Shell sets out expected carbon costs, climate risks

Shell expects its costs of compliance with carbon pricing schemes to triple in the coming decade, to a forecast carbon cost exposure of $1.5bn in 2032.

In its 2022 annual report issued today the company recorded around $493mn in costs to comply with the EU emissions trading system (ETS) and "related schemes" in that year. It expects costs to be $800mn this year.

"The lack of net-zero-aligned global and national policies and frameworks increases the uncertainty around how carbon pricing and other regulatory mechanisms will be implemented in the future," Shell said. But the EU ETS is structurally designed to increase the price of emitting over time, as the number of emissions allowances is gradually decreased. The Argus-assessed EU ETS front-year contract averaged €81.21/t ($85.76) of CO2 equivalent in 2022, 52pc higher on the year.

Shell estimated carbon costs up to 2030 based on policy — typically tax or emissions trading schemes. Beyond that, it based estimates on the expected cost of abatement technologies required for 2050, with costs ranging from $125-220/t. The cost of compliance with carbon pricing schemes is a fraction of the company's recent earnings — Shell made a record profit of $41.1bn for 2022.

It spent around $220mn on carbon capture and storage (CCS) in 2022, up from $146mn in 2021, and it had an equity share of captured and stored carbon of around 400,000 t/CO2. Shell is a partner in Norway's Northern Lights CCS project.

Shell reported for 2022 a lower net carbon intensity on the year, with third-party assurance. Net carbon intensity of energy products sold by Shell was 76g of CO2 equivalent/MJ — down by 1.3pc on the year. This was because of an increased proportion of renewable power and consequent reduction in carbon intensity of its power sales. The figure includes 4.1mn t of carbon credits, down from 5.1mn t in 2021.

Climate risks

Shell in its annual report gave outlooks for its gas and upstream assets, based on a variety of scenarios in line with Paris climate agreement goals. These ranged from the top limit of 2°C for global warming that the agreement permits, to more stringent pathways for net zero emissions by 2050. All outlooks resulted in lower recoverable amounts for Shell from its gas and upstream assets.

The potential decline in recoverable amounts ranged from $4bn-6bn for gas assets and $1bn-2bn for upstream assets in scenarios of 1.5-2°C, to $9bn-12bn for gas and $8bn-11bn for upstream assets when set against the IEA's net zero by 2050 scenario. The outlooks used an end-2022 baseline, for which Shell put its gas and upstream assets at $75bn and $88bn, respectively.

Shell also noted "acute risks, such as flooding and droughts, wildfires and more severe tropical storms, and chronic risks, such as rising temperatures and rising sea levels" that could affect its facilities, operations and earnings.

"The frequency of these hazards and impacts is expected to increase in certain high-risk locations," it said.

Shell said there are challenges around forming and reporting climate targets and progress.

"There is no established standard for aligning an energy supplier's decarbonisation targets," it said. Its carbon intensity reduction targets are derived from UN Intergovernmental Panel on Climate Change (IPCC) pathways, and reporting is in line with Taskforce on Climate-related Financial Disclosures (TCFD) guidelines.

Shell plans to be a net zero emissions company by 2050. It has set an interim target to reduce its absolute scope 1 and 2 emissions by 50pc by 2030, from 2016 levels.

By Georgia Gratton