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COP 27 – Five key things

by SuperiorInvest

Wood Mackenzie Energy Transition Team.

The preparation for COP27 was unfavorable. Only 26 of the 193 countries have tightened their pledges – made a year ago in Glasgow – to cut emissions by 2030, while the war between Russia and Ukraine has acted dramatically to change short-term priorities. So what did Sharm El-Sheikh bring and where did it fail? Prakash Sharma, Elena Belletti and Nuomin Han from Wood Mackenzie’s Energy Transition team share their five key takeaways.

First, restating the energy trilemma. COP27 was heavily influenced by the immediate political needs of energy security and affordability. However, progress on the faster sustainability agenda launched last year will slow, at least in the near term. Sharm El-Sheikh instead emphasized the long-term goals of keeping alive the 1.5°C path in line with the Paris Agreement.

Proposals to build on the commitment at COP26 to “phase out” coal (seen as a prelude to fossil fuels in general) did not find agreement. Major energy consumers divested and joined the existing chorus of producer nations. The energy crisis means that fossil fuels could play a bigger role in solving the energy crisis in the next few years.

Impacts: COP27 signaled that global climate change efforts are shifting from mitigation to adaptation. With fossil fuels still very much in the mix, more CCS or alternative carbon removal technologies will be needed to reach net zero by 2050. The good news is that government support for CCS has accelerated (Q45 in the US and tax incentives and funding support in Europe, Canada, Australia and Malaysia, for example).

Second, redressing losses and damages. Countries vulnerable to the effects of climate change will have additional funding available. As extreme temperatures, drought, floods, storms and forest fires become more frequent, developing countries have called for stronger adaptation finance commitments.

Impacts: a significant step forward towards a fair and just transition. It is not yet clear how much money will materialize. Developed economies fell short of the annual climate finance target agreed in 2009, with only $83 billion collected in 2020 of a $100 billion pledge. Member countries have agreed to create a new framework for the adaptation fund in time for COP28 in 2023, after which contributors and beneficiaries will be determined.

The financial demands can be enormous. Some studies estimate adaptation costs alone to be closer to $400 billion per year, while the Intergovernmental Panel on Climate Change (IPCC) estimates mitigation costs at three to six times the capital flows committed so far.

A risk for signatories could be an increase in litigation related to historical climate-related damages.

Third, voluntary carbon markets. Disappointingly, there were few concrete actions. Governments have postponed until next year the signing of an agreement to improve regulation that would make carbon trading more transparent. The current wording could lead to double counting, as governments and corporations are not required to disclose details of their emissions reduction deals. The new supervisory body has been tasked with developing a new proposal on this issue, which will be discussed at COP28.

Impacts: private and regional initiatives are flourishing despite governments dragging their feet. In the absence of a national carbon tax, the US is considering an energy transition accelerator that would see US businesses offset their emissions by buying carbon credits from low-income, fuel-dependent countries. India and Saudi Arabia have taken steps to create and trade national carbon registries. Singapore launched its Carbon Warehouse Initiative with the ambition to become a key market for all international credits.

Fourth, methane pledges are gaining momentum. A key element in the fight against climate change is methane, which is responsible for 30% of global warming. Only five other countries joined the global methane pledge at COP27. The total number of country endorsements now stands at 151 (including EU members), up from just over 100 after COP26.

Impacts: Methane savings could actually close the carbon reduction gap by 2030. Although work still needs to be done to meet methane commitments, countries still appear committed. The Biden administration’s inflation-reduction bill includes a methane leak tax. Meanwhile, Brazil’s new president, Lula Da Silva, has committed to zero deforestation by 2030, a boost that could be crucial to saving global biodiversity.

Fifth, the role of finance. COP27 reiterated that finance is key to a stable global economy. Although access to finance has improved over the past year, climate change competes with other global crises, from inflation and energy shortages to rising capital costs. Not enough money is flowing into the right sectors of the economy in time to build the technologies of the future and break the hydrocarbon habit.

Impacts: If the governments of major economies and global institutions like the World Bank and the IMF can put aside their differences and work together, finance can flow. Leadership will be the catalyst.

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