COP: See you in Sharm El-Sheikh

Members are thus given a “second chance” to produce NDCs consistent with keeping global warming to 1.5 degrees, a target which looks elusive on the basis of the current commitments.
Gilles Möec

Chief Economist

AXA IM

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COP26 finished late – as all COPs have – with three areas of focus in the conclusions. The first one is a “rendez-vous clause” in November 2022, coinciding with COP27 in Sharm-el-Sheikh, to update the countries’ Nationally Defined Contributions (NDCs).

This applies to those who haven’t submitted one in time for Glasgow, but also “requests Parties to revisit and strengthen the 2030 targets in their nationally determined contributions as necessary to align with the Paris Agreement temperature goal by the end of 2022, taking into account different national circumstances”. Members are thus given a “second chance” to produce NDCs consistent with keeping global warming to 1.5 degrees, a target which looks elusive on the basis of the current commitments

Asking for more clarity for 2030 makes sense. While the relatively optimistic Melbourne University assessment of the post-COP26 temperature trajectory (1.9 degrees) last week took on board all pledges, including the furthest away ones, the Climate Action Tracker analysis came out last week with a darker picture (2.4 degrees) largely because of its focus on the normally more tangible but unfortunately still insufficient short-term measures. 

The second key point is the explicit inclusion of fossil fuel and particularly coal in the agreement. The wording is however quite contorted. The text “ calls upon Parties to accelerate the development, deployment and dissemination of technologies, and the adoption of policies, to transition towards low-emission energy systems, including by rapidly scaling up the deployment of clean power generation and energy efficiency measures, including accelerating efforts towards the phase-down of unabated coal power and inefficient fossil fuel subsidies, recognizing the need for support towards a just transition”. There is an abundance of qualifiers which need to be analysed one by one.

Inefficient” is ambiguous when applied to fossil fuel subsidies. It could be understood as any subsidy which would encourage wasteful consumption and impair the transition to cleaner energy (it’s the definition used by the G20). But implementation could be “interesting”. Canada for instance has already pledged to scrap all inefficient federal subsidies by 2025, but in a preliminary report found all its existing programmes efficient, either because they could help reduce the country’s carbon footprint – e.g. supporting research in cleaning fossil fuel activity –  which makes sense, or – and that’s more debatable – because they had a “social” content (e.g. supporting access to affordable energy to some communities). If this interpretation is widespread, this would leave the door open to quite a lot of subsidy frameworks worldwide.  Finally, the mention of “just transition” implies the recognition of the significant transitory damage to employment which could be triggered by abandoning coal. Of course, the general direction of travel for fossil fuels is clear, and that’s probably progress relative to the Paris agreement (the International Energy Agency report on how to achieve net zero probably played a key role here ) but the speed of the transition could remain low.

The third point is a pledge to bring the developed countries’ contribution to help emerging and developing states to mitigate climate change to USD100bn per annum by 2025, against 2020 in the Paris agreement. This is an unimpressive target. The OECD review of the pledges ahead of COP26 suggested that USD100bn could be reached by 2023. This will not help bridging the gap between “North” and “South” when it comes to the fight against climate change. We note that to justify their rejection of “phasing out” carbon, India’s representative to the COP26 brought back the historical fairness argument , according to which developing and emerging countries should be granted a larger share of the remaining “carbon budget” – the quantum of CO2 which can still be emitted without pushing global warming above 1.5 degrees – given their minuscule contribution to global warming until the recent decades.

Finally, beside the “Glasgow Pact” proper a deal was struck on the tricky interpretation of article 6 of Paris agreement covering carbon trading across countries. Rules were defined on the centralised exchange, with in particular a mandatory cancellation of 2% of the new credits issued – to better ensure a “net decarbonisation” – and 5% of the credits will have to be set aside to help developing countries adapt to climate change. These “safeguards” however won’t apply on the bilateral agreements (such as the one which has already been concluded between Switzerland and Peru, whereby, in a nutshell, the former pays the latter to decarbonize). The “proof will be in pudding” though, as to exactly how these systems will work and how due scrutiny will be organized to avoid greenwashing, From this point of view, the fact that the agreement has allowed some “grand-fathering” of credits created under the Kyoto agreement (largely discredited in terms of real impact on global carbon emissions) into the new framework is not a great sign. Yet, as we argued last week, this may be an important step towards the emergence of a global price for carbon.

All in all, COP26 probably ends up better than what could have been feared (we summarized last week early wins on forests and methane), but we expect another moment of tension next year around the new pledges. We continue to think that attention is now likely to shift away from these “big moments” focused on pledges towards monitoring implementation at the national level. As things stand today, there are few “hard takeaways” for the private sector, apart from the methane deal which is going to have immediate consequences on the oil and gas industry.

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COP: See you in Sharm El-Sheikh