Category: Cutting Edge

Nature based solutions to climate change are among the largest and lowest cost options to decarbonize the global energy system. Looking across 1,000 pages of our research and over 200 data files, this short note summarizes the opportunity.

Manmade CO2 emissions currently exceed 40bn tons per year, which is equivalent to 11.6bn tons of carbon. This is part of a ‘carbon cycle’. For example, 120bn gross tons of carbon are fixed every year through photosynthesis, which naturally sequesters 2.3bn net tons of carbon from the atmosphere. Decarbonization models should consider the entire carbon cycle, to find the most economic route to reach ‘net zero’ CO2 by 2050, while limiting atmospheric CO2 below 450ppm (2C).  

Decarbonizing fossil fuels with nature based solutions can be much more economic than displacing them with alternatives, we find, based on all of our research, data and models into the energy transition (cost curve here).

Low costs decarbonization matters for consumers. As an example, the average developed world household currently spends $750-950 per year on heating, emitting 2.6T of CO2. No one wants to stop heating their homes. But we do want to stop the CO2 emissions. The most economic option is to use an efficient natural gas boiler, then carbon-offset the natural gas with nature based solutions. This would raise a typical household heating bill by $50 per year. Conversely, the bill would rise by $600-2,600 per year, if relying solely on renewables, biogas or hydrogen (chart below). Similarly attractive conclusions hold for decarbonized gas in the power sector.

Reforestation is the largest nature based opportunity, with potential to absorb 15bn tons of CO2 per year, across 3bn incremental acres (8% of the world’s land mass), as outlined in our recent deep-dive note. These CO2 offsets must be verified using advanced technologies and we have screened exciting companies in this space. They must also be safeguarded using corporate balance sheets, to guarantee that CO2 is genuinely offset. The costs of forest-based CO2 credits will be between $10-50/ton, in our models.

Soil restoration is the second nature based opportunity, with potential to sequester another 3-15bn tons of CO2 per year, using a growing agricultural practice called conservation agriculture. Economics can be exceptional. If CO2 credits are sold at $20/ton, the best farms would make more money farming carbon than crops. This matters as one third of the atmosphere’s post-industrial CO2 derives from degradation of soil carbon. Fertilizer demand would also halve in this scenario.

The need for land is one of the largest pushbacks on nature based solutions, addressed using granular data in our recent note. Our numbers only assume forests will sequester 5T of CO2 per acre per year. But CO2 offsets can be uplifted to 15-25T per acre per year via planting faster-growing grasses, and then burying the biomass (data here). This would save 8x more CO2 per acre than present attempts to displace fossil fuels in the biofuels industry. Precision engineered proteins could also free up 485M acres in the US alone.

Another option is to push into the world’s 11bn acres of arid or semi-arid land, by irrigating deserts, possibly using desalination technology. Unfortunately, the numbers do not work in the most arid deserts, where each ton of CO2 absorbed by new trees would require >300 tons of water, cost >$500/ton of CO2 and emit >0.4 tons of CO2 (below right). An additional 100mm of rainfall-equivalents could, however, green marginal lands for $60-120/ton of CO2 costs. There is historic precedent from Israel’s Negev desert (below left). The best opportunity we can find uses produced water from the Permian basin

A final option is to extend the opportunity into oceans, which are 2.5x larger than all the world’s land. Although these methods and their consequences are less clear-cut.

None of this is to exonerate industrial companies from reducing emissions and improving their energy efficiency. Opportunities to do this remain a core focus in our research, and in our models of the energy transition.

Energy companies can uplift their margins by 15-25% by selling CO2 credits alongside their fuels to yield ‘decarbonized fuels’, both for oil products and for natural gas. Together with CO2 reductions and leading technologies, we find companies can uplift their valuations by 50% as they move their businesses to ‘net zero’.

