2 degree scenario
         resolutions at nine U.S. companies including
         ExxonMobil, Chevron, Occidental Petroleum,
         Devon Energy, Anadarko, Noble Energy, First
         Energy, AES, and Southern. While climate
         risk shareholder resolutions generally
         averaged 20% support in the U.S., this set
         of resolutions achieved an average of 38%
         with high votes of 49% at Occidental and
         42% at Anadarko and AES. Investors with
         over $10 trillion in assets under management
         publicly declared their support for the
         resolution at ExxonMobil leading to the
         highest shareholder support for a climate
         risk resolution ever achieved there, 38%.

         Although the fossil fuel industry is familiar
         with forecasting and scenario analysis,
         many companies have voiced uncertainty
         over how to approach conducting a 2
         degrees scenario analysis. Investors have
         also identified a need for clear guidance
         that will assist them in assessing which
         of their portfolio companies are taking
         this key strategic challenge seriously. This
         paper proposes the basis for 2 Degrees
         Scenario Analysis, the Key Components for
         a 2 Degrees Scenario Analysis Framework,
         examples of best practices to date, the
         basics for meaningful climate disclosures,
         and key questions for investors to ask when
         engaging with companies on the analysis.
         The heart of this work begins with the Key
         Components For a 2 Degrees Framework,
         set forth on the next page.

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KEY COMPONENTS FOR A 2 DEGREES FRAMEWORK
A meaningful 2 degrees scenario analysis will contain five key components as
represented below:

    1. ESTABLISH CLEAR PARAMETERS
          Time scale
          Scope
          Drivers/Influences

    2. ALIGN WITH 2 DEGREES
          Compare CO2 levels under reference case to CO2 levels required for 2 degrees
          Evaluate and explain abatement options chosen as compared with IEA 2
           degrees or other 2 degrees reference scenarios
          Discuss how abatement options compare with current trends and how
           technology or policy could impact them

    3. ASSESS THE IMPACTS
          Quantify range of impacts each scenario has on existing classes of assets and
           planned capital expenditures

          Identify key factors that contribute to risk

    4. INTEGRATE INTO CAPITAL AND STRATEGIC PLANNING
          Test against company reference scenarios
          Create key indicator roadmap
          Develop strategies to increase portfolio resilience (e.g. ConocoPhillips, Total)
          Involve broad, cross-functional teams & engage with board
          Monitor (quarterly) and update

    5. DISCLOSE & ENGAGE
          Disclose methodology and results of scenario analyses
          Identify material risks and disclose in financial statements
          Engage with investors to explain risks compared to peers & other sectors

                                                          A FRAMEWORK FOR 2 DEGREES SCENARIO ANALYSIS | 5
INTRODUCTION
                                  Policy makers, investors and scientists gathered in Paris in
                                  December 2015 concluded that new efforts were needed if
                                  the planet is to avoid catastrophic climate change driven by
                                  the accumulation of greenhouse gases in the atmosphere.
                                  Over 184 countries submitted commitments to reduce their
                                  greenhouse gas emissions during the climate talks with
                                  195 countries agreeing on a goal to limit the rise in global
                                  temperatures to well below 2 degrees Celsius and to pursue
                                  an even more ambitious target of 1.5 degrees Celsius. In
                                  November 2016 the Paris Agreement entered into force and
          The Paris Agreement     its goal of keeping global temperature rise well below 2
         goal of keeping global   degrees Celsius is already shaping national policy decisions,
                                  with major economies such as the United States, China and
          temperature rise well   Europe actively working to shift away from fossil fuels to less
      below 2 degrees Celsius     carbon-intensive fuel sources.

         is already shaping the   Many corporations around the world, including some
                                  of the largest international oil and gas companies,
      national policy decisions   have not fully incorporated the adoption of a binding 2
     of major economies – the     degrees C climate accord into their business planning.
                                  In some cases, executives from those companies have
      world is actively working   expressed a view that a 2 degrees C cap on climate
      to shift away from fossil   warming will not prove achievable. Yet for the past two
                                  decades or more, energy companies have operated
          fuels to less carbon-   under a set of assumptions about the future business
        intensive fuel sources.   environment that are looking increasingly unrealistic.
                                  Irrespective of whether governments actually achieve a 2
                                  degrees C cap on climate warming, it cannot be ignored
                                  that many governments are making major commitments
                                  to the low carbon transition by tightening regulations and
                                  performance standards designed to reduce the use of oil
                                  and coal. But perhaps just as significantly from the point of
                                  view of a global transition in energy usage, societal patterns
                                  for fuel use are also changing through the advent of digital
                                  technologies that are proving to be either energy saving or
                                  altering choices among different fuels. Given the long capital
                                  horizons in the oil industry, where investments made today
                                  may not pay off for decades, it is imperative that the industry
                                  be particularly attuned to the potential for disruptive change.

                                  In considering how the business landscape for the energy
                                  sector may change given these trends in the coming
                                  decades, companies need to consider multiple variables at
                                  once.

                                  Uncertainties in the Outlook for Oil Demand
                                  Typical business-as-usual forecasts for energy heavily weigh
                                  a number of factors. Generally speaking, global economic
                                  growth is assumed to expand by between 2 to 4% a year

