A Sustainable Future: Tim Gould, IEA Chief Energy Economist, on Peak Fossil Fuel Demand

 

After the energy crisis, what comes next? Listen to Jason Mitchell discuss with Tim Gould, IEA Chief Energy Economist, the IEA’s latest World Energy Outlook report, the implications of the energy crisis, and policymakers’ efforts to balance decarbonisation, energy security and price affordability.

Recording date: 03 March 2023

Tim Gould

Tim Gould is the International Energy Agency’s Chief Energy Economist. He provides strategic advice on energy economics across a wide range of IEA activities and analysis. Tim, is also Head of the Division for Energy Supply and Investment Outlooks, in which capacity he co-leads the World Energy Outlook, the IEA’s flagship publication, and oversees the Agency’s work on investment and finance, including the World Energy Investment report. Tim joined the IEA in 2008, initially as a specialist on Russian and Caspian energy, and in recent years has designed and directed the World Energy Outlook together with the IEA’s Chief Energy Modeller. Prior to joining the IEA, Mr Gould was Senior Advisor to the Secretary General of the Energy Charter and has ten years of experience in Eastern Europe, primarily in Ukraine.

Episode Transcript

Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

Jason Mitchell:

Hi everyone. Welcome back to the podcast, and I hope everyone is staying well. Over the last 18 months, one thing has become incredibly clear about the energy transition. It's likely to be anything but smooth and linear. It also poses a really interesting question that I've been turning over a lot, namely, what does 2022 teach us about the relationship between carbon emissions, energy intensity, and economic growth? I've tried to unspool this question since coming out of COP '26 in Glasgow. First with guests like Alex Grant at Equinor, who's in the middle of European energy markets. Then Rob West at Thunder Said Energy and even Vaclav Smil himself. But there's perhaps no better narrator than the International Energy Agency to answer this question and to put into context the lessons from last year.

And frankly speaking, the narrative is pretty profound, because there's a real irony that while 2022 represented the highest profits in the fossil fuel industry's history, it's also the year the IEA called out peak fossil fuel demand. Not to mention the reaction function from policy makers we've seen. Many who have doubled down on energy transition policies like the European Unions' REPowerEU, the US' Inflation Reduction Act, Japan's GX strategy, and China's 14th five-year plan. Or the fact that the fossil fuel industry itself has focused more on returning capital to shareholders than investing in long-term expansion related CapEx.

It's why it's great to have Tim Gould from the International Energy Agency on the podcast, we talk about the IEA's latest World Energy Outlook and CO2 emissions in 2022 reports, the implications of the energy crisis and the Russia Ukraine conflict on the energy complex and the trade-offs that we're already facing as policy makers choose between energy security, decarbonization, and price affordability. Tim is the IEA's Chief energy economist, he provides strategic advice on energy economics across a wide range of IEA activities and analysis. Tim's also head of the division for Energy Supply and Investment Outlooks, where he co-leads the World Energy Outlook and the World Energy Investment reports. Prior to joining the IEA, Tim was senior advisor to the Secretary General of the Energy Charter and has 10 years of experience in Eastern Europe, primarily in Ukraine.

Welcome to the podcast Tim Gould. It's great to have you here, and thank you for taking the time today.

Tim Gould:

Thanks a lot, Jason. I'm very much looking forward to the conversation.

Jason Mitchell:

Likewise. It's so incredibly relevant. So Tim, I've really been looking forward to this conversation and I want to start out with some big scene setting. What are the biggest changes to the IEA's World Energy Outlook 2022 relative to 2021? And can you weave that into the new IEA report, out today, titled CO2 Emissions in 2022, where it looks like we're seeing evidence of a real decoupling between GDP growth and the growth in carbon emissions? So in short, what does 2022 teach us about the relationship between carbon emissions, energy and intensity, and economic growth?

