After two weeks of negotiations, the United Nation’s 27th Conference of the Parties (COP27) in Egypt concluded with a greater focus on how to suppress climate change rather than the headline commitments which have been much of what occurred at previous COPs. There were a number of initiatives announced across countries, industries and organizations. The talks concluded with a landmark agreement to establish a fund to help developing nations pay for damages from the increasing severity and frequency of climate hazards associated with global warming. In this article, we highlight key developments from COP27.
Climate Justice: Action vs. Talk
Arguably the biggest achievement of COP27 was the establishment of a loss and damage fund to compensate developing nations most impacted by the effects of climate change.1 Governments from across the world also agreed to the formation of a transitional committee, with representatives from 24 countries, that would be responsible for making recommendations on the mechanics of the loss and damage fund next year at COP28 which is set to take place in the United Arab Emirates.
This marks a major agreement as wealthier nations had previously resisted compensating poorer nations which have been severely impacted by climate change. However, following recent climate disasters in developing countries such as floods in Pakistan and drought and famine in Uganda and Ethiopia, it became an increasingly challenging issue to ignore. Pakistan, as chair of the G77 group of developing nations, was a leading advocate for the loss and damage fund as the country experienced the worst natural disaster in its history this year, as heavy rains and flash flooding displaced 33 million people, destroyed 1.7 million homes, took the lives of nearly 1,500 people and caused $30 billion in damages. As Sherry Rehman, Pakistan’s Minister for Climate Change, stated: “The announcement offers hope to vulnerable communities all over the world who are fighting for their survival from climate stress.” As we have previously written, the countries at most risk of severe climate events are some of the lowest emitting nations. With the establishment of a loss and damage fund, these countries could finally have some means to rebuild.
While encouraging, there is no guarantee that wealthier nations will contribute to the fund. Previously, the US, EU and other developed nations had pledged to commit $100 billion per year in climate finance to help poorer nations transition from fossil fuels. However, they continue to fall short on these commitments to the tune of tens of billions annually. Importantly, negotiators also agreed in the case of the loss and damage fund that nations cannot be held legally liable for payments. And then there was debate over whether major economies such as China and Saudi Arabia and others should start contributing to the poorest and most vulnerable developing nations. China’s delegation did not make any commitments to pay into a common fund. As a result of all these uncertainties, only time will tell how effective this new global funding initiative will be.
Growing Importance of Transition Finance
Given the differing levels of economic development across the world, the first coordinated global plan to address how countries from across the globe can become more resilient to impacts from climate change was announced at COP27. The Sharm El Sheik Adaptation outlines 30 “Adaptation Outcomes” to help protect those living in the most climate-vulnerable communities by 2030. The Agenda calls for $140-$300 billion in public and private financing to spur adaptation and resiliency globally.
In addition, the UK Transition Plan Taskforce (TPT) Disclosure Framework and Implementation guidance was published following the UK government’s announcement of such work at COP26. The TPT, together with a “sandbox” to allow companies to evolve reporting capabilities, is meant to be a “gold standard” for private sector transition plans. At a minimum, the framework and guidance will be factored into UK mandatory transition plan disclosures. Lastly, the Sustainable Markets Initiative (SMI) met at COP27 and one of the key topics discussed was transition finance as the SMI has been working on frameworks for transition finance. More details are expected soon.
Harnessing the power of carbon markets
Carbon offsets have emerged as a key strategy to raise money for climate adaptation and mitigation. At COP27, US Special Presidential Envoy for Climate, alongside the Rockefeller Foundation and the Bezos Earth Fund, announced the formation of the Energy Transition Accelerator (ETA), a new carbon credit trading platform that would allow US companies to shop for certified carbon credits derived from renewable energy projects in developing countries. These countries, in turn, would benefit from new sources of financing for their transition from fossil fuels. The ETA, which is expected to be operational in a year, will be open to companies that commit to net zero no later than 2050 and excludes fossil fuel producers.