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between now and 2040, in line with                                                         Citibank relate that losses in global GDP
projections from the International Monetary                                                could be even higher, at as much as 5% per
Fund (IMF). Such a forecast has embedded                                                   annum, as declines in crop yields accelerate
in it a high growth rate for the developing                                                in Africa and sea level rise intensifies coastal
world, driven by urbanization and                                                          flooding and related damage.2 These
modernization across Africa, Latin America,                                                forecasts highlight the internal inconsistency
ASEAN, China and India. ExxonMobil’s                                                       in forecasts that project both large increases
forecast, for example, assumes 2.8% growth                                                 in global emissions and oil use as well as
per annum in global GDP to 2040 or roughly                                                 steady economic expansion, since any failure
a tripling from 2000. The International                                                    to sufficiently curtail oil use and emissions
Energy Agency sees world GDP growth                                                        would likely be accompanied by large
averaging 3.5% a year to 2040, including                                                   economic losses attributable to climate
4.6% GDP growth in Africa and an average                                                   impacts in some geographies or key sectors,
of 4.5% for the entire developing world. It                                                registering over time in slower global
pegs developing Asia, including China and                                                  economic growth.3
India, at 5.2% compound average annual
                                                                                           Beyond economic trends, there are other
growth in real GDP.
                                                                                           key variables in projecting fossil fuel use.
In recent years, however, unexpected                                                       Oil use forecasts exhibit a high correlation
events have greatly influenced market                                                      to changes in populations. Most forecasts
trends, adding an additional layer of                                                      assume a growth of 0.9% a year per annum
uncertainty to these business-as-usual                                                     to reach 9 billion people by 2040, related
forecasts. The collapse of China’s stock                                                   to medium variant rates projected by the
market in 2015 raised questions, for example,                                              United Nations. Africa is expected to nearly
about expectations of continuing strong                                                    double its population over this period, with
economic expansion in China. Political                                                     other large additions coming from India,
upheavals such as Russia’s invasion of                                                     Southeast Asia and the Middle East. But
Crimea and the UK vote to exit the European                                                climate change, rising concerns about food
Union (Brexit) has also cast a cloud over                                                  security and massive migrations from war
the economic outlook for both Europe and                                                   torn, weather-afflicted or disease-ravaged
countries highly dependent on exports                                                      regions in the Middle East, Africa and Latin
to the EU such as China and Brazil. Mass                                                   and Central America may complicate the
migration will also impact economic trends                                                 future landscape for demographic trends.
as will major natural disasters such as the
                                                                                           Finally, another highly influential element
tsunami and related Fukushima nuclear
                                                                                           to oil demand forecasting is the set of
accident in Japan. It is hard to capture
                                                                                           assumptions related to the impact of wealth
these black swan events in long-term
                                                                                           effects on vehicle ownership and use. To
forecasting but their impact can be highly
                                                                                           the extent that forecasts project too high or
material in economic outcomes. A 20%
                                                                                           too low a correlation between GDP growth
lower GDP outcome by 2050, for example,
                                                                                           and car use, forecasts for oil demand can
would translate into over 10% lower global
                                                                                           become unduly skewed.
oil use number over the forecast period.
In addition, some important organizations                                                  A study by University of California Davis
such as the World Bank have highlighted                                                    found that one of the most sensitive
the macroeconomic risks posed by climate                                                   elements influencing oil demand forecasting
change. OECD estimates for global GDP
losses range from 0.7% to 2.5% per annum                                                   2 Citi, Energy Darwinism II: Why a Low Carbon Future Doesn’t Have to Cost the Earth, 33
                                                                                           (August 2015).
to 2060.1 Other organizations such as                                                      3 Notably, despite the clear negative economic impacts that accompany higher levels
                                                                                           of global average temperature rise, only Statoil, among its oil peers forecasting GDP and
                                                                                           oil use, has attempted to account for this impact on GDP forecasts in its current scenario
1 Dellink, R., Lanzi, E., Chateau, J., Bosello, F., Parrado, R., and de bruin K. (2014).   analysis. As Statoil explained, “To underline and illustrate the gradual negative economic
“Consequences of Climate Change Damages for Economic Growth: A Dynamic Quantitative        impact as a result of increasing climate costs, we assume that GDP growth declines
Assessment,” OECD Economics Working Papers, No. 1135, OECD publishing.                     towards 2040.” Statoil, Energy Perspectives, 8 (June 2015).

                                                                                                            A FRAMEWORK FOR 2 DEGREES SCENARIO ANALYSIS | 7
Figure 1: Simulated Impact of percentage change in Vehicle Miles Traveled on global oil demand by 2050.
                                                Source: University of California, Davis.

                      100
                                                                                          30% Higher VMT

                       90

                       80

                       70

                       60                                                                     50% Lower VMT

                       50
                                                  Baseline
                       40

                       30

                       20

                       10

                         0
                             0       5      0        5          0      5      0       5        0       5       0
                         200      200    201      201        202    202    203     203      204     204     205

         outcomes is the uncertainty surrounding                      sizable impacts on oil prices, for example,
         vehicle adoption rates. In the developing                    as was seen during the Asian financial
         world, adjusting vehicle adoption rates and                  crisis in 1998, after the September 11
         urban saturation levels by 25% dropped                       terrorist attacks in 2001, and again in
         final oil demand by 13%, according to UC                     the aftermath of the global banking
         Davis’ global transportation oil modeling. UC                crisis in 2008. Moreover, unrecognized
         Davis also tested the sensitivity of changes                 uncertainties can lead to misallocation
         in expected rates of miles traveled by                       of capital, as seen in recent years with
         vehicles by the International Energy Agency                  billion dollar write-downs in Alaska, the
         New Policies reference case and found                        Russian Arctic, the Caspian Sea region and
         that a large increase or decrease in just                    the Saudi natural gas initiative. Current
         this one variable could impact oil demand                    low oil and gas prices have spurred
         projections by millions of barrels a day in                  bankruptcies in the Canadian oil sands and
         either direction (see Figure 1).                             curtailed expected returns in many global
         Given the range of uncertainties                             liquefied natural gas mega-projects in
         surrounding these kinds of factors,                          Australia and elsewhere. Such write-downs
                                                                      are prompting institutional investors to
         companies can benefit from considering
                                                                      question managements’ abilities to assess
         multiple variables at once, to fashion
                                                                      uncertainties adequately using traditional
         strategies that will be resilient in all
                                                                      methodologies.
         possible cases. Unexpected, sudden
         changes in oil demand levels can have