Tim Gould:

Well, thanks a lot, Jason. That's a big question because 2022 was a really dramatic year in energy as in many other areas. So perhaps it's useful to cast our minds back a little bit to where we were in 2021, because the big theme that we were following up on in our work in 2021 was the Glasgow COP. Were countries going to step up and increase the ambition of their climate pledges? And then in the second half of the year, we were already seeing some signs of strain in energy markets, primarily due to the rebound in economic activity after COVID, but also some first signs of strategic behavior from Russia, which wasn't filling up its gas storages in Europe in the same way that it might have done in previous years. So there was some nervousness in markets, but really no indication of the sort of turbulence that we were going to have in 2022.

And then one year on, we've lived through all of the implications then of Russia's invasion of Ukraine, which triggered what we are calling the first global energy crisis. And a lot of that has to do with Russia's status in international energy. Let's have in mind Russia was the biggest oil and gas exporter to international markets by far. So if you put those together, it's more than 50% larger than the country in the number two position, which is Saudi Arabia, and Europe was by far the biggest client then for those Russian deliveries. So when you severed one of the big arteries of global energy trade, that's going to have huge implications for the international energy system. So we had a major energy security crisis, not just in Europe, but everyone felt the implications of tighter markets, higher prices, particularly those sky-high prices for natural gas that we saw last year.

And because of the link between natural gas and electricity, natural gas is the price setter in many markets for electricity, many people felt that in their electricity bills as well. So what did that mean? I think there's a few things. It meant that we have had a change in not just in prices, but also in perceptions around natural gas in many countries. There's been this big energy security motivation for change, which has reinforced in many cases the sort of climate and energy sort of emissions reduction drivers. But that energy security discussion has also focused attention on other potential vulnerabilities. So what about our clean energy supply chains? I mean, are we very confident that they won't suffer one day some of the similar vulnerabilities that we've seen in natural gas last year? And I think the other important thing to have in mind is that we've sort of increased the incentives to change the way that we produce and consume energy.

But for many emerging developing economies, we've also kind of drained the means to implement that change. So we have big problems within indebtedness, higher borrowing costs. And so you have that tension there between the impetus for change and the actual ability to proceed with it. But you mentioned also the new analysis of global CO2 emissions, and there I think it's quite interesting because many people assumed that when this crisis hit, what you would have would be a return to fossil fuels, that you'd have a big jump in coal and that you'd see a big jump there in global emissions. And what we found is that last year's energy related emissions, they rose, but they rose by less than 1%. So it was less than many people had initially feared. And the reason for that is because we've also had very strong growth in renewables.

We've had strong growth in electric vehicle sales, we've had strong growth in efficiency investment, and that's really helped limit the impact of increased use of coal and oil through this crisis. So you had global economic growth above 3%, but those emissions grew by less than 1%. And if we hadn't had that increase on the clean energy side, we would've seen a significantly higher level of emissions growth in 2022 as well. So you've had a number of competing forces playing into that energy debate, but I think from our perspective, one of the key things that you can take away from 2022 is that a lot of those energy security worries are kind of reinforcing the push towards clean energy.

Jason Mitchell:

I was going to ask, I mean, what are the long-term implications of today's energy crisis, particularly the Ukraine Russian conflicts? We've seen short-term fossil fuel investments paired with big renewable energy policy commitments. One thing that I point out that I found really interesting in today's CO2 emissions report was the fact that Chinese emissions have flat lined despite a heavier reliance on coal in that country, which I found pretty interesting. But do you see the current crisis ultimately accelerating the energy transition or delaying it?

Tim Gould:

So I think there's a sort of temporal perspective here as well. So in the short term, when you are in a crisis, consumers and governments, they will reach for whatever energy is available and they won't look too hard at the emissions profile of that energy. So you have seen in many countries in Europe and indeed in many countries in Asia, increases in coal use this year. But our analysis suggests that that uptick in coal use is likely to be relatively small and relatively short-lived while the uptick in deployment and use of clean energy solutions, particularly renewables, is likely to be much larger and then really sustained over time. So in the short term, of course, this has been a big jolt to the energy system and we've all experienced the results and the bruises from that, but we are convinced that because of the reaction of governments to the crisis and the way that they have come in a sense to strengthen many of the policies that help clean energy into the system, that ultimately this accelerates transitions.

