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Insight 17.11.2021

COP 26 follow-up

COP 26 follow-up

The 2015 Paris Agreement called for a 5-year cycle of updates on nationally determined contributions (NDC). This latest update would have occurred in 2020 but was postponed due to the COVID-19 pandemic.

Key takeaways

  • In the run-up to COP26, the G20 met in Italy with the ambition of delivering optimistic climate targets for the rest of the world to follow. The group agreed to “enhance” their respective 2030 climate plans, and while this reflects a positive direction of travel, it would still result in aggregate emissions surging 43% above 2010 levels; in comparison, a 45% reduction is needed to achieve the 1.5°C target. During the G20 talks, member countries also agreed to deliver COVID-19 recovery plans with “an ambitious share” of their budget supposedly targeting climate change. 

    ​Building on this, COP26 unfolded over the last couple weeks and came to a close on Saturday 13 November with a list of agreements and action points. The successes of the conference include a breakthrough agreement on fossil fuels, agreement on a 45% reduction in emissions by 2030, progress on the global carbon trading mechanism, and further discussions on the need to tackle methane emissions. Importantly, the International Energy Agency (IEA) stated that if all pledges come to fruition, the world is on track for warming of 1.8°C, which represents an improvement both from the 2.7°C rise calculated by the United Nations using the 2030 pledges and targets that existed prior to COP26, as well as the 2.1°C rise obtained by factoring in 2050 net-zero objectives.

COP26 follow up chart.png

  • The biggest achievement of the conference was the methane pledge, signed by over 100 countries accounting for some 42% of global methane emissions. Methane is a much more potent greenhouse gas than CO2, making it a significant driver of climate change and the collective agreement targets a 30% reduction by 2030. Even though some of the largest emitters, such as China, Russia and India, did not sign up, it would be enough to hold a rise in global temperatures down to 1.8°C, as per the IEA scenario analysis.
  • Another main development was Brazil signalling its willingness to compromise on Article 6 from the 2015 Paris Agreement, enabling negotiations to reach a deal on global carbon trading. Article 6, amongst other things, aims to establish a policy foundation for an emissions-trading system, which could help lead to a global price on carbon. Brazil was in complete opposition to this in 2019 at COP25 and this latest development is a key success, as the country’s Amazon rainforest will play a significant role in the new carbon-offset scheme. 
  • Finance is a powerful and essential tool in the fight against climate change. The Glasgow Financial Alliance for Net Zero (GFANZ) created by Mark Carney to consolidate decarbonisation commitments for financial institutions reached over 450 members representing USD 130 trillion in capital to net zero. GFANZ will help financial institutions as well as governments establish better climate-related reporting structures and help develop further climate-risk-specific regulatory standards. For the first time, an agreement was reached to establish the mechanisms required to provide help to countries struck by catastrophic climate events, but the finer details will be determined next year in Egypt at COP27.
  • A report released by the COP26 organisers confirmed that developed countries raised significant funding to help developing countries tackle climate change, but did not reach their target of USD 100 billion. The estimated amount is closer to USD 83–88 billion and caused many developing countries to point out that developed countries were not leading by example. In the larger scheme of things, BNEF estimates that USD 644 billion was invested in renewables, electric vehicles and other technologies behind the energy transition in 2020, with about USD 240 billion actually going to developing countries, albeit mainly in China, and most of the funds were raised and spent locally.
  • India, the fastest-growing economy in the world, pledged for the first time ever to reach net-zero CO2 emissions, although its decarbonisation promise only puts the country in line to reach that goal by 2070, while most countries promise to hit a net-zero CO2 goal by 2050, with China aiming for 2060. By stretching its time horizon, India is effectively trying to balance its aspirations for economic development and decarbonisation. Moreover, India also announced its intention to reach 500 GW of non-fossil energy capacity by 2030, up from 450 GW previously, which represents 3.2 times the current non-fossil capacity.
  • Saudi Arabia, Thailand and Vietnam also announced net-zero pledges for the first time. Although some of these commitments still lack concrete, science-based, long-term emission-reduction plans, we can only hope that with legislated targets in place, various policies across countries helping the climate transition will likely get better chances of being accepted. As BNEF rightly points out, only 10% of global greenhouse-gas emissions were covered with net-zero goals in January 2020. With these latest announcements, 62% of emissions are now covered with net-zero goals, and another 27% are under discussion.
  • The talks also touched on the science and innovation needed to limit global warming. According to BNEF, early-stage climate-tech investment sector funding reached USD 36.8 billion in the first nine months of 2021 alone, with an increasing belief that this sector can not only help limit global warming but can also generate significant returns. Early-stage companies in that sector cover a wider range of industries and solutions than ever before, from renewable power to sustainable materials, meat alternatives and satellites. In this context, the mobility sector has attracted the highest share of funding. Coincidently, 24 nations accounting for 20% of the global auto market pledged at COP26 to have all new cars and vans to be zero-emission by 2040, or 2035 in leading markets. Another seven countries agreed to work intensively to boost electric vehicle deployment in their countries, setting the stage for zero-emission vehicles to account for at least a quarter of the global fleet.
  • A breakthrough agreement on fossil fuels was reached by 20 countries, the intention being to end overseas financing, although it must be said that major global contributors are missing from the list. Similarly, the UK initiated the “consign coal to history” programme. The idea of phasing out coal-generated power by 2040 is a good one; however, the countries that have joined this initiative account for less than one-tenth of global coal-fired generating capacity and many of them had already announced their intention to phase it out anyway. One exception is South Africa, which struck a deal with France, Germany, the US, the UK and the European Union to be granted USD 8.5 billion over the next 3–5 years to help the country phase out coal-fired power plants that supply 80% of the country’s electricity generation. This deal should particularly benefit Eskom, the USD 28 billion-indebted state-owned power utility company that has been under pressure for a number of years, but more importantly, this deal paves the way for more multilateral agreements of this kind.
  • An encouraging pledge was made by 100 countries which account for over 85% of the world’s forests to end deforestation by 2030. The pledge is backed by USD 19.2 billion, of which USD 7.2 billion will come from corporations who will cease investments in activities linked to deforestation; however, this remains well under the USD 711 billion per annum needed up to 2030 to reverse biodiversity decline. Indonesia was one of the 100 countries who made this commitment, however, the country’s vice foreign minister later announced that the country had only agreed to keep its forest cover steady, meaning that trees could still be cut down and replaced to support economic growth which remains the country’s priority. That said, this sort of global commitment is a positive development ahead of next year’s COP15 on biodiversity restoration.
  • At the end of the conference, the US and China boosted sentiment by posting a joint statement on enhancing climate action in the 2020s. The news went down well with the public, but arguably lacked concrete and specific pledges from either country: the bar was set quite low in terms of cooperation between the two nations with the largest CO2 footprints, so any kind of entente between the two nations should be considered positive.

Adrien Cambonie
SMID CAP & ESG Analyst
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Tidjan Ciss
Equity Research Analyst
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