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WHY SCENARIO                                   strategy that meets a particular contingency
                                                or set of contingencies. It is to develop a
PLANNING IS ESSENTIAL                           base strategy that will be successful under
                                                many sets of possible market conditions.4
FOR EXAMINING CLIMATE                           Scenario planning helps companies
                                                monitor events as they unfold to test the
RISKS                                           effectiveness of the company’s ongoing
Scenario planning is a disciplined              strategy and to allow the company to be
method of imagining possible future             prepared to change course if necessary.
environments that companies might face          Scenario analysis differs from sensitivity
over a set time period. It allows corporate     analysis because it does not examine in
executives to explore and plan for              isolation how changing one major variable
more than one possible future. It allows        or influence would impact the economic
companies to examine what outcomes              outcomes of a strategy or project. Sensitivity
they can expect under a wider range             analysis is often used to test whether a
of economic, regulatory and societal            capital investment in a particular project
conditions under varying operating              or a range of projects will continue to be
strategies. Scenario planning is used in        profitable if one variable were to change. So,
the oil industry as a process to identify and   for example, oil companies use sensitivity
evaluate issues that need to be addressed       analysis to test capital investment under
as part of the strategic planning process.      conditions where commodity price levels
Scenario planning differs from other kinds      over the life of the project might deviate
of planning methods such as contingency         from the business-as-usual forecast for
planning, sensitivity analysis, and decision    that commodity price. Sensitivity analysis
under uncertainty analysis by its ability to    might also be applicable to test whether
integrate a wider number of uncertainties       a business strategy or capital investment
into one more simplified methodology that       would make sense if a new tax, for instance,
allows relationships between many elements      a price on carbon, were to be instituted over
to be explored more systematically. It is       a time frame under study for the strategy or
uniquely suited to the task of assisting        investment.
companies in preparing for a variety of
lower-carbon futures.                           Scenario analysis also differs from
                                                decision making under uncertainty
Scenario analysis differs from                  modeling, in which a structured set of
contingency planning which creates              probabilities of outcomes are quantified and
alternative actions to use in response          examined with a formal mathematical model.
to one factor that may be of high               Uncertainty modeling provides a statistical
concern. In contingency planning, parties       framework to measure how likely uncertainty
consider their base case projection and         about a certain variable or set of variables
consider how to manage an exception or          is to influence outcomes. The models can
contingency that might arise in that base       incorporate the range of probabilities that
case. Contingency planning allows firms         some conditions may exist or occur and
to assess the impact of sudden market           express uncertainty as a range of values
changes or disruptions. By contrast, scenario   that can be used in a computer simulation
analysis explores alternative futures that      (often a Monte Carlo methodology). Also
are comprised of many uncertainties that        measured is a risk tolerance threshold value
are considered simultaneously, and jointly      for decision making and the value of new
as a comprehensive whole, as compared           information to the decision-making process,
with similar variables organized around         e. g. all information is not equal when
the business-as-usual worldview. The goal
in scenario analysis is not to develop a        4 Recent shareholder resolutions have referred to this concept as “portfolio resilience.”

                                                                 A FRAMEWORK FOR 2 DEGREES SCENARIO ANALYSIS | 9
making decisions and considered also in light of flexibility
                                  of decision making. Value of additional information depends
                                  on the level of uncertainty and the payoffs for the venture.
                                  Decision under uncertainty modeling is an effective tool in
                                  geological assessment.

                                  Scenario analysis allows practitioners to capture
                                  new states of reality that might result from wider
                                  changes such as major events or shocks, technology
                                  breakthroughs, or political upsets or changes in societal
                                  values. In scenario analysis, variables do not need to remain
                                  constant per se and there is no limit to the number of
           Scenario planning      variables that can be altered. An entire range of possible
    differs from other kinds      combinations of factors can be captured and considered
                                  simultaneously and compared to a business-as-usual
        of planning methods       reference case. In this way, scenario analysis provides a
                                  better tool to avoid tunnel vision or groupthink. It is a good
        such as contingency
                                  alternative for strategic planning in industries that are subject
         planning, sensitivity    to great uncertainties and possible disruptive technology
                                  but might tend toward excessive optimism in forecasting
       analysis, and decision     the future by simply casting the past forward as a trend line.
           under uncertainty      This pattern of analysis is endemic in the oil and gas industry,
                                  which is both a cyclical industry but also one that believes
        analysis by its ability   and relies upon the premise that the large scale nature
         to integrate a wider     of its incumbent infrastructure prevents sudden changes.
                                  The companies’ energy planners believe the cost and scale
    number of uncertainties       of their asset base provides considerable momentum for
    into one more simplified      continuity. This may have been true at one time, but in recent
                                  years, several disruptions have appeared on the horizon that
           methodology that       resulted in material impacts on the industry and its economic
                                  performance. The highly negative consequences of the failure
         allows relationships
                                  to recognize and plan for the possibility of such disruption
    between many elements         have been evident in the coal industry and the electric power
                                  sector, illuminating some of the risks to which oil and gas
        to be explored more       companies similarly are exposed.
              systematically.     Scenario analysis also helps leaders identify drivers
                                  of change that might serve as key indicators that
                                  strategies will have to be adjusted. This is in contrast to
                                  general operating assumptions that change will occur only
                                  gradually. Because oil and gas are cyclical industries, reliance
                                  on historical data is common and has left the oil industry
                                  vulnerable to uncertainties about the extent to which the
                                  future may not resemble the past. Scenario analysis increases
                                  readiness to consider a wider range of possibilities about
                                  what the future might hold, protecting against groupthink and
                                  promoting the challenging of conventional wisdom. Scenario
                                  planning can help companies to challenge deeply held beliefs
                                  and assumptions and develop a clearer view of the future
                                  among executives and directors. It can help leadership better
                                  understand the key levers it has to influence outcomes under
                                  alternative futures and inform board oversight.

