SustainaWeekly - Will this COP be any different?

Economist: Going into COP28 the focus is on increased ambition and imminent progress towards the Paris Climate goals. Progress needs to be made in scaling down investment in high-emitting economic activities, increasing the pricing of emissions and scaling up investment in renewables, particularly in emerging and developing economies. More concrete steps are needed on the financial arrangements for loss and damage.

Policy: Following the Dutch elections, a right-wing coalition is most likely. Based on the party programmes, it seems likely that climate ambitions will be watered down significantly. There is quite some overlap in the manifestos on stepping up nuclear power, continued use of natural gas and a slowdown of the renewable roll-out, while the PVV wants to scrap earlier agreed upon carbon reduction commitments completely.

Sectors: A slower transition because of limited grid capacity is magnified by the mismatch in the timeframe for deploying grid extensions versus that needed for electrification or renewable deployments. Meanwhile, vulnerability to supply chain interruptions, inflationary pressures, and rising financing costs are some of the factors hurting the business case for renewables.

ESG in figures: In a regular section of our weekly, we present a chart book on some of the key indicators for ESG financing and the energy transition.

What to look out for at COP28

• Going into COP28 the focus is on increased ambition and imminent progress towards the Paris Climate goals

• Progress needs to be made in scaling down investment in high-emitting economic activities, increasing the pricing of emissions…

• … and scaling up renewables investment, particularly in emerging and developing economies

• More concrete steps are needed on the financial arrangements for loss and damage

Introduction

COP28 is about to start. From 30 November until 12 December the 28th Conference of Parties (COP) to the UN Framework Convention on Climate Change (UNFCCC) will be held in Dubai, United Arab Emirates. The COP meets yearly to determine climate ambition and responsibilities, and identify and assess climate measures based on the Paris Agreement and the latest scientific findings. The EU and its members states are parties to the Convention, which counts 198 Parties (197 countries plus the EU). COP28 is a critical opportunity for countries to increase their ambition and action to close the emissions gap and align their policies with the 1.5°C target.

Taking stock

An important agenda point at COP28 will be the Global Stocktake. The Global Stocktake was agreed during the Paris agreement and is meant to take place every five years. The process implies looking at every issue related to where the world stands on climate action and support, identifying the gaps, and working together to chart a better course forward to accelerate climate action. It is intended to inform the next round of climate action plans under the Paris Agreement (nationally determined contributions/NDCs). By evaluating where the world stands when it comes to meeting the goals of the Paris Agreement and using its inputs, the Stocktake can help policymakers and stakeholders strengthen their climate policies and commitments in their next round of NDCs, paving the way for accelerated action.

Unfortunately, the answer to “where we stand currently” is very clear: although there has been significant progress since the Paris Agreement, the world as a whole is not doing enough to meet the 2030 goals. Globally extreme weather is already showing us the effects of the increasing temperatures. While meaningful progress has been made across some sectors, collective efforts to first peak and then nearly halve GHG emissions this decade still fall woefully short.

Observed data not moving in the right direction

Global GHG emissions increased by 1.2 per cent from 2021 to 2022 to reach a new record of 57.4 gigatons of CO2 equivalent (UNEP Emissions Gap Report 2023). All sectors apart from transport have fully rebounded from the drop in emissions induced by the COVID-19 pandemic and now exceed 2019 levels. CO2 emissions from fossil fuel combustion and industrial processes were the main contributors to the overall increase, accounting for about two thirds of current GHG emissions. Emissions of a number of other GHGs have also been increasing. Early indications are that carbon dioxide levels in 2023 will be at record levels. This is in stark contrast to the goal: in modelled pathways that limit global temperature rise to 1.5°C with no or limited overshoot, greenhouse gas (GHG) emissions peak immediately and by 2025 at the latest, and then decline by a median of 43 percent by 2030 and 60 percent by 2035, relative to 2019 (State of Climate Action 2023). Carbon dioxide (CO2 ) emissions, specifically, reach net zero by mid-century.

Limited progress was made in COP27

COP28 picks up where COP27, held in November 2022, left off. We concluded last year (here) that limited progress was made in the fields of the outlook for global warming and the important specific issue of climate finance for developing countries. While the ambitions were reiterated, there were some concrete commitments lacking. Examples mentioned by Alok Sharma, President of COP27, include no mention in the concluding text of peaking emissions of 2025; follow-through on the phase-down of coal; and the phasedown of fossil fuels generally. The outlook for global warming under different assumptions did not change significantly at COP27 compared to COP26. This reflects that there have been limited updates of country’s emission reduction plans (Nationally Determined Contributions, NDCs) in the run up to or during the climate summit.

Nine new or updated NDCs have been submitted since COP27

Since COP27 nine countries have submitted new or updated NDCs, bringing the total number of NDCs that have been updated since the initial NDCs were submitted in advance of or following the Paris Agreement to 149 (counting the EU’s 27 member states as a single Party) as of 25 September 2023. Among others, the EU has adopted many elements of the Fit for 55 package and the REPowerEU plan over the past 12 months, including the expansion of the current EU Emissions Trading System (ETS), improvement in regulations and the carbon border adjustment mechanism. Still, increased investments in fossil gas infrastructure and a temporary shift from gas to coal pose a threat to the European Union’s climate ambition, as do shifts in support for green parties towards right-wing climate-sceptic parties in the EU and its member states. More NDCs now contain GHG reduction targets, and more of these targets are economy-wide, covering a country’s entire economy as opposed to certain sectors only. A total of 81% of global GHG emissions is currently covered by Net Zero pledges at some time this century, but not all inspire confidence in their implementation given their legal status, existence and quality of implementation plans, and the misalignment of ST emission trajectories with net zero targets.

