COP26 in Glasgow: all you need to know – Avantfaire Investment Management Limited

The COP26, concluded on 12 November in Glasgow, was to help member states of the United Nations (UN) discuss climate change and how countries are to address it. Being part of the annual Conference of the Parties (COP) series dating from 1995 in Bonn, Germany, this summit was based on the United Nations Framework Convention on Climate Change (UNFCCC) to “stabilise greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system”.

The COP26 was held in Glasgow, Scotland © Reuters / AvantFaire

This year’s COP26 summit built upon the 2015 Paris Agreement and had four key points: ways to secure global zero net emission by 2050 and keep the 1.5C target within reach, the protection of communities and natural habitats exposed to climate change, financing the risk mitigation from global warming, and global cooperation. Some 30,000 delegates attended, representing different entities like governments, businesses, NGOs and civil society groups.

The COP26 is a continuation of the Kyoto Protocol in 1997 and the Paris Agreement in 2015. The Kyoto Protocol, also known as COP3, included legally-binding emission targets for developing countries on six major greenhouse gases by an aggregate of 52.% below 1990 levels. In 2015, the Paris Agreement, or COP21, sought to limit global warming to 1.5C above pre-industrial levels in 1750. In addition, countries have aimed to peak global greenhouse gas emissions as soon as possible and become carbon-neutral by 2050. Though the Agreement was the first multilateral binding agreement that brought all nations to address climate changes and their effects as one, it was up to each country to find their ways to achieve the common goal.

Why is Article 6 of the Paris Agreement so important?

One of the most important negotiations around COP26 was the implementation of Article 6 of the Paris Agreement. Rectifying states should promote sustainable development and environmental integrity, and carbon emission mitigations are transferable in a transparent manner. Proceeds from the mitigation sharing should also cover the adaptation costs for developing countries particularly vulnerable to climate change. However, the lack of commitment from many developed countries has fueled resentment and a sense of unfairness. African countries have only contributed to only 2-3% of greenhouse gas emissions but suffer disproportionately from the impacts of climate change. Countries like Nigeria, Algeria and Angola are highly dependent on oil exports for revenues, though most of Africa’s population still lacks access to electricity and the basic energy needed for cooking. Without adequate financial and infrastructural aid, shifting to more sophisticated sources of energy would be very challenging in Africa.

Negotiations were mainly on how countries trade carbon offsets and whether non-market-based approaches to cut emissions were possible. While large and highly forested countries have enough natural carbon sinks to meet their emission cut goals, most developing countries need to capture and store their carbon emissions. But that requires foreign investment. Creating a market-based mechanism to facilitate investments vital for the developing states has become a focal point of the COP26, and members of the Global South find this a particular concern where capital is scarce despite ample potential.

The failures of the Clean Development Mechanism under the Kyoto Protocol in upholding human rights and environmental integrity has driven the Global South’s anxiousness on facilitating a carbon trading mechanism that can fund the infrastructure change necessary for mitigating climate change costs while bringing down emissions. Loopholes like countries intentionally creating emission hotspots to be paid to shut down or carbon reductions relying on investments have raised concerns.

A meaningful implementation of Article 6’s would require developed and developing countries to work together. Issues like allocating funds for the necessary development or settling how carbon credits should be counted during a trade are fundamental. For example, the banning of “double counting” of emission cuts, which does not allow both the buyer and seller of an emission credit towards their climate target, was a heated topic between developed states and Brazil, a developing country active in carbon trading. A majority of countries believe double-counting would hinder global carbon-reduction efforts, or worse, lead to an increase of emissions with more credits available in ratio than emissions. Brazil argued otherwise, saying it had the right to this arrangement. The issue was eventually settled in the COP26 negotiations, in which the credit-generating country could decide whether to authorise it for sale to other nations or to count towards their climate targets.

Why are the negotiations so difficult?

Ministers and climate negotiators had faced tough negotiations on seeing countries and companies pay to reduce emissions and investment in return for emission reduction credits.

Fossil fuels haven’t been mentioned in a UN climate summit text until now. This year’s proposal draft explicitly named “unabated coal power” and “inefficient subsidies” as the key problems. Despite the focus on carbon fuels, attempts to mitigate the impact of carbon emissions have faced strong resistance from leading carbon producers. “Let’s leave Glasgow with strong action on coal power, on subsidies for fossil fuels,” said EU climate chief Frans Timmermans. “Without these concrete steps, our [climate] targets will be utterly meaningless.”