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Scenario analysis is a particularly                                                        fine-tuning each scenario allows management
effective approach to consider the                                                         to actively evaluate and prioritize which
business risks associated with a 2                                                         trends will be most impactful to individual
degrees C climate accord because it                                                        business lines and to identify critical
allows for a multi-pronged consideration                                                   uncertainties that need to be addressed
of a wide range of factors that may have                                                   through resilient strategies. Scenarios can
an influence on the business environment                                                   be used to overcome overconfidence,
under a global climate accord. Some                                                        groupthink and mischaracterized optimistic
of those features would include new                                                        outlooks by forcing management to prepare
regulations, technological innovation and                                                  strategic alternatives for a wider range of
changing societal values and changing                                                      possible market conditions rather than a
priorities that lead to new patterns of                                                    singular business assessment.
behavior. Scenario analysis is most useful                                                 Scenario analysis allows companies to gather
in situations with high uncertainty that                                                   market intelligence within a structured
challenge managers’ and directors’ ability to                                              framework that defines potential strategic
forecast the future or to effectively adjust                                               challenges, giving the strategic planning team
strategy. This is particularly important given                                             a stronger methodology to use in identifying
that the outlines of exactly how a 2 degrees                                               trends and possible disruptions that may
accord might impact energy markets and                                                     affect the business overall or specific
industry are only just emerging, and much                                                  business units. Once constructed, planning
uncertainty surrounds the topic both on                                                    teams can look at how organizational,
a global scale and on a regional as well as                                                operational and financial requirements might
national level scale.                                                                      vary under different business conditions, as
MIT’s Sloan Management Review notes some                                                   imagined by different scenarios, to identify
conditions that describe what the energy                                                   actions that would strengthen the company
industry has faced in the past. In reflecting                                              under all possible conditions that might be
upon these conditions listed below, these                                                  likely to emerge – i.e., so-called “no regrets”
organizations who have experienced them                                                    or “resilient” strategies.
would gain the most from scenario planning:                                                McKinsey & Company notes in its assessment
    •      Too many costly surprises have                                                  of the benefits of scenario analysis that teams
           occurred in the past                                                            must be vigilant to avoid “availability bias,”
                                                                                           that is, the tendency to make decisions based
    •      The industry has experienced                                                    on information that is already known or most
           significant change or is about to                                               easily gathered. Proper scenarios analysis
                                                                                           goes beyond national markets to regional
    •      There are strong differences of
                                                                                           and global trends and encourages the
           opinion, with multiple opinions having
                                                                                           inclusion of a broader range of information
           merit
                                                                                           than might otherwise have been gathered
    •      Competitors are using scenario                                                  by individual business units. Scenarios can
           analysis 5                                                                      allow for integration of economic trends with
                                                                                           technological developments, demographic
Well executed scenario planning can help                                                   and cultural shifts and possible geopolitical
a company review the widest possible                                                       developments. Using a scenario analysis
range of trends that are likely to affect the                                              format also forces management to consider
company’s business by more systematically                                                  futures that won’t mirror the past, thereby
allowing management and directors to                                                       overcoming stability biases. It can also guard
identify interconnections between emerging                                                 against underestimation of the chances of
developments and markets. The process of                                                   failures.

5 Scenario Planning, A tool for strategic thinking, MIT Sloan Management Review, January
15, 1995, Paul J.H. Schoemaker.

                                                                                                  A FRAMEWORK FOR 2 DEGREES SCENARIO ANALYSIS | 11
Figure 2: Old v. New Forces Impacting Long Term Oil Demand
                                        (adapted from IEA 450 Scenario and New Policies Scenario data)

                                                                                                                                            ~ 103.5 MB/D
                                                                     NEW FORCES                                                               IEA New Policies Scenario
          120

                                                                       Technology
                                                              Growth of Alternative Energy
                     ~ 90 MB/D
                       Current Demand                      Millennials Reject Vehicle Ownership
          110
                                                                 Legislative + Tax Policy
                                                                    Energy Efficiency
                                                               (energy per GDP declining)

          100

                                                                                                                                            ~ 74 MB/D
                                                                                                                                              IEA 450 Scenario
           90

           80                   Population Growth
                           Expanding Global Middle Class
                           Emerging Economy Expansion

           70
                                  OLD FORCES

           60

         Many energy companies “stress test” project                                in the banking system in the aftermath of the
         capital investment decision making against                                 2008 financial crisis.6 In the case of climate risks,
         defined risks such as oil price volatility or                              companies are not treating the current levels of
         a range of carbon prices, in many cases                                    policy and regulatory action being undertaken
         currently between $60 a ton and $80 a ton,                                 as a result of the Paris Agreement or the
         to ensure that the internal rate of return for                             accompanying low carbon technologies that are
         each project receiving approval is sufficiently                            coming to market as tail risks that are unlikely
         robust under different potential market                                    to occur. Rather, companies are trying to craft
         conditions. Companies might also consider                                  corporate strategies that will be most successful
         how to hedge against low probability tail                                  and resilient under the widest range of possible
         risks and take specific actions designed to                                business environments.
         limit exposure to such risks. This kind of
         “stress testing” differs in context from the
         kind of “stress testing” often referred to                                 6 In the U.S. context, “stress tests” are developed by the Federal Reserve pursuant to the Dodd
                                                                                    Frank Act and accompanying regulations and may be modified each year.

12 | WWW.CERES.ORG
A PRIMER ON SETTING                             geographic region should include all areas
                                                 where the company operates, produces,
UP A SCENARIOS                                   purchases services or goods, sells its
                                                 products or may be subject to costs or
ANALYSIS EXERCISE                                regulations imposed by governments or
                                                 markets.
Before beginning a scenario process,
organizers must create parameters for the        Drivers and Influences
exercise. In determining the parameters,
                                                 In considering the construction of scenarios,
organizers must consider the types of
                                                 participants will need to cover the drivers
uncertainties that will influence the business
                                                 and influences on their industry or question
or question to be studied. Factors such as
                                                 of inquiry. This can be done by creating a
product or infrastructure life cycles and
                                                 team either internal or external, or both,
rate of technology change are relevant, as
                                                 with expertise in relevant areas. A critical
are expected political leadership transition
                                                 question for the team to consider is: who
cycles, important events, business cycles
                                                 are the key influencers of outcomes? This
and usual planning horizons for capital
                                                 can range from customers and suppliers to
expenditure that influence the strategy
                                                 regulators, competitors, disruptive entities
development process. It is also important
                                                 and technologies, and governments. Is
to acknowledge and avoid the potential
                                                 there a role for advocacy groups or other
for groupthink at the outset by seeking to
                                                 civil society stakeholders? Will investors
consult a diverse range of expert analysis
                                                 or capital markets be influential? Are there
and by including outside experts to
                                                 other players that might bring about a
challenge ingrained assumptions.
                                                 change in an issue or the overall business
Time Scale                                       climate such as scientists, media, or the
                                                 courts? Are there changes from other
First and foremost, a time scale needs to
                                                 industries that might alter outcomes?
be set as a parameter for the exercise.
Decisions need to be made regarding              Other kinds of influences might require
whether the scenario is intended to cover        expert opinion or surveys. Drawing upon
immediate business decisions or long range       these types of outside opinions provides
planning. For the latter, business cycles        a key reality check against internally held
and time scale for development of new            views. There are fundamental factors such
technology, as well as life of capital stock,    as rates of economic growth, demographic
are key considerations. For long range           trends, geopolitical developments and
scenarios covering decades, it is possible to    environmental factors, as well as scientific
consider multiple layers within a scenario of    and technological advances such as artificial
decadal trends; thus, for example, from the      intelligence, automation, 3D printing,
present to 2020, 2020 to 2030, and 2030          biotech and other health breakthroughs for
to 2040 for a study that would cover 2016-       which internal experts may not have the
2040.                                            fullest access to competitive information.
                                                 A good scenario exercise will identify the
Scope                                            inter-connections between such factors
Another parameter that needs to be set           and possible outcomes that might emerge
in advance of creating scenarios is the          from combinations of trends shifting in one
scope for analysis. This can entail defining     direction or another. Scenario construction
the geographic region and other variables        might revolve around a combination of these
related to the competitive outlook to be         drivers and influences, contrasting a positive
considered, such as certain technologies,        scenario and a negative scenario or focusing
sectors, products or markets. The                around high or low continuity or level of

