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Beyond Ratings Weekly Digest

Your briefing on augmented financial risk analysis

N°139 ▪ 29th March 2018


Energy-related CO2 emissions up by 1.4% in 2017

After three years during which global energy-related CO2 emissions were relatively flat, according to a recent IEA report they increased by no less than 1.4% in 2017. And this does not take into account the fact that, although CO2 had been decreasing or stable in many G20 countries between 2011-2016, non-CO2 greenhouse gas emissions have increased in almost all G20 countries on the same period (for more information on this, see our Beyond Ratings Weekly Digest n° 128 of the 11th January 2018). Yet, energy-related CO2 emissions is one of the areas on which massive action is possible as it relates to both energy efficiency and energy mixes. However, these emissions also reflect the fact that energy demand is still growing, and this is at least partly due to structural drivers. In 2017, energy demand increased by no less than 2.1%, while its growth had reached 0.9% in 2016 and – in average – in the previous 5 years. So, let us have a look at what is behind this.

A key reason explaining the increase in energy demand is simply the massive energy needs of China and India. They accounted for 40% of the 2017 energy growth, whereas developed countries only accounted for 20% of this growth. Developing countries are catching up economically and this of course requires large volumes of energy, and not only for their industrial activities. In addition, the gap remains so wide that it is very difficult to imagine that this trend could or should structurally reverse.

But another interesting fact revealed by the latest data on energy and CO2 emissions is the still massive reliance on fossil fuels despite the development of renewables. 72% of the 2017 increase in energy demand was based on fossil fuels, which is not far from their share of total primary energy use (c.80%), a figure that has been stable in recent decades and cannot be expected to change considerably in the short or medium term based on current trends. Here again, the issue tends to be structural. Renewables are of course growing (they met 25% of the energy use growth as renewables-based power grew by 6.3% in 2017), but fossil fuels also remain clearly on the rise with growth rates of 1.6% for oil (twice as much as the average of the past 10 years), 3% for gas and 1% for coal.

2017 increase of energy demand by source

In this context it is no surprise that the world’s energy consumption is on the rise, fuelling the global economic growth and the development of emerging countries. And it is, thus, very logically that we observe a 1.4% growth in energy-related CO2 emissions, in particular as annual energy efficiency gains remain insufficient to counter the impacts of GDP growth. GDP grew by 3.7% in 2017 but its energy intensity improved by only 1.7%, which was even significantly lower than in the past 3 years (2.3% average).

Energy efficiency gains were notable in China where GDP increased by 7% but CO2 emissions grew by only 1.7%. This did not only reflect the development of renewables in the country and the “make China’s skies blue again” policy, but also a change in the structure of the country’s economy, trying to limit its exposure to the most energy-intensive industrial sectors. Potential good news given the country’s health problems or in terms of diversification.

A surprise came from the USA where CO2 emissions decreased by 0.5%. This is not new as a decrease had already been observed in the past two years, but it was interesting to note that this evolution was less related to coal-to-gas switching than in previous years, and much more to the development of renewables. Signs of change? It should however be noted that not all the indicators are in the green. The USA is one of the most emblematic examples of a current trend towards more and more SUVs on the road. There are now almost as many SUVs and light trucks in the country’s passenger car fleet as other vehicles, and SUVs and light trucks represented 60% of sales in 2017 compared with 47% in 2011.

These current trends are not completely new as they reflect structural factors. It is however good to stay up to date on them (as some shifts can also be observed, as in the USA and China). The question that remains is nonetheless that of how climate targets can be achieved in the face of such structural trends and given the limited changes observed in terms of energy intensity of GDP and carbon intensity of energy. A quote by Einstein summarizes one part of our current issues: “Problems cannot be solved with the same mindset that created them.”

Guillaume Emin, Project Manager



Sovereign Risk

The Fed remains optimistic, the inflation lurks!