Jason Mitchell:

With price inflation and energy security issues as key drivers behind the energy crisis. I keep coming back to this question that Daniel Jurgen posed about the energy transition in late 2021, and this was just when the energy crisis was sort of emerging post COP26 and before the Ukraine Russian conflict, which I think is an important thing to note. But he asked this question, which frankly I've asked Vaclav Smil and Alex Grant at Equinor, and I find it just a really provocative kind of question looking forward. He asks, "Is this energy shock a one-off resulting from a unique conjunction of circumstances or is it the first of what will be several crises resulting from straining too hard to bring 2050 carbon reduction goals rapidly forward, potentially prematurely choking off investment in hydrocarbons, thus triggering future shocks?" What's your read?

Tim Gould:

So I don't buy the argument that this is kind of the first clean energy crisis. I don't think you can pin the blame for this crisis on the push to change the energy system. I mean, in practice we talk a lot with policy makers around the world. None of them came back to us to complain that, oh, well the big problem I have at the moment is that I have too much clean energy. We moved too fast. I mean people drew the opposite conclusion then in practice they would've been a lot better off had they moved much more quickly with deployment of renewables, making sure that people had well-insulated homes and they were sort of more insulated against also the effects of volatile fossil fuel prices. So our interpretation of the crisis is that there are strong kind of one-off elements to that, but at the same time it's also a warning about the risks of poorly managed or poorly sequenced change in the future.

If the way that we choose to transform our energy system, supply gets out of sync with demand that we push some solutions much harder than others and we don't understand the sort of integrated nature of our energy system, then indeed this could be a very bumpy ride. And so we need to be very wary of the potential for a disjointed pattern of change in the energy sector. So I think I've probably come down as this has more of the characteristics of a one-off, but it's also a warning about the risks of a poorly managed process in the future.

Jason Mitchell:

Well that's super interesting. When we talk about this energy crisis, and again last December on the podcast, Vaclav Smil made the point that this energy crisis isn't a global energy crisis. It's uniquely in a sense a European crisis. How do you see the energy balance in Europe working itself out? There's a view that the EU has this medium term problem where there will be persistently as much as five to 10% short energy, mainly natural gas, through most of this decade given the long build cycle of LNG import facilities as well as renewable infrastructure.

Tim Gould:

So I think it's a very good question. Let's have in mind also that Europe is a relatively wealthy region. So in the end it can make a strong claim on available resources on the international market. And that's in practice what we saw also in 2022. So Europe dramatically increased its LNG imports and to a degree then the implications of that were felt also in South Asia and parts of Southeast Asia by countries that were priced out of that market. So in a sense it might not be Europe that's short, it might be some other parts of the world that feel the implications then of the dramatic sort of shortfall in energy in Europe after the cutting of Russian pipeline deliveries. That said, there's a lot of things happening in Europe that are sort of policy driven that help to replace and help to make up that potential shortfall.

So we've had the amount of renewable power capacity added in the EU last year rose by nearly 45%, installations of heat pumps increase by some 40%, we did have a jump in energy efficiency investment, electric car sales increase by around 15%, and CO2 emissions in Europe, you may have noticed from the new release, I mean they fell by about two and a half percent. So there are the structural changes in Europe that are making up that ground, and I think those are proceeding quite quickly. I also believe that Europe is not out of the woods yet and the global energy system is not out of the woods yet. I agree that we are going to be vulnerable for a few more years to come, particularly in gas markets. It's only around the middle of this decade that you see a big new sort of surge of new LNG export facilities coming online, primarily in the Middle East, but also in the US and Canada.

And so until then, and if you assume that Russian gas is gone for good from Europe, then there is the risk of some quite tight natural gas markets. And a lot really depends on what happens in China because China is opening up. We had a really exceptional year last year in China where both oil and gas demand fell and you can look back to the early eighties I believe when the last time that gas demand fell in China. But that's the first time we see that for oil in China. So it's a really unusual year and to the extent that China comes back strongly also this year, then that could be another factor that tightens markets quite quickly.

