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After two weeks of discussions and negotiations, COP26 came to an end a day later than scheduled. The conference resulted in an agreement that has been hailed as progress by some and criticized by others. Navigating among the attractive headlines, the reality is less sunny, as COP26 did not provide enough reassurance to put us on track to limit temperature increase to 1.5°C above pre-industrial levels. Nevertheless, even if there are still unresolved challenges, and even if we need higher ambitions not only for 2050-2070 but already for 2030, the Glasgow conference made progress in several respects. The following paragraphs highlight the main achievements, challenges and takeaways.
Some Developments, but Also Credibility Concerns
India’s net-zero announcement was the highlight on nationally determined contribution updates
Ahead of COP26, expectations with regard to updated announcements on nationally determined contributions (NDCs), which allow countries to determine for themselves the paths they want to take to reduce emissions, were rather low. Compared to what we knew beforehand, we did not see major shifts in NDCs for most countries. Yet, there were some surprises in Glasgow as within the UN World Leaders Summit new pledges to reach net-zero emissions were unveiled (e.g. India, Israel, Lithuania, Mauritania, Montenegro, Nigeria, Rwanda, Ukraine, Vietnam). Of those pledges, India’s pledge to cut carbon emissions to net-zero by 2070, was the biggest surprise. This target, half a century away, appears rather unambitious for the world’s third-largest emitting country. And Climate Action Tracker, an independent scientific nonprofit organization, points out that India’s plan is not ambitious enough. However, the plan still represents an improvement from how things were pre-COP26. More importantly, India’s Prime Minister Modi also stressed short-term goals, such as reaching 50% power market share for renewable energy (around 500GW capacity, more than doubling the current renewable capacity) and reducing the carbon intensity for each unit of GDP by 45% by 2030. This is a welcome initiative, as we need more stringent pledges now for 2030, not just for 2070. If implemented, we could see a swiftly growing deployment of renewables in India’s coal-dominated power sector. Another positive signal came in the latter part of COP26 from an unexpected US-China joint declaration, which stressed that the two countries will work together to address climate change already in the 2020s. The declaration points to future discussions on methane emissions and coal phase-down. Nevertheless, the declaration contains no concrete binding decisions, targets or deadlines. Critics point out that “empty climate promises” were made to mark “progress”, since the only advancement of this declaration so far is the fact that these two parties are talking to each other at all.
Including the new COP26 announcements, more than 80 countries, which account for over 70% of the global greenhouse gas emissions, have now set net-zero targets. Yet, this outlook looks less optimistic when we consider that only a few parties, responsible for about 10% of the actual global greenhouse gas emissions, currently have these targets enshrined in law. Moreover, the long timeframe that we are looking at raises concerns regarding the possibility that some parties under other future governments could change their minds. Another factor of concern is that the net-zero agendas of countries like China, Russia, Saudi Arabia or Brazil do not include detailed plans or are back loaded beyond 2030. To improve this picture on short-term targets, the deal achieved in Glasgow urges countries “to revisit and strengthen the 2030 targets” in their NDCs by the end of 2022. This call is a positive signal to take more action in the following months.
As expected, Global Methane Pledge took off and coal is still not a thing of the past
While India was initially in the spotlight with its net-zero plan, this announcement was later outshined by the expected Global Methane Pledge, backed by over 100 countries. NDCs did not bring many major announcements for 2030 and the Global Methane Pledge did just that. The signatory parties, responsible for approximately half of the world’s methane emissions, committed to collectively reduce global methane emissions by 30% by 2030 from 2020 levels. Reducing methane emissions is seen by IEA as one of the most effective short-term solutions to combat climate change. Yet half of the global methane emissions originate from countries that did not join the pledge. The main parties missing from this list are Australia, China, India, Iran and Russia, all major emitters of methane. In order to build a comprehensive plan to cut methane emission, we must have these countries on board too.
