The ESG Economist - COP26 in short

• COP26 looks set to fall short of putting the world on track to achieve the Paris goal to keep warming to well below 2 degrees above pre-industrial levels and ideally 1.5 degrees

• Leading up to the summit, global warming is projected at 2.1-2.7 degrees on the basis of government plans or pledges, with the exact point in the range determined by assumptions about implementation

• Countries that account for around a quarter of global methane emissions have pledged a 30% reduction by 2030. A more comprehensive deal could reduce warming by 0.2 degrees

• Developed countries may take until 2023 to step up financial flows to developing countries to the USD 100bn that had already been promised for last year but could exceed that target in 2023-2025

• The conference also aims to agree rules to promote the consistency and comparability of climate plans and govern international emissions trading, that have proved a sticking point up until now

Introduction

COP26 (Conference of Parties) is the 26th climate change conference of the governments that have signed the UN Framework Convention of Climate Change (UNFCCC). The summit has just kicked off and will last until 12 November. The COP is usually annual, though this one was postponed from 2020 due to Covid-19. This COP is an important one given that this is the first test of the mechanism designed to trigger a step up of ambitions five years following the Paris Agreement (signed at COP21 in 2015). In this research note we assess the main goals of COP26, with a view to setting out a framework that can be used to chart progress from the conference. Below we provide a brief review of four main focus areas: 1) Emission targets 2) Financial flows to developing countries 3) Adaptation efforts 4) Paris Rulebook

Emission targets

One of the goals of COP26 is for countries to come forward with ambitious 2030 emission reduction targets that align with reaching net zero by 2050 and have a chance of limiting warming to 1.5 degrees. The Paris Agreement aimed to keep the rise in the global average temperature to ‘well below 2 degrees above pre-industrial levels, ideally 1.5 degrees’. Countries themselves were tasked with setting out their own targets to the UNFCCC in the form of Nationally Determined Contributions (NDCs). Under a so-called ‘ratchet mechanism’, countries should submit new more ambitious NDCs every five years. In the runup to COP26, around 150 countries have submitted updated NDCs, which represent around 60% of global emissions. NDCs differ in their degree of detail, but also on whether the pledges made are conditional on factors such as international support, the actions of other countries or the ability to pass laws. NDCs aside, many countries have announced pledges that are not (fully) in NDCs, including Net Zero pledges. More generally, a pledge to achieve a certain goal is quite different from having the policies, investment and technological readiness in place to credibly achieve that goal. In a recent report, the UN (see full report ‘The Heat is On’ here) assessed the impact of recent NDCs and pledges on future emissions and temperature change by the end of the century. If all unconditional pledges are fully implemented, global warming is estimated at 2.7 degrees, while that drops to 2.6 degrees once conditional pledges are added. The implementation of net zero emission pledges would see these estimates lowered to 2.2 degrees. The IEA comes to similar conclusions in another recent report (see full report ‘World Energy Outlook 2021’ here). Under its Announced Pledges Scenario (APS) - which assumed announced net zero pledges and enhanced NDCs are implemented in full – warming is limited to 2.1 degrees by 2100. Meanwhile, in its Stated Policies Scenario (STEPS) - which reflects current policy settings - the global average temperature rise reaches 2.6 degrees by the end of the century.Emissions start to flatten out or even turn modestly lower by 2030 under these scenarios, but obviously not by enough to be on the path of global net zero and warming of 1.5 degrees. For instance, under the IEA projections, global carbon emissions are 1% higher annually in 2030 relative to 2019 under STEPS and 6% lower under the APS. However, emissions would be 40% lower in 2030 on the way to its Net Zero (NZ) scenario in 2050, which would achieve high chance of limiting warming to 1.5 degrees.

Pathway to Net Zero matters

Governments have made some progress in terms of both the updated NDCs and pledges over recent months and years. The UN calculates that compared to previous unconditional NDCs, the new pledges reduced projected emissions by 7.5%, while the number of net zero pledges has risen significantly. As such, one could take comfort in the idea that policy is moving in the right direction and could eventually speed up and get to Net Zero in the end. However, it is still highly uncertain whether policy will be accelerated. In addition, the road to Net Zero matters. It is the cumulative stock of emissions that determines the temperature rise and delayed action adds to that stock even if rapid progress is made later. For instance, the NGFS Delayed Transition scenario sees emissions getting quite close to net zero in 2050, but because they do not start coming down before 2030, global warming still exceeds 1.5 degrees. That is even assuming rapid progress with emissions in the decade after this one.

Methane pledge a possible breakthroughs during the conference

The US and EU announced the Global Methane Pledge (GMP) last month, an initiative to reduce global methane emissions by at least 30 percent from 2020 levels by 2030, which will be launched at the conference. Delivering on the pledge would reduce warming by at least 0.2 degrees by 2050 according to the founder members. So far 28 countries and the EU have joined the pledge and the group accounts for just over a quarter of global annual methane emissions on our calculations. This reflects that six of the largest ten emitting countries have not yet supported the pledge. So there still seems a lot of work to at the conference, to make the pledge a significant step forward in terms of overall greenhouse gas emissions.

Financial flows to developing countries

At COP15 developed countries originally committed to a collective goal of mobilising USD 100 bn per year by 2020 for climate action in developing countries, while this commitment was extended to 2025 at COP21. The goal is to provide support to developing countries in their efforts to mitigate and adapt to the adverse impacts of climate change. The OECD tracks these flows (see here). Although data is only available until 2019, it is unlikely that the goal was met last year based on the trends up until that point. However, forward-looking scenarios provided again by the OECD (see here) suggest that the goal could be exceeded in 2023 and remain above the target in 2024 and 2025. This is on the basis that ‘the public climate finance provided by bilateral and multilateral providers converges over time towards their stated intentions, pledges and targets’. Canada and Germany have launched a climate finance Delivery Plan on the basis of this framework (see here). As well as an increase in the scale of finance, the plan sets out a number of guiding principles for collective action, including increasing finance for adaptation and prioritizing grant-based finance for the poorest and most vulnerable countries.

Adaptation efforts

COP 26 sets out three aims to step up adaptation efforts. First of all, it calls for plans and more finance (see also above) to be put in place to improve early warning systems, flood defences, and build resilient infrastructure and agriculture. Second, further action to protect and restore habitats. Finally, all countries should set out plans and actions in the above areas in an ‘Adaptation Communication’. The goal in this area and what would constitute success is not very concrete.

The Paris Rulebook

COP26 aims to finalise the so-called ‘Paris Rulebook’, which are the rules needed to implement the Paris Agreement. Although some progress has been made in this area in recent COPs, key outstanding issues remain up in the air. The main focus here is on a framework that facilitates effective international co-operation. This includes market and non-market based approaches. Market mechanisms include an international emissions trading system, supervised by the UN, which would allow public and private entities to trade emissions reductions. This requires accurate measurement and clear rules. Governments also aim to agree common time frames for NDCs to promote consistency and comparability.