Jason Mitchell:

It's really interesting, this European dynamic around supply and demand. What does mid-transition energy security look like to you when you think of Europe's short to median term problems relative to gas exporters' long-term interests? In other words, how realistic is it that we see maybe at some point in the future 10 to 20 year take or pay fixed price contracts between European states and gas exporters, again to kind of match that short to medium term need around hydrocarbons with producer investment preferences or interests?

Tim Gould:

Yeah, I think that's a really excellent point because it's very difficult in a long term industry like the gas industry to solve a short term problem because when you go to talk to suppliers, they want you to commit for an extended period of time. And what many European importers are finding when they go and talk to new US export projects or when they go and talk to Middle East exporters that the discussion goes well, the Europeans say, "Well, we need gas till 2030, so can we commit for sort of five, eight years?" And the answer is, "No. Well, we need to underpin the investments in the liquefaction facilities and the export facilities. We'd like you to commit for 15, 20 years." And that 15, 20 year commitment then takes Europe not just through its immediate energy security worries, but it would take it into a period where it's widely believed that European gas demand would be in strong structural decline.

And that sort of temporal mismatch between the needs of importers and the sort of preferences of the exporters is a difficult one to square. And what that's meant in practice is that many European importers have found it difficult to conclude new long-term gas supply arrangements. Now there's two sort of implications of that. One is that Europe could be perhaps excessively reliant on the short-term market because it's finding it difficult to conclude longer-term arrangements. And the other one is could we not start getting a bit more creative in the way that we think about some of these gas supplier arrangements? Could we not structure them in a way that allows the gas supplier to pay back the costs of its investment more quickly, even if that means slightly higher delivered costs for the gas? Or could we think about ways to make some of these arrangements more compatible with energy transitions by building in emissions reduction goals or finding ways to use some of that infrastructure for low emissions gases over time?

And that seems to us to be an important element of these discussions. Of course, there's one other aspect of this which I think is worth having in mind is that the US LNG projects, they offer destination flexibility. So in theory, a European importer could conclude a longer term arrangement with a US exporter and say, deliver that gas to Europe for the first 10 years. But then if indeed that gas proves to be surplus to requirements in Europe for the latter part of that contractual period, then you would always have the possibility to move that gas perhaps to another part of the world that still has a gas import requirement, but you wouldn't have necessarily the same flexibility with all of the gas suppliers out there.

Jason Mitchell:

How do you read the politics of energy prices into all of this and what does the energy price volatility in 2022 teach us going forward? Is decarbonization possible without higher energy prices or does it cut both ways? Are higher energy prices an obstacle in fact, for decarbonization?

Tim Gould:

This is another great question and it's one that we've been discussing a lot here at the International Energy Agency over the last year. The energy models that we use, if you put higher fuel prices into them, they do respond and you do see the economic advantages then of greater efficiency and you see an increased deployment of all sorts of alternative technologies. But you can also see very visibly in 2022 that high prices are regressive, they hit the most vulnerable in our societies hard and they hit the most vulnerable in the international system hard as well when you have a fuel import dependent developing economies. So I guess the lesson from our side is that high fossil fuel prices can help aspects of transitions, but they're really no substitute for consistent climate policies. So what we are urging governments to focus on is what can they do now in order to prepare themselves for the potential for future price volatility?

And a lot of that has to do with helping different categories of consumer, but particularly vulnerable consumers, manage the upfront costs of change. Because one of the features of energy transitions is that you are moving from, in a way, an OpEx world into a CapEx world, by which I mean you are moving from technologies that require significant spending on ongoing fuel costs to a lot of technologies that require higher upfront costs, but then have lower operating costs over time or even sometimes zero operating costs over time.