The methane story is intertwined with that of coal, as coal production is a significant source of methane emissions. Unless the coal-reliant countries are serious about reducing their coal dependence in the short run, pledges for a significant reduction in methane emissions are unlikely to come from these regions (e.g. Australia, India, China). For a variety of reasons, some of which explained by CSIS, Australia, China and India did not commit to begin phasing out coal as early as the 2020s. Timing was also not on the organizers’ side, as the recent energy price spikes placed energy security higher on China’s short term agenda than climate issues. Eventually, China and other coal-reliant countries will phase out coal, and the question is when rather than if. In the short term, we see no concrete steps towards this goal from Australia, China, India or even South Korea and Japan. This means that coal will still play a significant role in our global economy for the foreseeable future.
On a more positive note, more than 20 countries agreed within COP26 to phase out coal power, including a number of countries heavily reliant on coal, such as Poland, Vietnam or Indonesia. In addition, an increasing number of countries, including the Netherlands, committed to end foreign financing of fossil fuels by the end of next year and to steer towards financing cleaner energy solutions. If implemented, more resources will become available for investment in green energy. Again, China, Japan and South Korea, major supporters of fossil fuel projects abroad, have not backed this initiative.
The divergent views and priorities surrounding coal and fossil fuel subsidies placed these topics at the heart of negotiations in Glasgow until the very last moment. An initial COP26 draft agreement, which called upon countries to “accelerate the phasing out of coal and subsidies for fossil fuels,” was watered down in several negotiation rounds to a weaker final text in which countries agreed to “escalating efforts towards the phase down of unabated coal power and phase out inefficient fossil fuel subsidies, while providing targeted support to the poorest and the most vulnerable, in line with national circumstances”. Negotiations included a last minute pushback from India’s delegation on changing the wording of coal “phase out” to “phase down,” arguing that countries themselves should determine, based on local circumstances, which path to take to achieve their climate goals. Even if weaker than initially envisioned, some see the deal in Glasgow as a positive signal as it is the first COP decision to mention coal and fossil fuel subsidies.
Increasingly divergent views between developed and developing countries on climate finance matters
While we already saw frictions between certain developed and developing countries in the debate over coal phase out, the two groups seem to be growing even further apart on the subject of climate finance. To start with the positive developments, several western countries promised more support for poorer nations. One of several announcements is the partnership between South Africa and France, Germany, the UK, the EU and the US, through which USD 8.5bn will be mobilized over the next three to five years to speed up South Africa’s transition towards a low-carbon economy. The good news so far stop here. While the above commitments are to be applauded, developed and developing countries are not in agreement with regard to climate finance. In Glasgow, negotiators discussed climate finance plans for 2025 and beyond, even though it seems unlikely that the USD 100bn per year promised by 2020 will be delivered before 2023. Meanwhile, countries like India are already asking for much more: a figure of USD 1 trillion has been mentioned as needed for climate finance. Developing countries often feel that their voice is not being heard and stress the urgency they face in adapting their economies, calling for an equal split between adaptation and mitigation finance. Yet, so far only a quarter of all climate finance has gone to adaptation, and even at COP26 there were no major pledges to help developing countries counter cyclones, droughts, flooding or rising sea-levels. In this context, it is likely that we will hear more and more about loss and damage reparations over the next few years and in next COP editions.
Article 6 of the Paris Agreement Rulebook finalized at COP26
While negotiations on climate finance did not advance as much as we had hoped two weeks ago, COP26 lived up to expectations with regards to Article 6 of the Paris Agreement Rulebook. With the agreement on paragraphs 6.2, 6.4 and 6.8, signed by almost 200 countries, we can finally say that the rulebook that makes the Paris Agreement operational is settled. The negotiations on this matter were closely linked to those on climate finance, as countries that own large forest areas, often developing countries, pushed for a robust deal. Such countries, including, for example, Brazil, which have vast forest areas and also have a favourable climate for the deployment of wind and solar power, will become net exporters of carbon credits. The second link to climate finance stems from the request of poorer nations to redirect part of the proceeds from carbon credit trading to fund climate adaptation projects. COP26 reached a compromise on this: 5% of the value of emission offsets traded through a centralized system will be allocated to adaptation finance, but bilateral agreements between countries to offset emissions will not be taxed.