It is fully possible to meet the world’s energy needs in 2050, even as aggregate global demand almost doubles from today’s levels, while also achieving ‘net zero’ CO2 within the confines of 450ppm. Our models foresee c90Mbpd of long-term oil demand (still equivalent to 1,000 barrels per second) and 400TCF of natural gas (3x growth on 2019 levels) in a fully decarbonized energy system.

Some commentators criticize that methane leaks detract from natural gas as a low-carbon fuel in the energy transition. Compared with CO2, CH4 is a 25-125x more potent greenhouse gas (depending on the timeframe of measurement). Hence, leaking 2.7-3.5% of natural gas could make gas “dirtier than coal”. However, for an apples-to-apples comparison, we must also consider the methane leaks from coal and oil. Natural gas value chains have the lowest methane leakage rates of the three.

When combusted, natural gas emits >50% less CO2 than coal, at c320kg/boe versus as much as 850kg/boe. Generating 1MWH of power from natural gas emits 0.35T of CO2, versus 0.85T for coal (chart below, data here).

But it has been criticized by some commentators that natural gas value chains leak methane. Methane is a 120x more potent greenhouse gas than CO2. It degrades over time, due to hydroxyl radicals in the atmosphere. So its 20-year impact is 34x higher than CO2 and its 100-year impact is 25x higher. Therefore, if c2.7-3.5% of natural gas is “leaked” into the atmosphere, natural could be considered a “dirtier” fuel than coal (chart below, model here).

Is this comparison apples-to-apples? After tabulating EPA disclosures, we find that the US underground coal mining industry emitted 1.4MT of methane in 2018. This is because natural gas often desorbs from the surface of coal as it is mined, and can thus be released into the atmosphere. For comparison, 250M metric tons of coal were produced from underground mines in 2018, out of 700MT total coal production. In other words, for every ton of underground coal production, the methane leakage rate was 0.6%, equivalent to around 33kg/boe (chart below, data here).

For comparison, similar EPA disclosures imply that the methane leakage rate in the upstream US oil and gas industry ranges from 0.1% through to 1.1%, with an average of 0.26% (chart below). The data are available here, by basin and by operator.

The US upstream methane leakage rate also appears to be much higher for associated gas in oil basins than non-associated gas in gas basins. The Marcellus is the lowest-leak basin in our sample at 0.1%, versus the Permian, Bakken and Eagle Ford at 0.4-0.5% (chart below, which also correlates the leakage rates with the number of pneumatic devices).

The fairest comparison must also add in the methane leaks from gas gathering, processing and distribution to end-customers (chart below), in order to capture the methane emissions expected across the entire gas value chain. This takes our estimate for total US methane leaks to 0.6% of commercialised gas. Leading the industry, we find the total end-to-end value chain taking Norwegian gas to European consumers leaks around 0.23% of the methane (note here).

Converting back into energy-equivalent units is the most comparable metric, to assess the methane leakage rates of different energy resources. The average ton of coal mined under the US contains 23mmbtu of energy (11,584btu/lb). The average ton of oil contains 40mmbtu and the average ton of gas contains almost 50mmbtu. In turn, this is because greater molar portions of oil and natural gas are from hydrogen molecules, which are very light, but generate energy when they are combusted into water vapor. Dividing through, we calculate the methane intensities below.

Looking most broadly, we find the total emissions profiles of commercializing piped natural gas will tend to run at 25kg/boe (chart below, model here), the total emissions profile of producing coal will tend to run at 50kg/boe (model here) and the total emissions profile of commercializing oil will tend to run at 60kg/boe (model here). This is deeply favorable for the credentials of natural gas as a low-carbon fossil fuel. It adds to the favorable credentials for combusting natural gas versus other fossil fuels.

None of this is to exonerate leaks in the natural gas industry, which remains an urgent challenge for upstream producers to resolve. We are excited by the opportunity and have recently screened companies in the supply chain that can help mitigate methane (chart below, note here, screen here).

What producer impacts? We have also screened the leading and lagging operators around the industry, as ranked by their methane leaks, and after looking across 750,000 bleeding pneumatics that need to be phased out (chart below, data here).