Accordingly, some of the offsets in the ETA will originate from African countries. Fittingly given that COP27 took place in Egypt, the new Africa Carbon Markets Initiative (ACMI) was inaugurated.2 African nations including Nigeria, Egypt and Kenya joined the launch event to announce their commitments to scale voluntary carbon markets. By 2030, ACMI aims to ramp up carbon credit production to the tune of 300 million carbon credits, $6 billion in revenue and the support of 30 million jobs. This bold ambition for the African Continent, which has already grown its carbon credits market by 36 percent annually over the past five years, will be crucial given its expected population boom over the next decades.
Lastly, given the growth and need for carbon markets to evolve in order to align with a 1.5-degree pathway, there were positive developments to institutionalize the carbon markets. On November 8th, Three Cairns Group and Bloomberg Philanthropies announced the formation of the Global Carbon Trust (GCT) and Carbon Storage Governing Council to help drive durability of the voluntary carbon markets. Importantly, the GCT will create standardized contracts for carbon credits, thus enabling these instruments to be more easily accessible and allowing for third party verification.
In the spirit of “what gets measured gets managed”, there were a number of updates on enhancing disclosure of climate related risks during COP27. Following on the heels of last year’s announcement that the IFRS Foundation will set up an International Sustainability Standards Board (ISSB), the Carbon Data Project (CDP) announced that it would incorporate ISSB’s proposed standards into its corporate environmental disclosure platform by 2024. This addition, on Finance Day, the ISSB launched a Partnership Framework which will enable existing standard-setters and other stakeholders to provide technical input into the development of the ISSB’s global baseline with the intention is to ensure all national/regional specificities are taken into account.
In addition, the Climate Data Steering Committee announced an update on the recently launched Net-Zero Data Public Utility (NZDPU). The Committee, comprised of leading data providers as well as policy makers, will partner with CDP on a foundational set of climate data (including current and historic Scope 1, 2 and GHG as well as reduction targets and use of carbon credits) from CDP’s global platform and expects to have a beta pilot launched by mid-2023.
African Just Transition
Given the African continent’s heavy reliance on fossil fuels, a number of initiatives were announced to help in the just transition towards a sustainable future. South Africa, which relies on coal for more than 80 percent of its power, launched the new Just Energy Transition Investment Plan (JET IP). The JET IP focuses on three priority sectors – energy, electric vehicles, and green hydrogen – for financing. A Just approach is a key pillar to ensure that communities most impacted by the transition from coal are not left behind. The plan identifies nearly $100 billion in financing needed over five years to begin South Africa’s energy transition. Last year, at COP26, it was first announced that the governments of France, Germany, the United Kingdom, the United States and the European Union had pledged $8.5 billion in first round financing to assist South Africa with energy transition projects as part of the Just Energy Transition Partnership (JETP) between the countries. This October, the South African cabinet approved a five-year investment plan for the $8.5 billion package. Separately at the G20 summit in Bali this November, Indonesia announced its own JETP, which requires some $20 billion in financing over the next 3 to 5 years.
In addition, a number of African countries announced energy transition plans:
Egypt announced an initiative to help African countries access clean energy. The “Africa Just and Affordable Energy Transition Initiative” (AJAETI) targets three objectives to achieve by 2027: securing access to affordable energy for at least 300 million Africans, transitioning 300 million Africans to clean cooking, and increasing the share of renewable energy by 25 percent. The latter is a key focus as less than 2 percent of global investments in renewables have gone to the African continent, making it nearly impossible for those nations to achieve net zero alignment.
Sustainable Energy for All and Bloomberg Philanthropies announced that they will work with Ghana’s government on the formation of its transition framework.
Nigeria highlighted its existing Energy Transition Plan and a recent $1.5 billion commitment from the World Bank to continue its efforts.
