Overview: Managing Long-Term Climate Risks

Overview: Managing Long-Term Climate Risks Dr. Brian P. Flannery Exxon Mobil Corporation Workshop on Power Market Reforms and Climate Change Stanford University, January 28, 25 1

Outline Scope of the challenge Status of Kyoto Negotiations Technology to address climate change Perspectives on the role of the private sector Considerations for a way forward 2

World Energy Demand 199-23 ExxonMobil Energy Outlook 24 Total Energy Other Energy Wind & Solar MBDOE MBDOE MBDOE 4 6 3. 35 Growth Rate Growth Rate 198-23, % 23-23, % Wind & Solar 1.6 1.7 5 2.5 3 25 2 15 1 5 2.7 2.2 1. Other Coal Gas Oil 1.4 1.7 2.2 8 9 1 2 3 4 3 2 1 5.9 2.2 Biomass, MSW Nuclear Hydro 1.2.8 8 9 1 2 3 2. 1..5 Wind 11.1 2.1 Solar 9.5. 8 9 1 2 3 3 Incorporates significant efficiency/conservation efforts

World Energy Demand 199-23 ExxonMobil Energy Outlook 24 Total Energy Other Energy Wind & Solar MBDOE MBDOE MBDOE 4 6 3. 35 Growth Rate Growth Rate 198-23, % 23-23, % Wind & Solar 1.6 1.7 5 2.5 3 25 2 15 1 5 2.7 2.2 1. Other Coal Gas Oil 1.4 1.7 2.2 8 9 1 2 3 4 3 2 1 5.9 2.2 Biomass, MSW Nuclear Hydro 1.2.8 8 9 1 2 3 2. 1..5 Wind 11.1 2.1 Solar 9.5. 8 9 1 2 3 4 Highly optimistic solar/wind growth still only ~1% energy supply

World Energy Demand 199-23 ExxonMobil Energy Outlook 24 Total Energy Other Energy Wind & Solar MBDOE MBDOE MBDOE 4 6 3. 35 Growth Rate Growth Rate 198-23, % 23-23, % Wind & Solar 1.6 1.7 5 2.5 3 25 2 15 1 5 2.7 2.2 1. Other Coal Gas Oil 1.4 1.7 2.2 8 9 1 2 3 4 3 2 1 5.9 2.2 Biomass, MSW Nuclear Hydro 1.2.8 8 9 1 2 3 2. 1..5 Wind 11.1 2.1 Solar 9.5. 8 9 1 2 3 Incorporates significant efficiency/conservation efforts 5 Highly optimistic solar/wind growth still only ~1% energy supply

World Carbon Emissions ExxonMobil Energy Outlook 24 12 1 8 6 Mid East/Africa Latin America Developing Asia Asia OECD Europe/Russia/Caspian North America Carbon Emissions Billion Tons/Yr Carbon Emissions Growth Billion Tons/Yr 5 4 3 4 2 2 1 6 197 198 199 2 21 22 23 Total Increasing CO 2 emissions Especially in developing countries Coal a major contributor Power

Carbon Emissions - Worldwide ExxonMobil Energy Outlook 24 Bn Tonnes Carbon 12 1 Annual Emissions Industrialized Emissions Growth 199-23 14% 5, M Tonnes Carbon 6%.4% 8 6.9%.7%.4% Industrialized 5% 39% 4 2 1.3% 1.1% 3.% 1.9% 2.5% Developing 16% 19% Developing 199 2 21 22 23 Power Transportation Industrial Res./Comm. 7

Carbon Emissions - Worldwide ExxonMobil Energy Outlook 24 Bn Tonnes Carbon 12 1 Annual Emissions Industrialized Emissions Growth 199-23 14% 5, M Tonnes Carbon 6%.4% 8 6.9%.7%.4% Industrialized 5% 39% 4 2 1.3% 1.1% 3.% 1.9% 2.5% Developing 16% 19% Developing 199 2 21 22 23 Power Transportation Industrial Res./Comm. 8 Major growth in Power and Transport

Climate Implications of Kyoto 2. Temperature Change C IS92a 1. Kyoto.5. 198 2 22 24 26 28 21 Conclusions: - Kyoto achieves very little - Additional steps may be needed 9

Global Emissions Scenario 14 12 1 GtC/yr 8 6 4 2 Annex 1 Non Annex 1 199 2 21 22 23 24 25 Year 1 IS92 a IPCC 1992

Global Emissions for 55 Stabilization 14 12 1 GtC/yr 8 6 4 2 Annex 1 Non Annex 1 199 2 21 22 23 24 25 Year 11 IPCC 1994