But you have to help people manage some of the upfront costs then, and that means helping poorer households with getting better insulation or installing heat pumps or it can help mean helping some of your industrial consumers managing the transition to cleaner fuels or more efficient technologies. And all of that then helps you down the road both with your emissions goals, but it also means that you're better able to weather the storm if and when fuel prices become volatile again. So it's much better to be spending scarce resources from a government perspective on those kinds of structural changes than on the emergency relief that we've also seen in quite large volumes in 2022.

Jason Mitchell:

That's interesting. I mean, if we took the politics out of energy prices out of it, I'm wondering what the signal is to the industry. There's that old energy adage, the cure to high prices is high prices. What does that mean in a 2022 context? What do high natural gas prices mean for gas? What's the evidence for high prices driving significant long-term investment either into fossil fuels or a diversification away from them?

Tim Gould:

Well, there is some evidence that we are not going to be coming out of this crisis in the same way that we came out of previous episodes of high fuel prices. And by that I mean that in the past you've seen quite a strong sort of supplier response when oil prices went up or when natural gas prices went up, suppliers obviously they received significant additional revenues and they plow that back into fossil fuel supply. But if you look at the numbers then one of the few parts of the international investment picture for energy where spending today is less than it was pre-COVID is precisely on upstream oil and gas. Pretty much every other part of the system investment has rebounded to above 2019 levels. And the exception, pretty much across the board with the exception of some big national oil companies in the Middle East, is that oil and gas companies are spending less on new oil and gas supply today than they were a few years ago.

Let's remember, that's despite the fact that 2022 was an extraordinary year for the sort of net income of the oil and gas industry. Our own estimates typically the net income of the oil and gas industry, if you take the average for the five years before 2022 was around one and a half trillion US dollars, but last year it was closer to 4 trillion and a lot of that is being returned to shareholders in practice rather than being plowed into new fossil fuel supply. So I guess the conclusion from that is that the burden of adjustment is going to be much more on the demand side than perhaps it was in previous incidents of instability in fuel markets and the demand side, by that I mean it's going to be on us adjusting the way that we consume rather than the producers coming back in and delivering much greater volumes of the fuels in question.

Jason Mitchell:

One of the most profound messages from me, from the IEA's World Energy Outlook report is that current policy settings are now strong enough to point to a peak in fossil fuel demand by 2030. At the same time, the report's clear about the risks, specifically about pushing millions of people back into energy poverty and diminishing the investment funds available to developing countries in the energy transition. In fact, the report cites that nearly 90 million people in Asia and Africa who had access to electricity can no longer afford it. So how do we fulfill the COP27 commitments to developing countries when, as we're talking about, affordability remains such a pernicious intractable feature in the energy transition?

Tim Gould:

I think the first thing to have in mind is that the sources of growth and demand for energy services are really going to come from emerging and developing economies. They're going to come from India, it's going to come from Africa, it's going to come from Southeast Asia. China has been that motor for all sorts of energy market developments in the past two decades. But China's energy demands in our view is really going to flatten in the future. So we have to have very much in mind the needs of that growing population, the rising incomes in some other parts of the developing world. And it's true that the cause of universal access to modern sustainable energy has taken a hit in the last few years. We've been tracking the numbers of people worldwide without access to electricity for many, many years, and we've been on a consistent positive if much too slow trend.

But as of 2020 with COVID and then with the impact of today's energy crisis, I mean that global number has ticked up. And so we're heading in the wrong direction right now and a lot of that has to do with developments in sub-Saharan Africa. So there's much more that needs to be done in order to make that energy available for development in many countries of the world. Now, the economic choice, at least when it comes to electricity, is to go for renewables. That is the cheapest new source of electricity in most countries around the world, particularly in countries that have very strong solar radiation. But let's not imagine that solar can solve all the world's problems, all the developing world's problems. You need a whole host of other technologies. You need grid infrastructure, you need fuels to support industrial development. You need measures to support the reliability of that power supply and you need a lot of measures and also to help many of the utilities in these countries get finances on a more sustainable footing because many of them are significantly indebted.