Meanwhile, public-interest financial NGO IFRS Foundation has announced a series of sustainability disclosure standards during COP26. The move was an answer to investors’ growing need for high-quality disclosures on climate and other sustainability issues. The formulation of a new International Sustainability Standards Board (ISSB) to develop a comprehensive global baseline of sustainability disclosure standards. The ISSB will also consolidate the Climate Disclosure Standards Board and the Value Reporting Foundation, which houses the Integrated Reporting Framework and the SASB Standards, by June 2022. Observers expect this move to set the technical foundation for global sustainability disclosure standard-setter for the financial markets while fulfilling the growing and urgent demand for a streamlined and formalised standard on corporate sustainability disclosures.

However, pushback from the private sector still persists. More than 500 delegates representing fossil fuel companies and associations have attended the summit and have tried different tactics in defending the interests of fossil fuel companies. Meanwhile, some of the world’s top-selling car makers like Toyota and Volkswagen have not signed an emission pledge proposed during the COP26 summit. Toyota defended its decision, citing that its global business would make the commitment difficult, and its focus on hybrid and hydrogen-fuel-cell cars would be sufficient. However, the former only reduces emissions by one third compared to petrol cars, and the market for the latter remains small.

Developing countries urgently need funding to compensate for climate-related losses. Still, the mood among developing nations is turning sour as trust is wearing thin. “COP26 has been the ‘two faced’ COP. Rich countries say one thing in their press releases, yet inside the negotiations, they do the opposite”, said Mohamed Adow, director of Power Shift Africa, a Nairobi-based climate think tank, in an email to Axios. “On finance, they talk up the trillions that could be mobilised outside. Yet, inside they can’t even deliver the $100 billion they promised 12 years ago.”

A game-changing twist in this year’s summit is the US’ return to the summit. The Biden Administration signed back up to the Paris Accord after his predecessor Donald Trump walked out on it. Having the US back at the accord has waned the influence of fossil-fuel producing countries, and it appears that Biden’s effort to walk the talk after the COP26 summit is in full swing. Shortly after the summit, the administration is pushing through key climate legislation in Congress. First, Biden has signed a USD1.2 trillion bipartisan infrastructure bill involving investment in energy, power, and infrastructure. The focus now shifted to the second “Build Back Better” bill, which includes a USD550 billion budget tackling climate change.

In a panel discussion on the COP26 with the Milken Institute, Hiromichi Mizuno, UN special envoy on innovative finance and sustainable investments, said he empathised why some see the COP26 as a failure. While the last two COPs were generally accepted as “miserable failures”, COP26 did align high-level ambitions among countries and secured monetary commitment from financial institutions. But the lack of follow-up policies and directions of delivering climate finance to developing countries have rendered the overall outcome lacklustre. Mizuno also added that the absence of a carbon pricing agreement, despite universally accepted as necessary, has also caused frustrations. But he remains optimistic that the 1.5C trajectory has changed investors’ expectations enough that companies are already taking their initiatives in pricing their carbon, which may evolve into a market-based de facto pricing mechanism.

Why is the US-China agreement important?

The last-minute deal between China and the US has also caught many observers by surprise. As the world’s two biggest CO2 emitters, the two countries have agreed to work together to achieve the 1.5C temperature goal and take steps to address issues like methane emissions, clean energy transition and decarbonisation. A joint working group is also expected to meet regularly to address the climate crisis over the next decade. Climate change cooperation between the US and China have bore fruits before. The state of California shares a joint research body with China’s prestigious Tsinghua University to foster development, diffusion and implementation of innovative climate solutions in both countries on a policymaker level.

The joint pledge between the US and China on tackling climate change has been welcomed by observers © Reuters / AvantFaire

The agreement between the US and China has surprised many but was largely positively received, which analysts believe shows both countries have acknowledged the severity of the climate issue and have agreed to play a bigger role in determining our climate future. On the other hand, other emitting countries like Australia haven’t come to any agreement in the summit. Considering the geopolitical tension between the two countries, though it may not be a game-changer, the pledge is a huge step forward.

“The current state of geopolitics between China and the United States is awful, so the fact that you can extract this… agreement between Washington and Beijing right now is important,” Former Australian Prime Minister Kevin Rudd told the BBC.

As curtains at Glasgow fall, policymakers and investors – or the world as a whole – will soon shape the world’s climate future. Though imperfect in many ways, COP26 is a welcomed first step towards global action on climate change. Implementing key infrastructure investments and refining a trust-based global dialogue will be key to the agreement’s success, which comes down to whether developed countries would walk their talk.

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