Global Emissions for 55 Stabilization Would 14 require Massive reductions in Annex 1 country fossil fuel use 12Large-scale development and deployment of new technology Participation by developing countries 1 As yet no scientific basis for choosing 55 ppm (or 8any other stabilization level) GtC/yr 6 4 2 Annex 1 Non Annex 1 199 2 21 22 23 24 25 Year 12 IPCC 1994

Kyoto Targets Stimulate Near-Term Steps Primarily Fuel switching (especially gas for coal) Energy efficiency Conservation Beyond what might otherwise be economic: by anticipated carbon cost in countries with targets 13

International Policy: Key Considerations UNFCCC/Kyoto negotiators must soon address 2nd commitment period (beyond 212, by 25) With Kyoto only now entering into force With major developing countries refusing to discuss future targets Without participation by USA, Australia With no shared sense of a way forward Nations implementing Kyoto face serious issues Competitive issues from unequal targets and emissions allocations (within sectors, across sectors, between countries) Wealth transfers for international emissions trading Potential for non-compliance by Kyoto signatories Developing countries without emissions commitments face the challenge of expanding reliable, affordable energy use to meet pressing social, economic and environmental needs (with -2 billion without access to commercial energy) 14

Cap & Trade and Technology Three questions for the long-term path forward: Will ~(5-1) euro/tonne price signal induce investment in 5-1 euro/tonne technology, or even research? Will competitive concerns/advantages induce or discourage developing country participation in Kyoto? Can programs focussed on technology (research and deployment) deliver more? 15

GHG Emissions Trading: Fundamental Challenges Increasingly it appears that the theoretical benefits of trading under: A cap In a single regulatory jurisdiction With zero transaction costs Do not apply to: A series of caps in time Linked trading in multiple regulatory jurisdictions As implemented in practice (transaction costs, especially CDM) International cap and trade regimes pose enormous challenges Competition Wealth transfers Enforcement/liability Evolution to future periods: + Mismatch between near term targets and strategic investment decisions (especially in energy) + Practical and political inability to establish binding long-term goals 16

Managing Long-Term GHG Emissions Must address: Emissions growth, especially in developing countries Access to energy Economic development, poverty alleviation Need for innovative, affordable, low GHG emitting technologies, especially for Electric Power Transportation/Fuels End-use energy applications 17

Technology Objectives Promote more widespread use now of existing efficient technology in developed and developing countries Stimulate research and development to create innovative, affordable, low GHG technologies sooner Encourage earlier retirement of less efficient but still productive technology 18

What Technologies Are Key Developing Countries Using & Investing In Today? Greenhouse Gas Emissions Per Dollar of Output.7.6.5.4.3.2.1 China India U.S. Japan Installed Base New Investment Source: P. Bernstein, S. Tuladhar, and W. D. Montgomery, Potential For Reducing Carbon Emissions from Non-Annex B Countries through Changes in Technology, forthcoming in Energy Economics 19

Projected Chinese Emissions with Enhanced Technology 2 US tech 18 Japan tech 15 Exponential tech Baseline 124 MMTCE 1 5 82 74 63 199 1995 2 25 21 215 22 Year Source: P. Bernstein, S. Tuladhar, and W. D. Montgomery, Potential For Reducing Carbon Emissions from Non-Annex B Countries through Changes in Technology, forthcoming in Energy Economics 2

Criteria for Technology Evaluation Performance Cost Consumer acceptance Safety Especially critical for developing countries Enabling infrastructure and capacity Regulatory compliance Environmental impacts Weakest link paradigm: failure in any dimension will prevent widespread commercialization 21

Private Sector Role 22 Profitable multi-national companies with strategic emphasis on R&D play an essential role in development and global deployment of advanced technologies Commercial opportunity typically derives from advanced technology and effective management systems (proprietary positions and know how)-- especially with advanced technology Financial controls Operations integrity Energy management Maintenance... Enabling frameworks/capacity are essential to deliver benefits Rule of law Safe, stable environment for workers and communities Open markets Realization of mutual benefits Protection of intellectual property Movement of goods, capital and people Respect for the needs of host governments and communities...

Key Elements to Manage Long-Term Climate Risk Promote global participation Encourage more rapid use of existing efficient technologies (in both developed and developing countries) Stimulate research and development to create innovative, affordable, low GHG technologies sooner Address climate risks in the context of developing country priorities: development, poverty eradication, access to energy Continue scientific research to assess risks, pace policy response Likely this requires a change (Beyond Kyoto) From: a progression of binding, differentiated targets for some To: incentives that encourage low emissions development for all 23

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