And that's a problem and that's a problem because these are also the off-takers for a lot of the new renewable projects that need to be built. One of the messages that we have for advanced economies is that please do not become too inward looking when it comes to your thinking about energy transitions because this is of course a collective endeavor and we're not going to win as a planet if we reduce emissions in advanced economies. But then we have other economies in the world following a much more or the same carbon intensive model of development that we ourselves followed in previous decades. We need to chart a completely new lower emissions model for development. We have many of the tools that we need for that, but we don't yet have all the tools and we don't yet have all the finances so that needs to be front and center in any discussion around the future of energy.

Jason Mitchell:

The energy trilemma has been a really valuable framework for thinking about policy objectives, particularly over the last 18 months around decarbonization, price affordability, and energy security. How do you see policy makers balancing those objectives going forward? And with your international relations hat on, if packages like the European Unions Fit for 55 and REpowerEU and the US's Inflation Reduction Act are the solutions, does it worry you that these policy responses are seen increasingly as anti-competitive?

Tim Gould:

I think would broadly feel that there is a strong alignment of energy security, price affordability, and decarbonization objectives. We believe that those are mutually reinforcing, but that's not to say that there aren't some trade-offs as well. And certainly if we were to push the energy security angle too hard, it would come with some trade-offs. If we started to believe that for the future of decarbonization we have to produce everything at home that we have to in a sense reshore all aspects of those clean energy supply chains, then I think we would soon run into some difficulties managing the costs of that. So there will continue to be strong benefits from open international trading regimes, both in terms of the broader economy, but also for energy because there are countries that both have the resources that we need for a clean energy transition, so whether that's the copper or the lithium or other battery metals or rare earths, and we need to make sure that we develop a more diversified web of sort of partnerships with some of those resource rich countries.

But then it's true also for all aspects of clean energy manufacturing. We will not be able to bring all of those home to our respective countries. There will still be a strong network of suppliers collaborating internationally to find a way to accelerate deployment to the future. What I think also though is very clear is that there are some vulnerabilities, and I think many people looking at the current international sort of distribution of labor for clean energy would recognize that we have a degree of geographical concentration in some of those supply chains that we need to act upon.

That's true for the critical minerals where if you look at lithium supply, if you look at cobalt supply, if you look at nickel supply, the geographical concentration of those suppliers is significantly greater than we see in today's fossil fuel world for oil and gas. And I think it's also true when you look at clean energy manufacturing, China is the largest producer in pretty much every clean technology that you can think of today, and Chinese companies also have many of the plans in the running to expand that manufacturing capacity. Now that is going to equalize a bit with the sorts of support that you see in the Inflation Reduction Act in the US and some of the initiatives underway in Europe and elsewhere. But it's a very important question, a balance that we have to get right.

Jason Mitchell:

Yeah. I actually want to dig a little bit more into this because as you said, critical minerals are vital to the clean energy transition given they're used in everything from batteries to solar panels. In an environment of growing geopolitical uncertainty, the IEA has flagged that a large concentration of production is in China, as you mentioned. To mitigate this risk an obvious answer is to build very diversified supply chains. But recent policies seem to be much more protectionist. As I mentioned, the IRA intends to boost domestic production. How do you see the future of critical minerals trade developing and how can we ensure a just transition where developing countries aren't shut out of important value chains like this?

Tim Gould:

So when we think of critical minerals, we are talking about the battery metals, we're talking about copper, we're talking about some rare earths, all of which are very important components of a more electrified system dominated by sort of clean sources of electricity. And those resources are quite broadly distributed internationally. But the current production is quite concentrated. And I think there is scope then for a new network of partnerships with important consumers of those minerals and metals with the new resource rich countries. Where we need to be, I think, very attentive is to not go back to a model where certain countries are identified as producers of raw materials. And then we have the idea that that would all be shipped off to the developed world for turning into our clean technologies. There has to be a discussion around how some of the resource rich countries can also capture a little bit more of the value associated with those resources.