The agreed text is catered to avoid double counting of emissions and this is a major achievement compared to previous discussions. The agreement reached in Glasgow also settled the dispute on historical carbon offsets by setting 2013 as the year from which past offsets can be considered. This measure has already drawn criticism for allowing past credits to be sold through carbon markets and thus resulting in oversupply. These old credit offsets were created under the Kyoto protocol (COP3) and are considered by critics as not delivering the benefits they claim. To partially address potential oversupply, 2% of the offsets traded through the centralized system will be automatically cancelled. In addition to fears of oversupply, the main concern of carbon markets is that major polluters might find it easier to offset emissions by simply buying carbon credits rather than by taking serious steps to reduce their carbon footprint.
Much of the world commits (again) to ending deforestation
The list of COP26 highlights cannot be concluded without mentioning the pledge to end deforestation by 2030. Signatory parties include more than 100 countries, which together cover more than 85% of the world’s forests. Unfortunately, this encouraging news is also accompanied by credibility issues, as similar agreements in the past have failed to curtail deforestation. Most notably, the 2014 New York Declaration on Forests, which had similar ambitions, did not live up to expectations. While under the New York Declaration, signatory countries agreed to half deforestation by 2020 and end it by 2030, a progress report released last month suggests that the majority of signatory countries have not even incorporated these goals in their latest NDCs. Further credibility concerns came from Indonesia’s Environment Minister, who called the signed pledge “unfair,” a few days after the country signed the agreement.
Not on Track for 1.5°C, but Steps Are Being Taken for Getting Closer
Before COP26, we were on track for 2.7°C of global warming. As expected, the gap between the pre-COP26 status quo and the 1.5°C target was too large to fill completely within one conference, partly given that the world has already heated to temperatures of 1.2°C above pre-industrial levels. But even setting aside the big headlines and looking only at actual commitments, we can still see that progress is being made. Not all countries are moving at the same pace towards decarbonisation, but the direction is clear. If fully implemented, updated pledges can put us on track for limiting global warming to 1.8°C according to IEA. This would already be a major step forward, but the “if” in the above statement is a substantial hurdle to overcome. Given that pledges have not been turned into reality on several occasions, the credibility gap makes the IEA’s scenario seem more like a best-case-scenario with the current status quo. Climate Action Tracker, for example, points to a more likely temperature increase between 2.1-2.4°C by 2100 if we do not take bolder action already in the 2020s. A Carbon Brief analysis points to similar projections and concerns. All in all, the current situation is slightly better than it was two weeks ago, but we are still not on track to limit the temperature increase to 1.5°C above the pre-industrial levels.
What Does COP26 Mean for Business? Between “Blah Blah Blah” and Substantial Investment Pipeline
As was the case with previous editions, COP26 was undoubtedly filled to some extent with “blah blah blah” from governments, as Greta Thunberg says. However, with each COP held, we see more and more pledges and initiatives being put in place. Maybe not all of them will (fully) materialize, but the message is clear: the world needs and will see more and more investments tailored to solutions that can take us to a low-carbon economy in the long run, and less and less investments in fossil fuels. In addition to governmental pledges, the increasing focus of society on climate issues was evident. COP26 had a record number of delegates and, more importantly, within this conference we saw an increasing number of private initiatives being announced, most notably, the commitment of the GFANZ coalition, a group of entities holding around USD 130 trillion worth of assets, to focus more on financing the transition towards a net-zero society. Another example comes from a group of countries, cities and companies that have committed to phase out fossil-fuel vehicles by 2040. The message from such initiatives is that society is increasingly pushing for a more sustainable economy. In many countries, societal demand for a low-carbon economy is increasing and this is putting pressure on both politicians and companies to rethink their agendas. For certain business players, a rapid transformation of their operations may even be the only solution as a significant proportion of fossil fuel assets are likely to become stranded as early the 2030s. Companies that want to be leaders tomorrow, cannot ignore investing in sustainability today.