Stress-testing the Norwegian economy: The effects of the 1.5°C scenario on global energy markets and the Norwegian economy

The Paris Agreement aims to limit global warming to 1.5 degrees, which means net zero emissions in 2050. Norway is a small economy with large exports of oil and gas, and conscious about its climate policy commitments. But are we aware of the scale of this transition and what it means for income, welfare and employment? Oil and gas have contributed significantly to government revenues. It is therefore important to analyze how global and national climate policy will affect Norway's position in the future energy markets. Norway is more than oil and gas, with great potential for both hydro and wind power. Furthermore, we can produce hydrogen using electricity, but also based on natural gas where CO2 can be captured and stored under the seabed (CCS). Hydrogen stands out as an alternative for heavier vehicles and shipping. We study the effects of climate policy and the phasing in of new energy technologies on energy use and production, and the opportunities and constraints this impose on the Norwegian economy and industrial structure. We use models describing energy markets globally and regionally in a situation where zero-emission technologies compete with fossil energy and can increase their market share through strict climate policy. The use and production of zero-emission technologies requires investments affecting growth in other parts of the economy. Our approach captures the interaction between economic development and the green transition, with a special focus on the Norwegian economy. In the first part of the project we obtained information on new, green energy technologies, i.e. costs, factors included in production, where they receive supplies from and where they sell their energy. Costs will determine how quickly these technologies are phased in and the potential for Norwegian exports of e.g. hydrogen. We wrote an article about this, which was published in the Norwegian journal Samfunnsøkonomen. Based on e.g. smoothing the pathways of key variables in the IEA’s Stated Policies Scenario (STEPS) (as documented in a method article published in an international journal), we developed and implemented a consistent baseline scenario in the three simulation models that are used in the project, and decided how the models are adjusted and linked (this is documented in a separate report). We apply two global models (one with a detailed description of the entire economy, and one with focus on energy markets) and one model for the Norwegian economy. In a paper (published in an international journal) we have studied what kind of measures are needed in order to reach the 1.5 degrees target, or more precisely reduce global CO2 emissions close to zero in 2050. In this analysis, the two global models referred to above have been used. We find that a range of strong measures are needed, such as high CO2 prices, stronger energy efficiency improvements, accelerated transition to renewable energy, and reduced extraction of fossil fuels. Furthermore, we study, using the model for the Norwegian economy, implications for the economy of a faster phasing down of oil and gas extraction. Preliminary results are obtained, and final results will be presented and discussed in a separate paper.

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The green transition implies that vehicles will no longer run on fossil liquids, limited hydro power no longer represents the only source of clean renewable energy, and plastic is no longer based on petroleum. Green energy technology, local environmental concerns and climate policy build up a large uncertainty about future production and use of fossil energy. A significant producer of oil and natural gas, Norway is aware of own and global climate policy obligations. The question is still if we grasp the scale of the challenge and requested change and its effect on global petroleum demand and national activity levels in a climate friendly future. This project will study how electric and hydrogen vehicles, zero fossil subsidies and fossil divestment will influence future volumes and prices of coal, oil, gas and renewable energy in the international markets. Further, we will identify needs for additional international climate policy if the 1.5° scenario shall be met and assess the potential for future energy production globally and on the Norwegian continental shelf in the 1.5° scenario. The impact of future petroleum production levels on the Norwegian economy will be analyzed, also considering the effect of compensating policy measures. We will ensure consistency between analysis of energy markets and economic development, globally and in major regions/countries. Finally, we will discuss our results in relation to authoritative energy and climate scenario analyses (IEA, IPCC) with special focus on baseline assumptions, modeling of the petroleum industry, renewable energy, new transport technologies based on electricity and hydrogen, and energy efficiency improvements. The project will emphasize transparency in communication of results.