                                                        A FRAMEWORK FOR 2 DEGREES SCENARIO ANALYSIS | 13
change or turmoil. Comparing scenarios          Importantly, the time frame for events
         with alternative outcomes for one or two        and technologies needs to be realistic.
         factors that are highly uncertain but also      How long would it take to deploy a new
         very material is another organizing structure   product? What conditions would be needed
         to create scenario comparisons.                 for it to happen quickly or slowly? How
                                                         do current company forecasts compare to
         Once established, scenarios must be
                                                         current and projected rates of growth and
         examined for consistency and plausibility.
                                                         market penetration for various emerging
         Does the scenario include sensible
                                                         technologies? Such themes need to be
         motivations and reactions for major players?
                                                         tested by a critical process that reviews
         Could the pairing of various outcomes inside
                                                         conclusions and vets them based on latest
         a scenario happen in the way contemplated
                                                         knowledge.
         – e.g. Do drivers follow the fundamentals of
         economics? Are there any trends that are
         mutually exclusive? Would political actors
         remain in power if they took that action?

14 | WWW.CERES.ORG
THE SCENARIO                  BASIC COMPONENTS OF A SCENARIO EXERCISE PROCESS
CREATION                       A scenario exercise can be structured around four main
                               sections: starting point and global overview; deep dives
PROCESS                        for key issues; challenges to paradigms; and syndicate
                               work to frame scenario storylines. The exercise begins with
The process for developing
                               either one or several presentations providing an overview
scenarios can vary from
                               of the prevailing outlook on the current and future
group to group, but many
                               business environment by external expert(s) or planning
planning organizations
                               professional(s), such as the company’s chief economist.
prepare a workshop or
                               The purpose of this part of the exercise is to set up the
war game framework for
                               boundary conditions for the reference scenario, its time
scenario construction
                               scale and its key drivers.
to elicit a wide range of
inputs and perspectives.       These stage-setting overview presentations are
Others use informal polling    followed by a provocation-response-discussion format
instruments such as            that stimulates consideration of alternative views or
electronic surveys to elicit   consideration of factors of what might go terribly wrong
external expert testimony      with the mainstream view, or at least how it might happen
on the probabilities of a      alternatively. The provocations should be structured to
wide variety of factors that   consider key uncertainties, issues and challenges to the
might be influential to the    paradigm, including alternative views on stakeholder
question to be studied         motivations; political, regulatory and/or legislative trends;
using scenario analysis.       and technology influences.
A combination of both
approaches is also possible.   The format of each provocation is a short (e.g., 15 minute)
                               primer by a relevant topical expert or executive who
                               is asked to present five provocative statements he or
                               she might have on key issues and dilemmas related to
                               the overviews that have been presented and how these
                               alternative issues might be solved. These five key high
                               priority issues can be technical, economic, geopolitical,
                               environmental, geophysical/geographic, political,
                               social, historical, cultural, etc. The presenter should
                               consider what are the enablers and blockers of these
                               issues and dilemmas and what are the key stakeholder
                               involvements. The goal of the presentation is not to be
                               “right” but to be provocative to stimulate debate. This
                               “provocation” presentation is followed by a brief (e.g.,
                               10 minute) reflection/response by two discussants who
                               each provide comment or critique on two or three top
                               issues they believe are most relevant from the provocative
                               presentation. This is followed by a somewhat longer (e.g.,
                               30 to 45 minute) discussion among the whole group. Key
                               observations throughout these sessions are recorded
                               as single points by a rapporteur on post-it squares
                               (hexagons) that can be compiled flexibly in multiple ways
                               on white boards.

                               The next part of the exercise is to build a critical map
                               where the hexagons are grouped on a white board by
                               theme/related dilemmas and solutions and possibly