So who in the end will be doing the processing and refining of those minerals and metals is an important question. And again, that's a segment that is very much concentrated in China. But is there also a way for some of those value chains to be located within the developing economies themselves? Because if we remember from a few minutes ago, that's where we need to see the big growth in deployment of solar panels, of wind turbines, of all sorts of electrified technologies. So it's logical then that we should be thinking hard about how to build up new production chains within those economies themselves. And a country like India is thinking very carefully about that. It has various sort of production linked incentives for clean energy deployment that mean that many manufacturers are now thinking about how they can locate more of their production of those technologies within India itself. So this is a complicated area, but I think we need to have a slightly new sort of network of energy relationships in mind when we think about the clean future versus our fossil fuel path.

Jason Mitchell:

I want to jump lanes and talk about future energy demand and how energy efficiency, as we talked earlier, plays into expectations as well as IEA models. How much has energy efficiency improved in the past? If you can give us some context and how much does it need to improve in the future on the IEA's roadmap to net-zero? How do you see in particular, because I'm a big fan of Stanley Jevons, but the Jevons Paradox playing into all this? Historically speaking, efficiency gains generally don't pay off in the long run, at least that's been the lesson for me. Rather, they simply incentivize greater use that inevitably leads to higher production in higher consumption.

Tim Gould:

So it's a really interesting point and we spend a lot of time on that. So we have a sort of proxy for the efficiency of energy use worldwide, which is the amount of energy you require for a sort of unit of additional GDP, and the efficiency of global GDP or the efficiency of energy use in global GDP has been steadily improving in recent decades. So it's been averaging around 1.5 to 2% improvement for year. But if we want to get on track for the net-zero emissions by 2050, that 2% would need to be much closer to 4%. So there's a lot more that we could be doing, and there's a lot of inefficiencies in the current way that we use energy that we could still be exploiting. And there are many good examples of how we've done that in the past, for example, with lighting, the way we've introduced LEDs.

And many of the changes that we would need in order to get on track for our lower emissions future are in themselves big efficiency gains. So a heat pump is by its nature, by its design, a much more efficient way of generating heat than a gas boiler. An electric vehicle just represents a huge efficiency saving relative to an internal combustion engine vehicle. So there's a lot of things that would put a dampener on the amount of energy that we use within the system and that are intrinsic to the way that we are designing energy transitions. That said, there's still no substitute for policy to also to try and to limit the scope for rebound effects or the Jevons Paradox, as you say, and to make sure that consumers have the sort of information that they need and the infrastructure that they need to make efficient choices throughout their daily lives.

Jason Mitchell:

I guess similarly, something like behavior change keeps appearing as a fundamental element in the energy transition roadmap. The IEAs net-zero emissions by 2050 scenario points to it, as does the UK's Net Zero Strategy. In some cases it represents as much as five to 10% of the emissions reductions assumptions. How do you think about the case behind behavior change, around energy efficiencies? What are the right incentives or disincentives in some cases?

Tim Gould:

So I think we need to be distinguished, first of all between efficiency and sort of behavioral change. So efficiency means sort of delivering the same energy service in a different, more efficient way, whereas the behavioral aspects actually reduce the energy service itself. So it means that instead of using... We might do ride-sharing for urban car trips or we might be limiting the amount that we use our cars, or we might be taking fewer short haul airline flights and instead doing some more online meetings. There may be also issues within the home that make a difference there as well. And we've seen some of that in Europe over the last year. I mean in response to the crisis, partially in response to price stimulus, but also out of a sort of solidarity with the Ukrainians or out of a feeling that people need to do something to help a lot of households in Europe, were turning down the thermostats for their winter heating and saving energy as a result of that as well.

So I think it's important that we have that in our scenarios. We shouldn't be over reliant on it. And we are, as you say, relatively modest in the contribution of behavioral aspects to the emissions reductions that we need to get to a zero emission system. But I think it is an important part of the conversation because in the end, this is a change that will affect all aspects of our lives. And I think it's important to have in mind that societies, individuals, consumers, they need to buy into that and think about ways in which they can also contribute to that process of change. And some of it may have additional benefits. I mean, if you are walking more for short term journeys rather than taking the car, that will have health benefits as well. But there's a link there between individual choices and government. Governments need to, in a sense, facilitate those kinds of sustainable choices by making available the infrastructure that enables us to change our behaviors safely and efficiently.

