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# An equitable redistribution of unburnable carbon

## Abstract

The rapid phase-out of fossil fuels is critical to achieving a well-below 2 °C world. An emerging body of research explores the implications of this phase-out for fossil fuel producing countries, including the perceived tension between least-cost and most-equitable pathways. Here we present modelling, which re-distributes remaining fossil fuel production towards developing countries. We show that redistribution is challenging due to large economic disincentives required to shift production, and offers limited economic benefit for developing countries given the long timeframe required to effect change, and the wider impact of rising fuel import and energy systems costs. Furthermore, increases in production shares are offset by shrinking markets for fossil fuels, which are part dependent on carbon capture and storage (CCS). We argue that while there is a weak economic case for redistribution, there is a clear role for equity principles in guiding the development of supply side policy and in development assistance.

## Introduction

To remain within a well-below 2 °C carbon budget, rapid reductions in the production and use of fossil fuels are required. Scenarios presented in the IPCC special report on 1.5 °C suggest a decline of coal to 18% of 2020 levels in 2050, oil to 34% and natural gas to 57% (median values)1. These and almost all 2 °C scenarios have profound implications for future fossil fuel production, and for producer countries facing the prospect of fossil fuel reserves being stranded or left undeveloped. In their 2015 paper, McGlade and Ekins2 analysed global fossil fuel production under a 2 °C scenario, highlighting that a cost-optimal allocation leads to high level of unburnable reserves, with clear winners and losers across different regions.

One criticism of the cost-optimal approach, which is inherent in the structure of Integrated Assessment Models3, is that it ignores the political economy of fossil fuel production and use, including equity considerations such as which countries get to produce their fossil fuel reserves as global production declines. This is problematic from a developing country perspective, where calls to keep it in the ground have been questioned given the historical benefits that many developed countries have realised from their fossil fuel reserves4.

Questions of equity in climate policy have long been part of the UNFCCC process. The Paris Agreement recognised the long-held principle of common but differentiated responsibilities, and established a framework under which countries pledge Nationally Determined Contributions (NDCs) to global emissions reductions targets, which reflect their differing circumstances and capacities5. These national level targets apply to emissions arising at the point of fossil fuel consumption. Accordingly, equity has been largely addressed in terms of consumption, where national limits on emissions would limit the domestic consumption of fossil fuels, which might in turn constrain economic growth in developing countries. By contrast, the issue of equity in production has historically been avoided, in part due to the risk of producer country claims for loss and damage, which could severely undermine climate negotiations and finance.

There is now growing interest in the contribution that supply side policies, which aim to curb fossil fuels at the point of production, can make to fossil fuel phase-out6,7. Lazarus and van Asselt set out the range of supply-side policies, including economic instruments such as subsidy removal, the taxation of fossil fuel production and the development of tradable production allowances, and regulatory approaches including calls to restrict exploration8. Piggot et al. note emerging momentum around supply-side policy at the international level, and argue for a more explicit recognition of the need for action on fossil fuel production under the UNFCCC process9. Asheim et al. argue that a supply-side treaty could complement demand-side action under the Paris Agreement and help coalesce action amongst producer countries10.

These developments have clear equity implications. Caney11 and Kartha et al.12 argue that policies that result in the stranding of fossil resources for some countries and not others will inescapably give rise to issues of equity. Kartha et al. argue that leaving the question of who may extract to markets risks leaving the least-able carrying the greatest burden, and that countries cannot be expected to constrain fossil fuel production unless this is part of a broader effort by the international community to reduce production13. Common to each is a focus on the perceived opportunity cost incurred by developing countries that forgo fossil fuel production, particularly the revenues, fuel flows and employment that fossil fuel development can in theory provide.

There is relative agreement that serious consideration of equity would lead to higher-income and higher-capacity countries constraining their production first, in line with both the reductions needed to meet the objectives of the Paris Agreement, and the principle of common but differentiated responsibility. For example, the Lofoten Declaration on the Managed Decline of Fossil Fuels states that developed countries have a responsibility and moral obligation to take the lead14. Kartha et al. argue that an equitable approach would minimise economic disruption, supporting economic diversification and ensuring the provision of energy services and investment in job creation, and be based on a fair distribution of costs13. Muttitt and Kartha go on to set out a set of principles to apply to an equitable transition away from fossil fuel production15.

Three broad challenges arise when thinking about how an equitable decline in production might be approached. The first is how to define an equitable distribution between countries. Caney proposes three criteria; a country’s current stage of development, its ability to develop based on non-fossil fuel alternatives, and its historical responsibility based on previous production and associated benefits accrued11. Second is whether and how to account for potential production that is foregone or reduced. Placing a monetary value against undeveloped resources is problematic, with large uncertainty around future production and potential revenues. Third is the presumed tension between equitable and cost-optimal (economic efficiency) approaches. Lenferna argues that prioritising equity criteria could result in high-cost reserves and those that require new infrastructure being developed, while low-cost reserves and those with infrastructure in place are phased out. A focus on reserves where equity and efficiency incentives overlap could be a focus, e.g. prioritising the stranding of inefficient reserves in rich countries, for example Canada’s oil sands or Norway’s high north region16.

The supply-side literature and the equity arguments therein have to date not included any quantitative analysis of the implications of an equitable approach to managed decline, including the tension between equity considerations and economic efficiency. Building upon analysis in McGlade and Ekins2, this modelling with TIAM-UCL contrasts a cost-optimal distribution of fossil production with an equitable redistribution, which incorporates equity considerations using two approaches as outlined above; first, and the focus of this paper, related to a country’s level of development as measured by the Human Development Index (HDI), and second, based on a country’s accrued benefit from past production.