                                               A FRAMEWORK FOR 2 DEGREES SCENARIO ANALYSIS | 15
over a distinct timeline (such as decadal, for      e.g. high technological change, a globalized
   example). The scenarios leader can circle           economy and strict regulation versus low
   the groupings of hexagons along a theme             technological change, high regional barriers
   and related dilemmas, stakeholders, issues          and loose regulation. The Uncertainty-Impact
   and solutions, and name the theme for the           matrix facilitates the delineation of multiple
   group to view. So, for example, if there were       archetypal scenario outlines by creating four
   multiple hexagons about issues related to how       quadrants (see diagram page 18).
   smartphone users might be doing something
                                                       Participants can then be divided into four
   in a different way – say, travel, purchasing,
                                                       groups (called syndicates, under the Shell
   banking and communications – the theme to
                                                       system, for example), each one assigned
   be categorized and circled on the white board
                                                       to a specific archetypal quadrant. The
   might be digital developments and trends.
                                                       groups/syndicates then gather separately
   Once the scenarios leader has organized the         for a discussion of the main themes, inter-
   various themes on the white board, the next         connections and timelines along the
   step is for this leader to establish “connectors”   archetypal quadrant to which they are
   by drawing arrows between one theme and             assigned. Then each individual syndicate/
   another if such conceptual connections              group sketches a storyline/scenario that
   make sense. For example, if one theme was           is consistent with their quadrant (say,
   about new regulations on energy efficiency          low economic growth/low technology
   and another was about energy technology             development for one quadrant versus
   innovation, an arrow might be drawn from            high economic growth/high technology
   regulations to technologies or between the          development for a second quadrant versus
   themes of government-led economic stimulus          high economic growth but low technology
   and economic growth. Issues/themes that have        development, and so on). Syndicates can
   no logical connections can be placed in the         refer to the critical map for inputs and add
   corner of the whiteboard for consideration.         new inputs as needed. Storylines should
                                                       include what developments will happen
   Once the critical map is constructed, it can be
                                                       within defined timeframes and why, for
   presented to the group by telling the ideas or
                                                       example, in the 2020s, the 2030s and 2040s.
   “story” laid out on the whiteboard. The verbal
                                                       They can be drafted into power point slides
   relaying of the critical map does not need to
                                                       or written on flip charts. Once the scenarios
   be a linear story or scenario itself but rather
                                                       are developed and recorded, the larger group
   it can be simply a description of the themes
                                                       should be reconvened for discussion. Each
   with their associated dilemmas and how they
                                                       group/syndicate should appoint a leader to
   lead to different pathways involving other
                                                       present that scenario to the larger group.
   inter-connected issues. The presentation of the
                                                       General discussion of each scenario can
   critical map process should include discussion
                                                       follow if time is available.
   of missing points or remaining questions about
   the items encompassed on the critical map.          It is possible to utilize the workshop
                                                       framework to construct scenarios just among
   At this point, the group will construct (or the
                                                       a small set of executives from the strategic
   leader can recommend) an Uncertainty-Impact
                                                       planning department, either with or without
   matrix. For best practice, we recommend a
                                                       polling input from external experts. One
   matrix with two fundamental uncertainties,
                                                       major oil company, for example, surveys
   e.g. for example, high economic growth versus
                                                       a wide set of oil and geopolitical experts
   low economic growth as one axis. Other
                                                       from academia, consultancies and financial
   axis options would be high technological
                                                       institutions to collect data to use as inputs
   change versus low technological change,
                                                       during their strategic planning teams’ internal
   or a world of globalized cooperation and
                                                       construction of scenarios. Companies can
   relatively free trade versus a world with
                                                       also utilize data and input from individual
   strong regionalization with barriers and
                                                       internal business units in the same manner.
   turmoil. A larger number of fundamental
   uncertainties can be combined, if desired,

16 | WWW.CERES.ORG
Figure 3: Use of an Uncertainty-Impact Matrix to outline possible scenarios based on rate of technological
                                   innovation and degree of regulation stringency

                                                                                           Stringent Regulation

                                                         Technological Innovation
                         Current Policies,
                         Extensive Technological                                           toward 2° Scenario,
                         Breakthroughs                                                     Extensive Technological
                                                                                           Breakthroughs

                                                                                    Regulation Stringency

                                                                                           Stringent Regulation
                         Current Policies,
                                                                                           toward 2° Scenario,
                         Limited Technological
                                                                                           Limited Technological
                         Breakthroughs
                                                                                           Breakthroughs

ESTABLISHING A BASE FRAMEWORK FOR 2                                                 For the purposes of this report, we suggest
DEGREES C SCENARIOS                                                                 as illustration a four-quadrant matrix that
As discussed above, a good way to organize                                          considers rate of technological innovation
scenarios is to structure them around an                                            and degree of regulatory intervention (see
Uncertainty-Impact matrix that can facilitate                                       Figure 3).
the delineation of multiple archetypal                                              Thus the four quadrants can be defined as
scenario outlines by creating four quadrants.
Quadrants should be based on the major                                                 •   Quadrant One: Current Policies and
outlines that an organization thinks will                                                  high innovation
influence the development of a 2 degrees
                                                                                       •   Quadrant Two: High regulatory
C world outcome. Some choices used by
                                                                                           intervention and high innovation
fossil fuel companies have focused on rate
of technological innovation, degree of                                                 •   Quadrant Three: Current policies and
regulatory intervention in markets, level of                                               low innovation
international cooperation or conflict, and
                                                                                       •   Quadrant Four: High regulatory
extent of globalization versus protectionism
                                                                                           intervention and low innovation
and regionalism in economic activity and
trade.

                                                                                             A FRAMEWORK FOR 2 DEGREES SCENARIO ANALYSIS | 17
The latter quadrants might seem                 carbon abatement opportunities in a
         inconsistent with a 2 degrees C scenario        systematic fashion, it is possible not only to
         world but it is useful to postulate the kinds   consider what would constitute a realistic
         of other events that might lower emissions      scenario for abatement actions to be
         substantially without resort to those           taken in combination with each other but
         particular levers, such as a severe slowdown    also to calculate the cost of carbon that
         in economic activity through natural            would be necessary to stimulate these
         disasters or large changes in travel behavior   actions. McKinsey & Company, for example,
         – e.g., due to social change; external shocks   published a study in 2009 called “Pathways
         akin to the attacks of September 11, 2001;      to a Low-Carbon Economy” that focused on
         diseases that discourage travel, such as        technical abatement opportunities costing
         SARS or the Zika virus; or a major energy       less than 60 Euros per ton of CO2 equivalent
         disruption like an oil crisis.                  (tCO2e) of avoided emissions.

