If COP26 was about commitments, then COP27, to be held in Egypt in November, will need to focus on implementation. CRU expects that the negotiations will be fraught. At COP27 there will be increased pressure on governments to detail how they will transition, but given inflation, the uneven Covid-19 recovery, high food prices, global conflict and the energy crisis, expectations of significant breakthroughs are low.
Issues surrounding loss and damage, in other words who should pay for the harm caused by climate change, have not be resolved and remain a key stumbling block.
Yet, some key themes will likely emerge, which could have significant impacts on business decision making. Watch out for progress on frameworks, an increased focus on nature and biodiversity, and calls for more spending on adaptation.
Loss and damage will be a central issue at COP27
We expect that COP27 will see much debate surrounding loss and damage – i.e., who should pay for the harm caused by climate change. In 2009, richer nations pledged to “mobilise” $100 bn in “climate finance” annually by 2020, to help emerging nations mitigate and adapt from the impacts of climate change. This target was missed and remains a contentious issue. Progress at the June 2022 Bonn UN climate talks was modest, with limited compromise found. In part, these talks aimed to clear the way for smoother discussions in Sharm el-Sheikh, Egypt in November.
As hosts, and therefore with influence on the agenda and tone of the negotiations, the Egyptian government has stated its aim to elevate and profile loss and damage. The mobilisation of capital for emerging markets and developing economies will be widely discussed at this COP. There is also a desire to make this more of an African and emerging economies-focused COP, with more discussion surrounding a ‘just transition’.
Away from governments, there is a growing focus on portfolio destruction and stranded assets, particularly among institutional investors who typically have long-term holdings. The call for more blended finance – to de-risk investments for the private sector – is growing. The OECD defines blended finance as “the strategic use of development finance for the mobilisation of additional finance towards sustainable development in developing countries”. This could help enable private-sector capital flows into riskier green investments in these regions.
Methodologies and frameworks could be a bright spot
Redirecting capital flows towards green technologies and sectors will require improved frameworks and regulations. Globally, many exchanges and investors are calling for standardised and mandatory disclosure of corporate emissions, detailing of transition plans, and reporting of green revenue streams.
A move towards more standardised frameworks is progressing, in part due to the work from the Task Force on Climate-related Financial Disclosures (TCFD). The G7 announced plans to make the TCFD’s recommendations on disclosures mandatory in 2021. New proposed rules from the US Securities and Exchange Commission (SEC) could force US-listed companies to detail climate-related risks, emissions, and net-zero transition plans.
Progress on frameworks could prove to be a bright spot at COP27.
Nature and biodiversity - the next big thing?
Over the last few years, there has been an increasing focus on two other important environmental issues – the dramatic degradation of nature and loss in biodiversity. The UN Biodiversity Conference in Montreal in December 2022 could prove significant in raising commitments and ambitions, with implications for businesses in commodity markets. These issues are interrelated with climate issues, with nature being affected by climate change and a partial solution to it.
Sourcing is one area which might be affected. The Council of the European Union, for example, agreed in June 2022 to set mandatory due diligence rules, focusing on deforestation, for all operators and traders who place, make available, or export many soft commodities to the EU market.
In 2021, a new Taskforce on nature-related financial disclosures (TCND) was established. Its aim is similar to that of the TCFD: “To develop and deliver a risk management and disclosure framework for organisations to report and act on evolving nature-related risks, with the ultimate aim of supporting a shift in global financial flows away from nature-negative outcomes and toward nature-positive outcomes”.
While COP27 will not address all these issues directly, we expect that it will help to set the scene for the Montreal conference taking place only a few weeks later. CRU details our thinking on the topic here.
Adaptation needed as emission reductions are far off target
The 2015 Paris Agreement was about temperature outcomes. COP26 in 2021 tried to keep a 1.5°C future possible. However, current nationally defined contributions (NDCs) do not get us close. According to the United Nations Framework Convention on Climate Change (UNFCC), based on current NDCs, global emissions would rise by 2030 – and not decrease by the 45% needed to limit the increase of global temperatures to 1.5°C above pre-industrial levels. Indeed, even limiting the world to 2.0°C warming is under threat. There will be pressure at COP27 to enhance commitments, but we do not expect any major increase in ambition given the multiple headwinds.
Up to now, policymakers, particularly in advanced countries, have focused on climate-change mitigation. There is a growing realisation that climate-change mitigation alone will no longer be enough. Societies and economies will need to adapt to climate change, and the increased shocks from events such as record heatwaves, storms and droughts it will cause. We expect climate-change adaptation to be a key issue at COP27. Huge quantities of capital will need to be mobilised.
Adapting to climate change could lead to significant changes for construction, infrastructure and transport markets globally. This will not diminish the need for continued, and vastly increased, spending on mitigation, but it will be a competing financial consideration for governments with stretched budgets. Adaptation could also have an influence on asset valuation, with preferential pricing emerging for less vulnerable assets.
Carbon pricing could help channel capital
CRU believes that carbon prices can help channel capital into green technologies. The role of a higher carbon price, as of that in Europe, is simply to lift the cost of fossil-based energy such that, more expensive, non-fossil alternatives become economically viable.
Carbon pricing schemes are regarded as one of the most effective ways to reduce carbon emissions. As such, it is not surprising that they play a key role in governments’ policy toolkits for addressing climate change.
Energy transition is central to climate goals – but progress is slow
Energy will be at the heart of the COP27 negotiations. To decarbonise, the world will need to radically change how it consumes and produces energy. However, the vital and fragile nature of energy markets have come sharply into focus, with prices soaring after Russia’s invasion of Ukraine.
High energy prices will hamper short-term decarbonisation efforts, dampening the potential for ambitious commitments at COP27. High energy prices should mean that low carbon alternatives, such as renewable energy generation systems or electric vehicles, become economically viable. Out thinking on this, using CRU’s proprietary Abatement Curve, is detailed here.
Another crucial aspect of energy markets is the need for electricity to grow as a proportion of primary energy. New technologies which are compatible with net zero – such as green hydrogen, electric vehicles, and heat pumps – will consume vast amounts of electricity. This will add further strain onto grids, at a time when moving to low carbon alternatives is going to be causing drastic changes.
Coal was one of the biggest points of acrimony at the COP26 negotiations. Globally, CRU forecasts that the share of coal generation in the electricity mix will decline this year to 34% from 35% in 2021, primarily because of falls in China. However, CRU forecasts that coal will be used extensively in the global energy market through the mid-term. COP27 is unlikely to drive significant changes to coal markets.
Key themes will emerge at potentially fraught negotiations
At COP27, there will be pressure on governments to enhance commitments, but given inflation, the uneven Covid-19 recovery, high food prices, global conflict, and the energy crisis, we do not expect any significant breakthroughs, especially in terms of binding emission reduction goals.
Instead, we expect that loss and damage, a just transition, and pressure for more financing for emerging markets from richer nations, will take centre stage in Egypt. CRU predicts that the negotiations will be fraught but progress on frameworks and methodologies could be a significant bright spot. Other key themes include more discussion on adaptation alongside mitigation, and an increased focus on nature and biodiversity.
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