Building Back Better – Globally

At first glance the decision to delay the largest climate conference in history – COP 26 (1) – appears to have been made on practical grounds. COVID-19 had made convening 30,000 delegates from 197 countries impossible. For the conference, it is also true that its UK hosts were simply not ready. Although the UK Government is well accustomed to dealing with many issues at once, 2020 was different. A uniquely difficult year, including Brexit, has seen institutional capacity at times overwhelmed.

However, the ‘long grass’ strategy of delaying COP 26 to late 2021 is beginning to look like remarkably good politics. Until now major international players have not been aligned on the primary objective of the conference – to implement international mechanisms to reach net-zero emissions by mid-century. Without basic alignment the objectives of COP26 cannot be achieved. Six months on from the decision to delay, China has pledged to reach net zero, and the change of US Administration puts the same within reach for the US.

As the year draws to a close, what did 2020 bring in terms of progress towards net zero emissions? 

1. While net-zero target setting is in fashion, net-zero government spending and investment is not.  In recent months, Japan, South Korea, China and the EU have all made commitments to reach net zero. However, 2020 was a missed opportunity to direct COVID-19 recovery stimulus towards net zero investments. More than six months on from the first wave of lockdowns, pandemic rescue packages are dominated by spending that has harmful environmental impact, including high-carbon infrastructure, which outweighs any positive climate benefits of the greener component. Vivid Economics, which compile an index of green spending measures around the world, showed that only four of the world’s 18 largest economies have packages that improve the environment. (2)
2. Momentum grew in the financial sector and among major energy multinationals. In 2020, action by corporates and the financial sector increased in voluntarily reporting their emissions. In its 2020 status report, nearly 60% of the world’s 100 largest public companies support the recommendations of the Taskforce on Climate-related Financial Disclosure (TCFD).(3) Some major corporates have been responding to these concerns in other ways, with several of the oil majors lowering the value of their assets as a result of the expected global transition to cleaner energy sources.(4) Regulatory actions have also begun, with both the UK and NZ claiming to be the first to mandate TCFD reporting!
3. Global investment in renewables hit record levels. In 2020 almost 90% of new electricity capacity investment is renewable, with just 10% powered by gas and coal.(5) The new investment was driven by investment in the US and China where renewables are often the lowest cost source of electricity. If these trends continue, renewables are on track to provide one-third of global electricity by 2025.

In the coming year, further important developments to look out for include: 

1. A race to the top between US and China. In the US, even if only a compromised version of the Democrats’ substantial US$2tr. green stimulus were to pass, this could still produce a transformative effect, and many other countries are impacted by the US. Much relies on the dynamic between the US and China, which in March 2021 is to set out plans for its next five-year plan. The recent commitments to net zero in China may signal a wider shift in spending towards low-carbon technologies and infrastructure.
2. Widening efforts in climate finance and regulation. Regulation around TCFD could spread beyond the UK and NZ as the appetite for important policy commitments gathers pace. The efforts of the financial community continue to widen, with investors now calling for the Big Four accounting firms (EY, Deloitte, PwC and KPMG) to ensure that climate-related risks are adequately reflected in the company financial statements that they audit.
3. Development of the Carbon Border Adjustment Mechanism (CBAM) in the EU. Trade policy is an important new front in climate policy making, as major producers of industrial goods want to preserve their competitiveness against a backdrop of uneven global carbon prices. The EU is considering imposing the CBAM, which would levy costs at the border depending on the carbon emissions in imported goods. Producers in countries with their own carbon prices could be exempt, creating pressure to implement their own carbon price. Even the expectation of such a mechanism could be an important trigger for companies around the world to begin to decarbonise manufacturing, one of the most difficult sectors in the net zero transition.

Regardless of whether these specific developments come to pass, the economic recovery, a supportive US administration and diplomatic energy leading up to COP-26 are sure to make 2021 a vital milestone on the path towards net zero.

Footnotes

1 The Conference of Parties, known as COP, is the decision-making body responsible for monitoring and reviewing the implementation of the United Nations Framework Convention on Climate Change. The UK Government will host COP 26, which will take place in Glasgow from 1 – 12 November 2021.

2. https://www.vivideconomics.com/casestudy/greenness-for-stimulus-index/ 

3. https://www.fsb.org/2020/10/2020-status-report-task-force-on-climate-related-financial-disclosures/#:~:text=Since%20then%2C%20more%20than%201%2C500,the%20TCFD%20recommendations%2C%20or%20both.

4.  The majority of investments do not currently report the impact of climate change on their valuation, which is leading to a systemic over-valuation of emissions intensive industries and under-valuation of potential opportunities.

5. https://www.iea.org/reports/renewables-2020