Jason Mitchell:

I've got one last question, and this is around methane. The energy sector accounts for around 40% of methane emissions. Methane leaks in 2021 from fossil fuel operations was equivalent to 180 billion cubic meters of gas, which is a similar amount of gas used in Europe's power sector. Despite the clear financial incentives and significant impact on reducing GHG emissions, only one out of the five largest energy related methane emitters is part of the global methane pledge. What's your read on this? Why has there been so little traction on this issue and what's needed from the energy sector to cut methane emissions by 30% by 2030?

Tim Gould:

So I'm glad you raised that because methane doesn't get the attention it deserves often in discussions around tackling climate change, but it is such a potent greenhouse gas. And if you look at the work that's been done by the IPCC and others, then up to one third of the observed warming so far is related to methane. And so we've been trying to shine the spotlight a bit on this for many years. And we recently released some new numbers with our estimates for energy related methane leaks in 2022 and there are some signs of progress. There's new sort of satellite observations of methane leaks around the world and satellite detected large leaks last year fell by around 10%, but these methane emissions from the energy sector remained completely unacceptably too high in a year in which there was a massive energy security imperative to bring additional gas to market. When gas prices were sky-high, you would've thought that there would be more done in order to reduce needless leaks of methane to the atmosphere.

So we are going to continue to make that a big part of our work here at IEA. And don't forget that that 30% reduction that countries have committed to as part of the Global Methane Pledge, that's for all sources of methane. And in our view, the oil and gas sector or the energy sector needs to be doing a lot more than 30% in order to hit that overall target. Because I think the easiest opportunities to reduce methane leaks are in the oil and gas sector in particular.

So why is it not happening? I think there's a few reasons. One of them is just information. Sometimes companies are simply not aware of the leaks from their equipment or they're not aware of the ease with which they can deploy technologies to deal with them. I think there's also a questions in many cases about how companies allocate their investment capital. That when these kinds of methane abatement projects, when they work themselves through up into a decision in a company, they may not pass some of the hurdles that are required, but it's nonetheless extremely important for companies to be acting on this because in the end, it's a reputational risk as well as an environmental risk. And I think that needs to be much higher on the list of priorities there.

And in some cases, you also have an infrastructure issue where either the infrastructure to bring that captured gas to market isn't there, or you have a sort of split incentive because the entity that needs to act to reduce methane leaks is not the one that benefits then from the additional gas captured. But there's all sorts of opportunities to reduce methane leaks. One data point that I found particularly striking, if you look at the amount of gas that's flared worldwide, and that's a waste in many dimensions. I mean, it's a waste when it comes to the CO2 emitted, but not all of the gas is combusted. So there's methane leaks to the atmosphere as well from flares. A lot of those flares, half of the gas flared worldwide, is within 20 kilometers of an existing pipeline. So the solutions are there, we need to be much more determined to act on them.

Jason Mitchell:

I'm really glad you pointed that out. I've actually seen you kind of speak on this on other form and agree it's a very overlooked problem. So it's been fascinating to discuss the IEA's latest World Energy Outlook report and what it holds, the implications of the energy crisis in Russian Ukraine conflict on the energy complex, and the trade-offs that we are already facing as policy makers choose between energy security, decarbonization, and price affordability. So I'd really like to thank you for your time and insights. I'm Jason Mitchell, head of Responsible Investment Research Man Group here today with Tim Gould, Chief Energy Economist for the International Energy Agency. Many thanks for joining us on a sustainable future, and I hope you'll join us on our next podcast episode. Tim, thank you so much for this. This was fantastic.

Tim Gould:

Thanks very much, Jason. Very much enjoyed.

Jason Mitchell:

I'm Jason Mitchell, thanks for joining us. Special thanks to our guests and of course everyone that helped produce this show. To check out more episodes of this podcast, please visit us at man.com/ri-podcast.