Fed Funds Rate (%)

On Wednesday March 21st, The Federal Reserve raised as expected its Fed funds rate by 0.25%. After a two-day meeting of its monetary committee, chaired for the first time by Jerome Powell, the Fed notes that “the economic outlook has strengthened in recent months”. FOMC members anticipate at least another two rate hikes this year, but do not go beyond that yet. Nevertheless, they revised their growth forecast for 2018 from 2.5% to 2.7%.

On the one hand, the reasons for raising the Fed funds rate several times before the end of the year are not lacking. Especially since this rate – now set between 1.5 and 1.75% – remains very low. However, in a context of GDP growth close to 3% and almost full employment. With an unemployment rate falling to 4.1%, we start to observe a shortage of manpower in many sectors. In addition, the relative weakness of the dollar adds to the cost of imports, while the extremely stimulating fiscal policy applied by the Republicans boosts activity. The risk of a too rapid acceleration of inflation by costs is therefore real.

On the other hand, other forces counter the risk of overheating. For the moment, inflation, although rising, remains below the 2% target that the Fed has been trying to reach since 2012. It seems that the Fed gives more weight to the positive economic momentum than to the inflation weakness in the conduct of its monetary policy.

Sources: Beyond Ratings, Datastream


Closer to the underground…

Land degradation and human development*

On March 24th, during its sixth session in Medellin (Colombia), the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), an independent intergovernmental body established by member States in 2012, published  a summary for policymakers about land degradation and restoration. It estimates that such degradation negatively impacts the well-being of at least 3.2bn people and costs more than 10% of the annual gross production in loss of biodiversity and ecosystem services. For example, it appears that current net primary productivity (biomass and agriculture) is 23% lower than it would have been under natural state. This implies an additional use of chemical inputs that should even increase by 2050. Indeed, land degradation and climate change together are predicted to reduce crop yields by an average of 10 per cent globally and up to 50% in certain regions. Simultaneously, wetlands lost 54% since 1900, mainly for intensive agriculture purposes, further impacting local biodiversity and resilience.

Fortunately, the IPBES also offers some solutions, suggesting a global framework based on international cooperation, sustainable land use practices and holistic integrated (forest, agriculture, energy, water…) approach. The final report will be delivered later this year and we hope that policymakers won’t wait until then to act.

* Data on soil organic carbon from Van der Esch et al. (2017) and Stoorvogel et al. (2017).

Sources: Beyond Ratings, IPBES

Carbon/Climate Change

The case for developing low-carbon electricity

2016-2030 evolution of electricity demand by region

Note: The bubble size matches the 2016 final demand in electricity (e.g. more than 8000 TWh in Asia)

Electricity consumption is an indicator of a country’s level of development as well as the state of its economy. Asia, North America and Europe had the biggest total electrical consumption in 2016. However, we estimate that the demand will expand considerably in Asia between 2016 and 2030 whereas the rise should be more moderate in Europe and North America, largely due to rapid projected population and GDP growth in this developing region.

In the Middle-East, Latin America and Commonwealth of Independent States (CIS) countries, further increases in electricity consumption will be moderate as these regions have already attained a certain level of access to electricity. Africa stands out as the shift from a primary-oriented economy to a more secondary-oriented one – combined with a sharp growth in GDP and population –, will cause a rapid expansion in electricity demand. The challenge for Asian countries will be to increase production to meet growing demand while also reducing its CO2 intensity (defined as the amount of CO2 emitted by kWh each produced). In addition to coal-to-gas switching, China is already the global leader in renewable energy investment, while India is also developing low-carbon energy (renewable investment in India has more than doubled between 2013 and 2016). However, as the graph above demonstrates, further dramatic reductions in the CO2 intensity of electricity are needed to meet the 2°C target.

Sources: Beyond Ratings, Enerdata


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Photo credit via Visualhunt/CC BY-SA or other: Front page ▪ Credit 1: CECAR – Climate and Ecosystems Change Adaptation R; Credit 2: Tony Webster; Credit 3: Kiefer.; Crédit 4: NASA Goddard Photo and Video / Research notes ▪ Credit 1: DnDavis (via; Credit 2: zhu difeng (via Fotolia); Credit 3: Mny-Jhee (via Fotolia); Credit 4: xmentoys (via Fotolia)


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