                                                         There are numerous studies that provide
         THE ELEMENTS OF A BEST PRACTICE 2               background information or combinations of
         DEGREES C SCENARIO                              policies that will be needed to achieve a 2
         In constructing a 2 degrees C scenario,         degrees scenario. Reviewing these reports
         the first step is to determine what the         can be helpful in thinking through the kinds
         level of total emissions would be under         of levers and influences to include in an
         the reference case and compare it to the        exercise that would be most useful to the
         lower level of emissions that are required to   planning organization.7
         achieve the 2 degrees C target.                 In publicly presenting and publishing their
         Obviously, there is more than one way to        own business-as-usual forecast and 2
         lower emissions to the target level but         degrees scenarios, some companies have
         a reasonable scenario will consider not         put their own results into context by laying
         only the least cost or most realistic ways      out comparisons with the International
         to reduce emissions but the policies and        Energy Agency’s 450 ppm scenario, which
         incentives that might be needed to achieve      is equivalent to a 2 degrees scenario.
         them. Some practitioners begin their            Such comparisons are a helpful way to
         exercise by considering the cheapest ways       contextualize company specific views that
         to lower carbon emissions, but sometimes        inform investors and financial analysts about
         that least cost path might not be the easiest   possible influences on the future business
         in political or social terms. Monitoring        environment and the strategic direction of
         compliance within a small, concentrated         the company.
         high-emitting industry, for example, might
         be easier for governments than monitoring       UNDERSTANDING THE INTERNATIONAL
         individual household changes even if the
                                                         ENERGY AGENCY (IEA) REFERENCE CASE
         latter abatements might be less costly per
                                                         Another way to think through what is
         unit of carbon emitted.
                                                         required for a 2 degrees C scenario is to
         There are several good sources that provide     consider the business-as-usual reference
         cost of abatement curves for greenhouse         case and analyze which features of the
         gas emissions by industry and sector or
         by geographies. A good starting point for       7 World Energy Outlook 2015, International Energy Agency, Paris; Pathways to a Low-
                                                         Carbon Economy, McKinsey & Co, 2009, http://www.mckinsey.com/business-functions/
         constructing a 2 degrees scenario is to         sustainability-and-resource-productivity/our-insights/pathways-to-a-low-carbon-economy;
         consider the broad categories covered in        Stanford Energy Modeling Forum, Climate Change Control Scenarios, https://emf.stanford.
                                                         edu/projects/emf-22-climate-change-control-scenarios; Statoil, Renewal scenario, http://
         these studies and develop one’s own opinion     www.statoil.com/en/NewsAndMedia/News/2016/Pages/EnergyPerspectives2016.aspx;
         or views of what could be accomplished in       Sonia Yeh, UC Davis, https://its.ucdavis.edu/blog-post/uc-davis-climate-modeling-we-can-
                                                         cut-carbon-by-2030-in-sync-with-state-goals/.
         each of them. By examining the technical

18 | WWW.CERES.ORG
reference case drive the higher emissions                                                    For example, the IEA New Policies scenario
outcome of that case. By doing so, it                                                        calculates 75 million b/d of that 2040 oil
becomes clearer which drivers and                                                            demand will come from the transportation
assumptions would need to change in order                                                    sector, roughly 6 million b/d higher than
to achieve a 2 degrees scenario.                                                             ExxonMobil’s 2015 projection to 2040
                                                                                             in transportation related oil demand of
The International Energy Agency (IEA)
                                                                                             69 million b/d. ExxonMobil’s transport
publishes the most well-known and widely
                                                                                             demand forecast includes a projection that
cited scenarios, which include a Current
                                                                                             population expansion, combined with the
Policies, New Policies, and 450 parts per
                                                                                             rising middle class in the developing world,
million (450 ppm) scenario among others.8
                                                                                             will lead to a steep increase in the global
Although the IEA’s scenarios have been
                                                                                             vehicle fleet to 1.7 billion vehicles, up from
criticized for being too slow to recognize
                                                                                             825 million in 2010. Both ExxonMobil and
trends and being overly optimistic about
                                                                                             the IEA assume high growth in oil use from
the advancements of carbon capture and
                                                                                             the commercial vehicle sector, supported
sequestration, they provide a well-known
                                                                                             by global economic expansion, supported
reference point for review. The drivers
                                                                                             by rapid economic growth in China and
of emissions in the International Energy
                                                                                             India. ExxonMobil, for example, sees an
Agency (IEA) reference case (New Policies
                                                                                             added 3 million b/d of oil demand by 2040
scenario) include the projection of a
                                                                                             coming from the heavy trucking sector
large expansion in economic middle class
                                                                                             while demand for oil for aviation, marine
populations throughout the developing
                                                                                             and rail is projected to rise by 7 million b/d
world. Closely coupling population growth
                                                                                             of oil equivalent by 2040. Neither of these
with increases in oil consumption, the IEA
                                                                                             scenarios is compatible with achieving the
scenario posits that this expansion will drive
                                                                                             2 degrees target, but they provide critical
a significant increase in oil use over the next
                                                                                             information about how current policies and
three decades.9 As a result, the IEA projects
                                                                                             dynamics would need to be changed in
oil demand will rise by 14% to 103.5 million
                                                                                             order to reach climate targets.
b/d in 2040, up from 90.6 million b/d in
2014. Under this scenario, global greenhouse
gas emissions from energy use would total                                                    CONCEPTUALIZING ABATEMENT
37 gigatons, well above the 19 gt target                                                     OPPORTUNITIES, BY CATEGORY OF
needed to hold global temperatures to an                                                     EMISSIONS REDUCTION STRATEGY
increase of 2 degrees C. In the IEA’s New                                                    In thinking about 2 degrees C scenarios, it
Policies reference scenario, demand for all                                                  is easiest to consider what are the drivers
fossil fuels increases over the forecast period                                              of expected emissions from the reference
but growth in coal is slow and natural gas                                                   case and how might these drivers be
makes significant gains in the world primary                                                 ameliorated either through new policies,
energy mix. These underlying assumptions                                                     improved technologies or changing
about the connection between energy                                                          patterns of use.
demand and oil demand would need to be
altered to develop a 2 degrees analysis, and                                                 To illustrate what kind of features might
many oil and gas companies have already                                                      reasonably be included in a 2 degrees C
adjusted their forecasts based on current                                                    scenario exercise, we suggest breaking
data and trends.                                                                             down the range of abatement opportunities
                                                                                             into broad categories to gain a better
8 The 450 ppm scenario is based upon the level of CO2 in the atmosphere that would
                                                                                             understanding of the kind of levers that
be necessary to provide an opportunity remain within the 2 degree limit that was initially   might be used in creating lower emissions
established under the Cancun Agreement.
                                                                                             scenarios. National carbon reduction plans
9 This scenario assumes that oil will be used to meet demand rather than lower carbon
resources and thereby accounts for significant emissions levels that are looking more        typically include this same exercise.
uncertain with the adoption of the Paris accord.

