As we reflect on all that’s happened in week 1 of COP26, we at Ortec Finance are thrilled to hear the number of pledges and statements that include an explicit end date, the phase out of coal, and a ramp up of global ambition. We do however, remain critical of the parties notably absent from these international pledges— especially as global CO2 emissions have returned to pre-pandemic levels.
Many members of our Climate & ESG Solutions team have arrived in Glasgow— ready for week 2, where, for the next few days the team onsite will report on the happenings in and around COP26.
End of Deforestation
Trees are vital for absorbing carbon dioxide, preventing erosion, and mitigating drought. Despite these vital services, current estimates show that forests the size of 30 football pitches are being cleared every minute. On Tuesday, more than 100 world leaders, whose jurisdictions account for over 90% of the world’s remaining forests, agreed to halt and reverse forest loss and land degradation by 2030. Notably, Brazil was among the signatories.
Such a declaration was met with some skepticism, remembering the failure of a previous international agreement to end deforestation back in 2014— an agreement that only yielded 40 countries’ support, with Brazil and Russia absent.
Whether true progress to combat deforestation will be legislated and regulated, only time will tell. Clearly it is important for land use to be captured in financial scenario-analysis. Ortec Finance is happy to say that this is on our innovation roadmap both from a risk (Climate MAPS) and alignment (Climate ALIGN) perspective in 2022.
Global Methane Pledge
More than 100 nations have pledged to cut global methane emissions by 30 percent between now and 2030 in an effort to quickly and significantly curb global warming. Methane is a very potent greenhouse gas and is also known as the second-largest contributor to climate change, after carbon dioxide. It is emitted from gas and oil wells, pipelines, livestock, and landfill sites. Unfortunately, some of the largest methane emitters did not sign up— China, India and Russia.
The International Energy Agency (IEA), was very enthusiastic about this pledge. Fatih Birol, executive director of the IEA , said that ‘If we fulfil this pledge over the next 10 years the impact is [the same as] switching … all the cars of the world, all the trucks of the world, all the planes of the world [and] all the ships of the world to zero emission technologies; [the] entire transportation sector.’ If fully implemented the world would avoid 0.2oC of additional warming. Together with our strategic partner Cambridge Econometrics, we will be following this development closely.
For more information, check out Birol’s blog: https://www.iea.org/commentaries/cop26-climate-pledges-could-help-limit-global-warming-to-1-8-c-but-implementing-them-will-be-the-key.
On Thursday, more than 40 countries signed the Global Coal to Clean Power Transition Statement. Of these 40 countries, at least 23 have made new pledges to phase out coal power, including Indonesia, Vietnam, Poland, South Korea, Egypt, Spain, Nepal, Singapore, Chile, and Ukraine. In the new Global Coal Pact, countries also committed to scale up clean power and ensure a just transition away from coal. The outlook would be even more optimistic if only US, Russia, China, India, and Australia, the major coal consumers and producers, also committed to phase out coal production and use.
The reason why the US, the world’s third-largest coal consumer, refrained from signing the statement is unclear. Commentators point to the continuous negotiations over the infrastructure bill— taking a clear stance on coal at COP26 may upset senators from coal-dependent states. Back at their home base, the long deliberated $1.2 trillion USD infrastructure bill finally passed in the House on Friday night, delivering a major domestic win for the Biden Administration after what some might say was a disappointment on the international stage. The passing of this bill marks the first major step to decarbonize the US energy mix.
India, Stealing the US’ Thunder (?) by Announcing Net Zero by 2070
Prime Minister Modi’s pledge for India to be net zero by 2070 was also seen as a highlight in the first week of COP26. Many observers describe it as a highly ambitious target for a developing country of 1.4 billion people to commit to net zero at all.
India’s 2070 pledge means that all major emitters (China, US, and India) have now declared a net-zero deadline. If these countries stick to their commitments we can soon look forward to an accelerated decarbonization. Although President Xi did not attend COP26 in person, just before the conference began China formalized its 2060 net zero target and committed to reaching peak carbon before 2030.
A Tougher NGFS
On Wednesday, the NGFS (the Central Banks and Supervisors Network for Greening the Financial System) reiterated their willingness to contribute to the global response required to meet the objectives of the Paris Agreement. They will do that with tougher guidelines to improve the resilience of the financial system to climate-related and environmental risks, and encourage the scale-up of financing flows needed to support the transition towards a sustainable economy. In their “NGFS Glasgow Declaration: Committed to Action”, the network announced that in the three years since its foundation, the membership has grown from 8 to 100 central banks and supervisors and 16 observers. Ortec Finance will be launching NGFS-compliant Climate MAPS scenarios in Q1 2022.
On Tuesday, an agreement was reached on the so-called Breakthrough Agenda that strives to accelerate the transition to renewable energy and expedite the uptake of electric vehicles. Forty countries have signed the Breakthrough Agenda, among them are Nigeria, Egypt, and India. Part of the agenda are the Glasgow Breakthroughs – a collection of global targets that aim to makes clean technologies and sustainable solutions the most affordable, accessible, and attractive option in each of the high-carbon sectors globally by 2030, that reads as follows:
- Clean power is the most affordable and reliable option for all countries to meet their power needs efficiently by 2030.
- Zero emission vehicles are the new normal and accessible, affordable, and sustainable in all regions by 2030.
- Near-zero emission steel is the preferred choice in global markets, with efficient use and production established and growing in every region by 2030.
- Affordable, renewable, and low carbon hydrogen is globally available by 2030.
This is yet another technological development that will be incorporated into our Climate MAPS scenario assumptions if they are indeed implemented.
Reality Check: Global CO2 Emissions Back to Record Levels
Amidst all the optimism that COP26 will deliver on real action, there was a sobering moment on Thursday, with the Global Carbon Project (GCP) report publication. The research shows that 2022 could set a new record for global emissions. The world could avoid that from happening if the expected increase in oil consumption as travel returns to pre-pandemic levels, is offset by a significant reduction in coal burning as seen in 2021.
Scientists who contributed to the report said the finding is a ‘reality check’. During the pandemic, CO2 emissions fell by 5.4%. With all the promises of build back greener, fossil fuel consumption has grown faster than expected in 2021, as the report shows.
Emissions of the world’s biggest polluter, China, increased slightly during the pandemic in 2020 and are expected to rise another 4% in 2021. India will see CO2 rise 12.6% in 2021, almost double that of fall 2020.
EU Taxonomy Risks Dilution
Very worrying news came from Brussels over the weekend— The EU moves closer to integrating natural gas as ‘green’ in the bloc’s sustainable finance taxonomy. This so-called EU Taxonomy is a set of stringent, scientifically-backed definitions (or KPIs) for what constitutes as ‘green’ in order to provide standardization of what is and is not sustainable in order to facilitate the global transition. If natural gas were to make it into the EU Taxonomy, such a move could potentially damage the EU’s credibility on green finance.
As we enter into week 2 of the Glasgow COP, we will keep a close eye on Article 6 and the Paris Rulebook— in particular how all of these talks impact the financial sector in general and our clients in particular.