According to the Emissions Gap Report, the current policies to reduce GHG emissions make the world likely to warm around 3°C by the end of this century. Delivering on all unconditional and conditional pledges by 2030 lowers this estimate to 2.5°C, with the additional fulfilment of all net-zero pledges bringing it to 2°C. Even in the most scenario the likelihood of limiting warming by 1.5°C is only 14%.

The Emissions Gap Report addresses emission gaps (the difference between the estimated global GHG emissions resulting from full implementation of the latest NDCs and those under least-cost pathways aligned with the long-term temperature goal of the Paris Agreement) and implementation gaps (the difference between projected emissions under current policies and projected emissions under full implementation of the NDCs). The implementation gap has been reduced significantly since last year, due to NDCs being implemented and becoming a concrete part of current policies of countries. However, the emissions gap in 2030 remains high: current unconditional NDCs imply a 14 GtCO2e gap for a 2°C goal and a 22 GtCO2e gap for the 1.5°C goal. An important question in this context, which we expanded on recently here, is how the remaining carbon budget should be allocated between high-income and low/middle income countries.

Investment in high-emission activities not phased down fast enough, and carbon pricing needs to be expanded

According to the Climate Action Tracker only one of the 42 indicators of sectoral climate action assessed – the share of electrical vehicles in passenger car sales – is on track to meet the 2030 target. For example, coal needs to be phased out of electricity generation seven times faster than recent rates, and the annual rate of deforestation – equivalent to 15 football fields per minute in 2022 - needs to be reduced four times faster. On the other hand, the report mentions spectacular gains “that have surprised even optimists”, mainly in the field of building renewable energy capacity and falling prices of renewable energy. Renewable energy targets have been met or even exceeded in the EU and China, while in the USA the Inflation Reduction Act will provide more than $370bn over 10 years to projects that reduce GHG emissions and enhance carbon removal – even though there have been some recent headwinds in the form of, among others, increasing borrowing costs.

UNEP states that for the window to limit warming to 1.5°C to remain open, among other investments in high-emission activities need to be phased out. According to the IEA, investment in oil and gas currently is actually almost double the level required in the Net Zero Scenario in 2030, signalling a clear risk of protracted fossil fuel use that would put the 1.5 °C goal out of reach. While the clean energy economy is beginning to replace the fossil economy, this transition is not occurring rapidly enough. The war in Ukraine has caused oil and gas prices to spike, and in response fossil fuel consumption subsidies reached $1 trillion in 2022—the highest level ever.

Also, efforts to expand carbon pricing appear to have stalled. The price for emitting carbon in jurisdictions with pricing in place show only a slow increase and remain significantly below target levels: the target carbon price for 1.5°C of at least $170 per tonne of CO2 equivalent (in 2030) is not met in any place, while less than 5% of global emissions have carbon pricing at or above the $40-$80 range that is estimated to be consistent with a 2°C pathway. The average carbon price globally, weighted by share of emissions in territories covered by carbon pricing, was $23.23/tCO2e in 2023 and increased $2.35 per year on average between 2019 and 2023, which would, if continued, lead the price to fall far short of the target. At the same time, there has been no significant increase in the share of global GHG emissions which is covered since 2021.

Investment in renewables need to be stepped up in EMs particularly

Simply cutting spending on oil and gas will not get the world on track for a Net Zero scenario; the key to an orderly transition is to scale up investment in all aspects of a clean energy system. Investment in clean energy has risen by 40% since 2020, and the world is set to invest a record $1.8 trn in clean energy in 2023. Still, sources such as IEA, OECD and IPCC estimate this number needs to increase to $4-5trn annually during the transition to be in line with a net zero pathway. The sharpest jump in clean energy investment is needed in emerging markets and developing economies (other than China). Both public and private climate finance will need to increase to meet these goals, and stronger domestic policies together with enhanced and more effective international support. Public finance plays a pivotal role in supporting, creating and shaping markets, setting the right incentives, and mitigating some risks. Public finance is also important for ensuring equitable outcomes and a just transition, and ensuring access to finance for individuals and government who may not otherwise be able to raise the resources needed for the transition. Providing adequate financing for the poorest and most vulnerable communities, and making sure they have a say in how finance is used, is therefore imperative for ensuring an equitable and just transition.

More concrete steps on the financial arrangement for loss and damage

During COP27 a fund (and broader funding arrangements) was agreed to provide assistance to poor countries that suffered from climate disasters. The agreement to set up a fund was hailed as a ‘historic step’ because of the underlying (albeit not explicitly stated) principle that wealthier countries that have contributed most to climate change, should support poorer countries that suffer most from it. However, there were no details or concrete commitments following COP27. This fund needs more detail and more efforts to mobilise financing and strengthening of the existing funding arrangements, potentially with the participation of multilateral development banks and the international financial institutions.