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The Scotsman: Shell deserves credit for wanting to be part of the climate change solution

“In 20 years the world will find itself desperately trying to put right what it could have avoided

By GEORGE KEREVEN

IT HAS been a busy week. Global equity markets suddenly went into meltdown at the prospect of a US recession. Quite where the market traders have been living for the past six months is not clear. Then out of the blue, Jose Manuel Barroso, the mild-mannered president of the European Commission, threatened to impose carbon tariffs on US imports unless America agreed to limits.

With all this going on, I found it a calming experience to have breakfast with James Smith, the chief executive of Shell UK and a man who looks beyond the contemporary froth to see where the economy will be in 20 or 30 years’ time.

Smith is both a physicist and an accountant, which lets him crunch the numbers while not getting carried away with techno-speak. He is also charming, erudite and fiendishly clever – not always attributes I associate with the heads of big companies.

Shell is famous for having pioneered a technique known as scenario planning. This involves researching competing future trends and comparing them with each other. The aim is not to predict the future – which is impossible – but to identify and rank the possibilities. This lets Shell prepare different action plans to be implemented to meet whatever actually transpires.

In the next few weeks Shell will publish its latest scenarios charting the long-term future of the global economy – quite timely, given the turmoil in the markets. This made it very opportune to button-hole Mr Smith on what we are likely to discover.

Shell’s previous set of scenarios (“People and Connections”) covered the world till 2020 and concentrated very much on social and cultural issues. This probably reflected the generally benign economic climate and the fact that the world was more concerned with the so-called war on terrorism and poverty issues.

However, the next set of Shell scenarios have taken a radically different direction and revert to major economic issues. Central to the analysis is climate change and global energy demands. Shell was the first of the oil majors to accept that climate change was happening and that something had to be done about it.

First, the general background as Mr Smith sees it. In the period to 2050, global energy demand is going to double under the pressures of population growth and economic development. Even if there is a fantastic increase in renewable energy it won’t be anywhere enough to keep up with demand. As a result, fossil fuels – coal especially – will still constitute 60 per cent of the energy mix.

This creates two interlocking problems: 1) how to find the extra energy sources; and 2) how to stop this energy explosion accelerating global warming? Shell imagines two probable paths the world could take to meet these challenges. It labels these “Scramble” and “Blueprints”.

Scramble is a scenario where self-interest predominates initially. Voters in the West and in the developing world are unwilling to make radical changes in lifestyle. Politicians concentrate on trying to optimise within their own national perspectives. As a result there is global competition for resources and little attention paid to cutting energy consumption. Naturally, this will lead to new international political tensions and greenhouse gas emissions continue to climb.

Note, however, that this is not a doomsday scenario. Eventually, faced with the negative consequences of climate change, self-interest will force the leading economies to co-operate to curb emissions and draw back from energy nationalism. At which point, 20 years from now, the world will find itself desperately trying to put right what it could have avoided with a little forethought.

We have been here before. The death and economic destruction of the Second World War was eminently predictable but we had to go through the pain before realising that international relations needed to be on a more rational basis and free trade hard-wired into global institutions.

The second scenario, “Blueprints” is more benign. Governments accept that climate change and skyrocketing global energy demand require a co-ordinated solution on the Kyoto model. This starts slowly – think the recent Bali accords – but gathers momentum in time to avoid the worst prospects for global warming and energy wars. New energy technology also plays a big role.

James Smith puts some skin on the bare bones of the ‘Blueprints’ agenda. He suggests that grand international agreements on emissions targets may be a while in coming, but that bilateral deals and coalitions could be the immediate way forward. Leaving aside process, he identifies several key “mega deals” that have to be done to tackle climate change.

First, we have to decarbonise the Chinese and Indian economies, and it is difficult to see how that will happen unless the West offers to pay for it. This could be done through carbon capture and storage technology but (at present) this adds considerably to the cost of electricity generation – some60 euros per ton of carbon.

Second, we have to stop deforestation. Bali made some headway on this but again the West is going to have to cover the cost. One way would be to invest in growing second generation bio-fuels on the land that has already been cleared.

Shell, as a liquid fuels company, sees its future in a big turn to bio-fuels production. It envisages using clean bio-fuels to generate more electricity for transport, as a way of dealing with the emissions resulting from burning coal or petroleum.

I detect that James Smith is an optimist. But he is also a realist. He makes no bones that Shell will continue to be in the fossil fuel business and that Shell’s investment in Canadian tar sands may even increase the company’s carbon intensity. But Shell wants to be part of the climate change solution.

That puts James Smith ahead of many a politician whom I could mention.

The full article contains 987 words and appears in The Scotsman newspaper.
Last Updated: 22 January 2008 9:08 PM

http://business.scotsman.com/business/Shell-deserves-credit-for-wanting.3699555.jp

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