                                                                                                   A FRAMEWORK FOR 2 DEGREES SCENARIO ANALYSIS | 19
Figure 4: Net emissions reductions (in million metric tons CO2e) achieved in 2020 from high abatement scenario
                                           Source: U.S. Biennial Report, Rhodium Group estimates

                                       Forest and
            6500                        Land Use
                                       Uncertainty
                            6210

            6000
                            5880              -463

            5500                                                -105
                                                                                 -90
                                                                                                  -135             5087

            5000                           17% Below Levels
                                                (5265)

            4500

            4000
                         Reference            CPP                Other         Methane           HFCs          High Abatement
                         Emissions                            Energy CO2                                          Scenario
                                                                Actions                                           Emissions

         In 2014, the Rhodium Group published an                             3. Adjusting terrestrial carbon, e.g. the
         outline of options for the US government                               status of carbon from land use change
         ahead of COP 21. The diagram shows that                                such as reforestation/deforestation
         the U.S. planned to achieve the highest                                and agricultural activity
         level of abatement via the Clean Power
                                                                             4. Behavioral or lifestyle change
         Plan (CPP), which would regulate emissions
         from the electric power sector, in addition
                                                                           Energy and Fuel Efficiency
         to promoting conservation of forestland,
                                                                           There are a number of levers that exist
         reducing methane emissions from the oil
                                                                           to enhance energy efficiency throughout
         and gas sector and regulating HFCs (see
                                                                           multiple economic sectors, including the
         Figure 4).
                                                                           industrial sector, the transportation sector
         Generally speaking, abatement opportunities                       and the residential-commercial sectors.
         conceptually fall into four major categories:                     In 2015, the IEA published a “bridge”
                                                                           scenario showing that improved energy
           1.     Energy and fuel efficiency                               efficiency in buildings, industrial plants,
           2. Switching to alternative fuels with a                        and transportation could contribute 49%
              lower carbon intensity                                       of the additional GHG reductions needed
                                                                           from the energy sector by 2030 to meet

20 | WWW.CERES.ORG
the Paris goal.10 A sound 2 degrees scenario                                         What role will electrification of transport
should reflect existing trend lines for energy                                       play? How long would scale up of these fuels
efficiency and how they might change                                                 and infrastructure take? What regulatory
through regulation, technology, costs and                                            policies are likely to affect the adoption of
other drivers. A broad calculation might                                             alternative fuels?
include modeling the changes in energy
intensity per unit of GDP and how it would                                           Land Use Changes and Terrestrial
have to change over time. How would such                                             Carbon
reductions in energy intensity be achieved?                                          Forests and soil act as natural sinks for
Under each scenario storyline, what are the                                          absorbing carbon emissions. Thus, land use
expectations for vehicle fuel efficiency for                                         changes that reduce the amount of forest
passenger vehicles and commercial trucks?                                            land or hinder soil’s absorptive capacity
What might change the rate of efficiency?                                            have consequences for reducing carbon
What is technically possible and at what                                             accumulation in the earth’s atmosphere.
cost? What role will the current trend                                               A thorough 2 degrees scenario should
to automation and digitization mean for                                              consider the fate of forest land and whether
energy efficiency in manufacturing or other                                          agricultural practices will include methods
industries? For vehicles? Or in the household                                        that enhance soil’s ability to absorb carbon
sector? How might changes in building                                                such as the use of biochar. A 2 degrees
materials or lighter weight materials for                                            scenario can factor in reported data on
cars impact energy efficiency? What kind of                                          events or levers that decrease deforestation
legislative or regulatory changes are on the                                         such as new regulations of the timber
horizon that might alter energy efficiency                                           industry, an international agreement to
practices? These are the kinds of questions                                          regulate deforestation (including aid
that can be considered in constructing what                                          or credits for developing countries that
efficiency gains would be needed under a 2                                           cannot finance monitoring) or the creation
degrees scenario.                                                                    of an efficient carbon offsets market that
                                                                                     promotes reforestation activities by high
Low Carbon Fuels                                                                     emitters.
In considering a 2 degrees scenario, it is
important to consider what opportunities                                             Behavioral Changes
might exist to shift to lower carbon sources                                         A 2 degrees scenario can consider
of fuel in major sectors. Since the electric                                         mechanisms that might be utilized to
power sector represents one of the largest                                           change consumer behavior in a manner
sources of global greenhouse gas emissions,                                          that makes significant reductions in carbon
a 2 degrees scenario should consider what                                            emissions. This could be technological,
changes might be made in the composition                                             such as smart meter technology that helps
of fuels used to generate electricity. What                                          households conserve energy use, or multi-
is the highest level of the use of renewable                                         modal digital applications for smartphones
energy possible under different scenarios                                            and vehicles that provide information to help
in the power sector? How would the shift                                             individuals avoid fuel-wasting congestion or
to different fuels take place? Are current                                           encourages the use of public transportation,
models for structuring and operating power                                           ride sharing and last-mile bicycling. A 2
grids likely to be cost-effective and reliable                                       degrees scenario can also consider the
in emerging markets or are alternative                                               effectiveness of “Smart Cities” programs
models more likely to be developed? For                                              designed to make large urban areas more
the transport sector, what low carbon fuels                                          livable and reduce emissions through
will be available and over what time frame?

10 IEA, World Energy Outlook: Special Report on Energy and Climate Change
(2015) available at https://www.iea.org/publications/freepublications/publication/
WEO2015SpecialReportonEnergyandClimateChange.pdf.

                                                                                            A FRAMEWORK FOR 2 DEGREES SCENARIO ANALYSIS | 21
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