An environmental economist's take on COP27
An environmental economist's take on COP27
Global leaders will meet from 6 to 18 November at the 27th Conference of the Parties of the UNFCCC (COP27) in Egypt, to discuss some of the most pressing issues of climate change. Adaptation, climate finance and loss and damage are high on the agenda.
But before discussing expectations around COP27 and its likely outcomes, we want to take a step back, looking at what was agreed in COP26 last year and the progress made so far.
COP26 – Key outcomes from Glasgow and current state
COP26 was held in Glasgow last year in November and ended with all countries agreeing to keep the Paris target of 1.5°C alive. After two weeks of intense negotiations, there was a common consensus on urgently accelerating climate action.
An important milestone of the Glasgow Climate Pact was to explicitly plan to phase down the use coal, the most carbon-intensive fossil fuel. The deal to reduce coal use was unprecedented in the climate process, as this language was never been included in United Nations (UN) text before.
The current energy crisis, however, is undermining this commitment, as rising concerns over energy affordability and energy security are favouring a coal come-back in the short term. The use of coal is far from being reduced as this fossil fuel represents a cheaper alternative to gas, whose supply is being squeezed by the Russia-Ukraine conflict.
As a result, the International Energy Agency (IEA) estimates that global coal demand is set to return to its all-time high in 2022. This means that carbon emissions have not peaked yet, in stark contrast to what was agreed in COP26 and previous summits.
Another of the main outcomes from COP26 was that countries were asked to strengthen their nationally determined contributions (NDCs) for 2030 by the end of 2022 to limit global warming to 1.5°C. While over 120 parties submitted new or updated NDCs ahead of COP26, these targets were too weak. These climate pledges were estimated to lead to a level of global warming of 2.4°C by the end of the century, which is still far from the Paris target.
While momentum on climate action remains positive, so far we have seen limited progress as fewer than 25 countries have updated their climate pledges. Of these countries, only one, Australia, has submitted a stronger NDC, according to Climate Action Tracker. More than 160 countries still have to update their targets.
COP27 will be different
COP27 has been framed as an implementation summit. This means COP conversations are not likely to be centred around new mitigation measures to reduce emissions, but rather on how to implement climate actions in order to fully operationalise the Paris Agreement.
In particular, discussions will have a focus on how to reduce the gap between targets and tangible actions. Parties will be expected to highlight how they will put the Paris Agreement into practice in their economies, showing progress on legislation and policies. This will be important for the financial sector as the definition of energy transition plans from the governments gives confidence to investors on the direction of travel.
We think COP27 is not going to deliver more climate action. A bigger push for more emissions reductions is not on the cards, as it is unlikely countries will agree on stricter regulation to tackle carbon emissions.
While higher carbon prices are necessary to incentivise the move away from fossil fuels and to decarbonise the global economy, they are not in favour at a time in which inflation is surging globally and energy supply is being squeezed by geopolitical tensions. Countries’ priorities have changed since COP26 and higher carbon prices are not in line with their concerns over energy security and affordability.
While increased ambition is on the agenda for COP27, prospects for stronger climate pledges on emissions reductions are looking poor, at least in the short term.
Key items on COP27 agenda
If not mitigation and more severe regulation to cut emissions, what is likely to be discussed?
This COP is being held in the African continent - one of the regions most exposed to the effects of global warming and extreme weather events, but also one of the least climate resilient regions of the world.
Adaptation, how to prepare for the increasing impacts of a changing climate, is a key issue, especially for developing countries. The Egyptian Presidency has highlighted that adaptation will be high on the agenda, while the recent drought in China and floods in Pakistan, but also heatwaves in Europe and in the western states of the US, have reminded us of the urgency of adaptation.
That was also highlighted by the 2022 Report on Climate Impacts, Adaptation and Vulnerability from the Intergovernmental Panel on Climate Change (IPCC), that found that climate impacts are already more widespread and more severe than expected.
How vulnerable countries are going to change their economies to prepare for a warmer world are important steps in ensuring stronger economic stability. Investing in projects like updating water infrastructure and making agriculture more resilient are set to improve the economic growth outlook for many economies.
The IPCC also finds a large gap between current adaptation levels and those needed, mainly due to lack of financial support. It estimates that adaptation needs will reach $127 billion and $295 billion per year for developing countries alone by 2030 and 2050, respectively.
Mobilising capital not only into reducing emissions but also into projects to adapt will be another pillar of negotiations at COP27. But this will not be an easy task.
Climate finance on the agenda, again
Climate finance demands from developing economies to help them cope with a changing climate are not new. The promises from richer nations of regular finance to support them in both adaptation and mitigation efforts are also long standing. In 2009, developed countries agreed to mobilise $100 billion of assistance for developing nations per year by 2020. More than 10 years later, these finance pledges have not been fulfilled.
Provisions for climate financing were also discussed at COP26, but not much progress took place. As a result, developing countries have become increasingly frustrated on the failure to deliver on these green finance promises, and have been particularly vocal about this issue.
In particular, African leaders have noted that while the continent has contributed the least to climate change, being responsible for less than 3% of global carbon dioxide emissions, it is highly exposed to the impacts of global warming.
Developing countries are therefore also looking for funding to address the costs of loss and damage, i.e. the impacts of climate change that go beyond what countries can adapt to and mitigate.
All countries agreed to address “losses and damages related to the impacts of climate change”, but developed countries have been reluctant to discussing this facility, as the loss and demand function is highly controversial. In particular, richer countries have been concerned about liability claims for climate damage caused by their emissions.
A few weeks ago, Denmark became the first UN member to grant money to compensate for climate losses and damages, with the Danish government allocating 100 million Danish krone (€13.5 million) to assist the most vulnerable communities.
The move could put pressure on other wealthy countries that have contributed to the rise in emissions since the industrial revolution, like the U.S. and Europe, to start fulfilling their green finance commitments while recognizing climate responsibility.
António Guterres, UN Secretary-General, highlighted in a recent speech to world leaders that a successful COP27 outcome has to include a financing facility for loss and damage. Setting up of a public financing facility is not on the cards, as the current energy crisis and increased spending during the Covid-19 pandemic have already put government finances under pressure.
World leaders could still find a compromise around the finance issue, avoiding fuelling the disappointment and frustration of developing nations once again. This could also provide support for geopolitical stability between poor and rich countries, while improving growth outcomes for developing nations.
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This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
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