Across all of our research, we find very strong credentials for natural gas as the fuel for the energy transition. All of our research into gas opportunities is linked here; and our work into LNG is linked here.

Carbon-offsets, specifically forestry projects, can sequester 15bn tons of CO2 per annum, helping to accommodate 400TCF of gas per year and 85Mbpd per oil in a fully decarbonized energy system by 2050. The cost is below $50/ton, placing forests among the the most economic ways to decarbonize global energy, by a factor of c6x.

It is also a golden opportunity for climate-conscious energy companies to uplift their NAVs by 15-25%, generating and commercialising carbon offsets. The natural point of sale is together with the purchase of the fuel. (schematic below).

But a recurrent challenge goes as follows: if you eventually cut down the trees in the forest, do they still sequester CO2? (like a 21^st century climate-variant of Bishop Berkeley’s 1710 thought experiment). This short note responds to the challenge.

How to think about CO2 offsets from forests?

Think in terms of land area, rather than in terms of tree tonnage. Each new acre devoted to forests should sequester around 5T of CO2 per annum. In other words, increasing the global land area that is covered by forests would increase the annual removal of CO2 from the atmosphere. Our target of 15bn ton per annum requires repurposing 3bn acres, or around c8% of the world’s land.

To maximise the rate at which forests offset CO2, our models suggest it is better to cut down old trees and replace them with new trees. This is because a mature forest absorbs CO2 more slowly than a maturing forest (charts below).

There are also economic benefits to re-seeding old forests, earning double-digit returns at a $15/ton carbon price. For contrast, $50/ton is needed to earn a 10% return under greenfield forestry economics (chart below).

But what happens to the wood?

The wood could be burned and the forest will still lock up two-thirds of the CO2. This is because 69% of the CO2 locked up by forests is not stored in the wood, but in the soils beneath the forests, according to the IPCC and the FAO. Again, this carbon will remain fixed in the soils, as long as the land remains devoted to forestry.

Burning the wood also displaces fossil fuels. If sustainably sourced wood is burned in a power plant, it can displace the combustion of fossil fuels, such as coal. Generating 1MWH of power from coal emits 0.85T of CO2; and burning 1ton of coal emits c4T of CO2e. As an example, Drax is currently running the world’s first carbon-negative power plant at the 3.9GW Selby facility in North Yorkshire. It runs on wood pellets from responsibly managed forests, and a pilot is ongoing to capture the CO2 for sequestration (including using MCFCs, an exciting technology that we recently reviewed in depth, chart below).

It is better if the wood is not burned, but instead used as a raw material. Do not underestimate how long wooden buildings can last, if properly maintained. The oldest wooden structure still standing is Japan’s Horyuji Buddhist temple, constructed in 639AD, and thus standing for over 1,400 years. Other examples include pre-Renaissance Italy (800-years old), Lhasa China (c1,400 years) and parts of the UK’s Greensted Church (c1,000 years old, below). Climatic conditions need to be dry, but not too dry.

The oldest wood still being worked on planet Earth is even older: at 45,000 years old, from the Ancient Kauri forest in Northern New Zealand, which was levelled by a tsunami and preserved in a peat bog. An exception, rather than a rule. But even wood products that end up in landfill effectively sequester CO2.

Wood can displace other materials, and thus carry a further benefit. For example, it takes 1.9T of CO2 to make 1T of steel, around 1T of CO2 per ton of cement, around, 1.3-1.5T of CO2 per T of glass and ceramic, and as much as 5T of CO2 per ton of plastic (chart below). The relative benefit of wood will depend, of course, on the energy intensity of the wood processing. Relative CO2-savings should be possible.

Thus on our numbers, the periodic harvesting of forests should not be considered to detract from the benefit of reforestation projects in offsetting CO2. Each ton of green wood cut down may still entail 1-4T of total CO2 sequestration (chart below). Please find our recent research on the opportunities in CO2-offsets linked here.