Given the inextricable links of climate change and deforestation, nations are increasingly committing to halting this progression. At COP27, the Forest and Climate Leaders Partnership (FCLP), a partnership of 26 countries committed to halting and reversing forest loss and land degradation by 2030, was launched on November 7.3 The partnership countries, chaired by the US and Ghana and which together account for a third of the world’s forests and 60 percent of global GDP, will build on the Glasgow Leaders Declaration for Forests and Land Use, which was committed to by 140+ nations. For its part, the UK has committed £1.5 billion in financing for forests as part of a wider £3bn ring fence for nature. In addition, the UK also announced a new program towards the protection of the Congo Basin, one of the world’s most efficient carbon sinks and home to 10,000 species of tropical plants as well as endangered species.
As the second largest contributor to global warming (after CO2), mitigating methane in the atmosphere was a key topic at COP27. A co-conveners of the Global Methane Pledge, the US and Europe highlighted significant progress in methane reduction including more than 50 nations launching methane action plans or are working to develop one.4 In addition, the UN established the Methane Alert and Response System (MARS) to scale up detection of major emissions events and alert stakeholders and governments. Notably China, alongside Russia and India, opted not to join the Global Methane Pledge but instead announced a national strategic plan to curb methane emissions along the oil and gas supply chain and those generated by agriculture and urban waste.
Additional highlights from COP27 include:
The World Bank launched a new fund to provide grants to developing nations for projects that reduce greenhouse gas (GHG) emissions. The Scaling Climate Action by Lowering Emissions (SCALE) fund will pool funds to provide grants to developing countries as they deliver pre-agreed, verifiable reductions in GHG emissions. SCALE will start with an initial $1 billion by the end of 2023.
Through support from the IMF and World Bank, climate vulnerable countries will be able to add new Climate Resilient Debt Clauses (CRDC’s) to future bonds, allowing them to defer sovereign debt repayments for up to a maximum of two years in the event of pre-defined natural disasters. CRDC’s were introduced for Caribbean countries in 2018 and the latest developments extend the facility to a wider range of countries across the Pacific, Africa and Asia.
Green hydrogen production from countries such as Oman and Panama, as well as investments in green hydrogen projects, were discussed at COP27. Oman, which is seeking to reach net zero by 2050, will have capacity to produce one to two million tons of green hydrogen by 2030 through the country’s solar and wind facilities, which is roughly equal to 10 percent of the EU’s future demand. Panama also announced plans to develop its own renewable hydrogen production, aiming to produce 4 million tons annually by 2040. Meanwhile, Germany will invest €550 million in establishing green hydrogen projects in developing nations. The funds will be managed by German bank KfW.
A number of Gulf Cooperation Council (GCC) countries announced climate initiatives at COP27. Saudi Arabia’s sovereign wealth fund, Public Investment Fund (PIF), set a target to achieve net-zero emissions by 2050. In addition, Kuwait announced its intention to work towards net zero, making it the fifth GCC country to set a net zero goal joining the UAE, Saudi Arabia, Bahrain and Oman. This leaves World Cup host nation Qatar as the only GCC member yet to make a net zero pledge.
Heated debate around decarbonization targets
There was no new agreement reached at COP27 to raise and catalyse countries’ ambition to decarbonize. The main reason this element was a source of debate is because from a purely scientific point of view the Nationally Determined Contributions (NDCs), collectively, are seen not to be on track of what net zero (carbon budget) pathways tell us they need to be.
The geopolitical landscape and concerns around energy security, which included regions with a long history of climate ambitions and pledges, can be seen as contributing factors.
Wrap up and Looking Ahead
Undoubtedly the key milestone at COP27 was the establishment of the loss and damage fund to assist countries which are the most at risk of climate change. However, given that there is no legal obligation for countries to commit funds, it remains to be seen how much developed nations are willing to contribute. However, given the recent enactment of the Inflation Reduction Act and newly announced Energy Transition Accelerator, the United States has asserted itself as a climate champion under the Biden Administration. As we look ahead to 2023, the Just Transition for developing nations will be an important trend to follow given the need for developing nations to uplift their citizens while mitigating the impacts of rising temperatures.
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