We find that very large economic disincentives are required to move production to low-medium human development (LMHD) regions, and that LMHD production increases only in later decades, when global demand for fossil fuels is lower. Redistribution also raises the costs to the energy system, increasing costs on non-producer importing countries, suggesting a tension between equity in production and equity in consumption. While we conclude that the case for an HDI-based equitable redistribution may be overstated and could disadvantage LMHD countries that are import dependent, we argue that meaningful engagement with equity principles can help inform supply-side policy in the highest human development (VHHD) countries and ensure the recognition of LMHD perspectives in international cooperation on fossil fuel supply.

## Results

### Global energy system modelling

The modelling, described in the Methods section, is undertaken using the global energy system model, TIAM-UCL17,18,19,20. The mechanism to redistribute production based on the above criteria is a carbon tax on fossil fuel production, differentiated by region. Concerning development need, defined using the HDI, very high human development (VHHD) countries are subject to a high carbon-based production tax, high human development (HHD) countries to a lower tax, while LMHD countries are exempted (Methods). In the accrued benefit approach, similar groupings are created based on historic fossil fuel rents (Supplementary Note 3). The model is first run allowing for a cost-optimal allocation under climate targets, and then subsequently run with the addition of the redistributive mechanism (carbon taxes on production) in place. The scenarios are assessed under high and low tax variants under 1.75 and 2 °C warming objectives. Note that we do not propose this redistributive mechanism as a basis for international policy, but as a modelling mechanism with which to explore the impacts of an equitable redistribution. In doing so, we explore the implications of changing distribution both for producers and consumers of fossil fuels. The complexities of operationalising an equity approach are further considered later in this paper.

The modelling results provide three important insights. First, under the global climate ambition pursued, any redistribution of fossil fuel production will be in a declining market, with this decline more rapid as climate policy stringency increases. The result is that smaller, less established producers from LMHD regions will be competing with large incumbent producers as market size reduces and prices fall. Therefore, the benefits of redistribution will be limited. The 1.75 °C pathways see reductions of up to 59–62, 59–62 and 87% for gas, oil and coal, respectively, in 2060, relative to current levels (Fig. 1c, i for gas and oil, respectively; Supplementary Fig. 1 for coal). For 2 °C, the comparable figures are 48–54%, 51–60% and 75–80% (Fig. 1f, l for gas and oil, respectively; Supplementary Fig. 2 for coal). Given the large reduction in coal and limited redistribution potential, the focus of the redistributed scenarios is on oil and gas under the 1.75 °C target, consistent with the ambition of the Paris Agreement.

What market does remain is itself subject to critical uncertainties. Demand growth may not be as robust as suggested under the narrative used, namely SSP2 (see Methods). A sensitivity case using lower energy demands (based on SSP1) suggests lower levels of fossil fuel production, and lower shares for LMHD, particularly for oil (Supplementary Note 2). Indeed, the continued production of oil and gas as shown in these scenarios is contingent upon rapid declines in coal consumption, which look optimistic given recent trends, and by the availability of bioenergy with carbon capture and storage (BECCS) in the system. For example, in the 1.75 °C cases, negative emissions from BECCS offset 2.7–3.7 GtCO2 in 2060, sufficient to capture 80–90% of the CO2 emissions from the gas produced (and used unabated) or 40–60% from oil.

### Reporting summary

Further information on research design is available in the Nature Research Reporting Summary linked to this article.

## Data availability

The results data and key source data (shown in the Supplementary Figures) are provided with this paper. Other datasets used in the determination of the equity criteria include the Human Development Index (accessed here http://hdr.undp.org/en/data) and fossil fuel rents data from the World Bank World Development Indicator set (accessed here https://databank.worldbank.org/). Other modelling input assumptions are available on reasonable request. Source data are provided with this paper.

## Code availability

The code underlying the TIAM-UCL model is available at this link https://github.com/etsap-TIMES/TIMES_model. Source data are provided with this paper.

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## Acknowledgements

This study was conceived of under a programme of work supported by the UK Department for International Development, and subsequently developed. We would like to acknowledge the input of Glada Lahn from Chatham House in helping to develop the ideas formulated in this paper.

## Author information

Authors

### Contributions

S.P. and P.E. conceived of the research idea. S.P. and S.B. developed the methodology and framing. S.P. and J.P. undertook the energy modelling, and analysed the results. S.P. and D.W. developed the supplementary information. S.P. and N.H. developed early drafts of the paper. All authors contributed to writing the final paper.

### Corresponding author

Correspondence to Steve Pye.

## Ethics declarations

### Competing interests

The authors declare no competing interests.

Peer review informationNature Communications thanks Narasimha Rao and the other, anonymous, reviewer(s) for their contribution to the peer review of this work. Peer reviewer reports are available.

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Pye, S., Bradley, S., Hughes, N. et al. An equitable redistribution of unburnable carbon. Nat Commun 11, 3968 (2020). https://doi.org/10.1038/s41467-020-17679-3

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• DOI: https://doi.org/10.1038/s41467-020-17679-3

• ### Unextractable fossil fuels in a 1.5 °C world

• Dan Welsby
• James Price
• Paul Ekins

Nature (2021)