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How Shell’s new climate commitments compare to those of BP

Sky’s Ian King examines Royal Dutch Shell’s new plan to combat climate change at a time of great upheaval in the energy sector.

As they contend with the ongoing coronavirus crisis, along with the ensuing economic destruction, business executives could be forgiven for putting all else on hold.

Few sectors face as many challenges as the oil and gas industry which, since the beginning of the year, has seen the price of a barrel of Brent Crude collapse by 57%. It has placed unimaginable strain on company managements.

So it speaks volumes for Royal Dutch Shell’s commitment to grappling with another longer term challenge – climate change – that it made a major announcement in this regard today.

The company said that, by 2050 or sooner, it aims to become a net-zero emissions energy business.

The ambition echoes one from its rival, BP, set out two months ago.

Ben van Beurden, chief executive of Royal Dutch Shell, said: “With the COVID-19 pandemic having a serious impact on people’s health and our economies, these are extraordinary times.

“Society’s expectations have shifted quickly in the debate around climate change. Shell now needs to go further with our own ambitions, which is why we aim to be a net-zero emissions energy business by 2050 or sooner. Society, and our customers, expect nothing less.”

The immediate question posed by today’s announcement is whether the ambitions laid out by Shell are more or less challenging than those laid out by BP.

In one way, they can be seen as more ambitious. Unlike BP, which has set out no targets for the years between now and 2050, Shell has set a challenging interim target. It aims to reduce the carbon footprint of the fuel it sells to its customers by 30% by 2035 and 65% by 2050 – up from existing targets for those years of 20% and 50% respectively.

Shell’s proposals are also more ambitious in that it hopes to achieve them in all of the products that it produces. BP, by contrast, has limited itself only to the oil it has produced and refined itself. It does not include emissions from products refined from oil it has bought from other producers.

In other ways, though, BP’s plans can be seen as the more ambitious.

Bernard Looney, BP’s new chief executive, has been clear that BP will not, in future, be “chasing” higher production volumes. He expects, over time, to be producing less oil and gas. There was no such commitment from Shell today.

Perhaps the most fundamental difference between what Shell has announced today and what BP said in February is that Shell has placed an emphasis on what it calls the “Net Carbon Footprint” of the energy products it sells. BP, by contrast, spoke about reducing specific emissions.

Shell said today it had taken its approach because Net Carbon Footprint will allow it to track the change in the emissions intensity of the energy products it supplies and, in so doing, focuses on the specific contribution made by the company.

It added: “Society will need more energy, so the total amount of energy Shell contributes is likely to increase. An intensity-based metric allows Shell to focus on providing the energy that our customers want while contributing to decarbonisation by also supplying lower-carbon energy products.

“The Net Carbon Footprint focuses on the type of energy supplied. It does not focus on the elements of the energy system that lie outside of our control, namely total energy demand or the extent to which carbon sinks are deployed by other parties.”

The explanation makes sense – but the two differing approaches mean it will be almost impossible for even informed observers to assess accurately which of the two companies is making the greatest progress.

Nor will what Shell has announced today satisfy its most strident critics. Greenpeace UK and Follow This, a Dutch shareholder group that has agitated for more progress by Shell in tackling climate change, both said today that the company has not gone far enough.

By contrast, Climate Action 100+, an investment initiative whose backers include more than 400 fund management giants including Allianz, BlackRock, Fidelity International and Legal & General Investment Management, welcomed the announcement.

Stephanie Pfeifer, a member of the global Climate Action 100+ steering committee, said: “Investors will now look to other energy companies to match, and build on, the welcome ambition Shell is showing.”

Ultimately, the ability of companies like BP and Shell to achieve net zero carbon in its broadest sense will involve the extent to which so-called ‘Scope 3’ emissions – those created by customers using their products – can be reduced.

It means that, as well as changing the carbon intensity of their own operations, companies like Shell and BP are going to have to take their customers with them.

As the Church of England Pensions Board – one of the investors that has engaged most deeply with Shell on this issue – noted today, it is therefore significant that Shell set out ‘net zero pathways’ in how it shapes demand for energy.

It matters because the use of a product creates 85% of the overall emissions associated with it. So changing how those products are used, or coming up with less carbon intensive alternatives to them, will be crucial.

And to that end, while companies like Shell and BP obviously have a crucial role to play in reducing global carbon emissions, it is ultimately down to everyone using those products, and those of their competitors, to change their behaviour too.