Sustainable Development in the Hydrocarbon Industry Nicholas Stern IG Patel Professor of Economics & Government, Chair of the Grantham Research Institute on Climate Change and the Environment, Chair of the Centre for Climate Change Economics and Policy. London School of Economics and Political Science Cartagena, Colombia 19 October 2012

Six Part Structure 2 Part 1: Scale and risk and the new energy-industrial revolution Part 2: Sustainable development in hydrocarbons Part 3: Unburnable carbon and the importance of CCS Part 4: The rush to gas Part 5: Responsible production and consumption Part 6: Implications for Colombia’s future development

What our global targets should be Holding below 500ppm CO 2 e, and reducing from there, is necessary to give a reasonable (say 50-50) chance of staying below 2°C (around 20% chance of greater than 3°C). A plausible emissions path is close to 50Gt CO 2 e in 2010, 44Gt in 2020, under 35Gt in 2030 and under 20Gt in Likely to have to go ‘well under’. Clearly necessary to ‘peak’ before Can do a little more earlier and a little less later and vice versa but shape of feasible paths similar, and very costly to catch up if postpone action. Note that a 2°C path (50-50) requires very strong action on emissions over this century and beyond. 3 Source: Bowen and Ranger (2009).

Waves of innovation 4 1 ST WAVE Industrial ( ) 2 ND WAVE Steam & Railways ( ) 3 RD WAVE Steel, Electricity & Heavy Engineering ( ) 4 TH WAVE Oil, Automobiles & Mass Production ( ) 5TH WAVE Information & Telecom (1971-) INNOVATION Cleantech & Biotech (2009-) 6 TH WAVE Source: DONG Energy (2009); diagram based on Perez (2002) drawing on report by Merrill Lynch (2008) (schematic not precise quantitative vertical axis).

Sustainable development in hydrocarbons A combination of policies required: – Encouraging substitution of gas for coal; – CCS development and deployment; – Electrification of transport and heating; – Energy efficiency in both consumption and production. A role for offsets to avoid deforestation? REDD+ policies would place a value on the forest that would otherwise be degraded or destroyed in the process of exploring and extracting hydrocarbons. Areas with high conservation value could attract high offset prices shifting economic incentives towards preservation of the biodiversity on the ground. 5

Unburnable carbon (I) * Total potential emissions from proven fossil fuel reserves of top 100 listed (globally) coal, oil and gas companies. 6 Note: CO 2 only. Source:

Unburnable Carbon (II) 7 Given that supply of other countries likely to be fairly elastic a restriction by Colombia would likely be replaced by production elsewhere. Should producers plan together for leaving resources in the ground? Otherwise there is an individual incentive to bring production forward if some will have to be left in ground. Should coal producers be supporting CCS R&D and demonstration to prolong demand for their product? *

Future US gas price projections* 8 *Consistent with gas price projections in IEA (2012) “Golden Rules for a Golden Age of Gas” World Energy Outlook Special Report on Unconventional Gas. ** In 2011, the average heat content of natural gas for the residential, commercial, and industrial sectors was about 1,023 Btu per cf; one Mcf = MMBtu ( **

US electricity generation from gas and renewables growing strongly 9 Note: total has stayed fairly constant at around 4, 100 TWH; oil has become negligible; and coal has decreased from around 2,000 to 1,734 TWH ( ). US Electricity Generation (TWH)