The first goal is perhaps the hardest: “Secure global net zero by mid-century and keep 1.5 degrees within reach.” Let’s be clear from the offset; 1.5 degrees is not currently within reach.
At the conclusion of COP21 in Paris in 2015 governments signed a pledge to substantially cut global greenhouse gas (GHG) emissions. Since then, many countries have submitted revised national climate plans, which include a new goal of ‘net zero’ emissions by around mid-century.
Net zero is effectively the point where emissions have been reduced by as much as possible and then whatever remains is netted-off by removing emissions from the atmosphere. The US, EU, UK, Japan and South Korea have committed to net zero by 2050. China has committed to achieving this by 2060.
These are big objectives but take a look at what the science tells us: according to the UN, over the remainder of this decade current government plans imply that global emissions will decline by 12% compared to 2010. This is in stark contrast to the 45% reduction in emissions required by 2030 if we are to limit temperature increases to 1.5 degrees. In May this year Climate Action Tracker estimated that government pledges and targets are consistent with 2.4 degrees warming by the end of the century but that existing policies are actually consistent with 2.9 degrees warming. These figures are alarming to say the least. What can be done?
Here are a few suggestions of what policymakers should aim to achieve at COP26.
First, all participants need to acknowledge that net zero is typically a very long-term goal and the problem with long-term goals is that they can provide a sense of comfort, which in turn reduces the apparent requirement (or urgency) for immediate action.
Second, policymakers need to agree a better framework to lower global emissions aggressively. COP26 will include more than 190 countries and the almost inevitable consequence of negotiating with so many parties is gridlock, followed by a last-minute unambitious agreement. One suggestion to improve the likelihood of better outcomes is to negotiate in small groups. The world’s top five emitting countries plus the EU account for around two-thirds of global emissions. Negotiating in a smaller group such as this should reduce the likelihood of gridlock and therefore increase the likelihood of a better outcome and allow larger countries/emitters to lead by example.
Third, policymakers need to agree more ambitious plans that can be actioned in the near-term. For example, energy use in buildings, transport and industry account for almost three-quarters of the world’s GHG emissions and the actions that need to be taken in each of these areas are already well known. The science is clear that the quicker emissions are cut the better.
Finally, participants at COP26 need to develop carbon pricing mechanisms. There are two principal approaches:
A carbon tax where emitters pay a fixed rate per ton of CO2 emissions. This creates a financial incentive for firms to take actions to lower emissions. This approach provides certainty about the price of the tax, but it offers less certainty about the extent of emission reductions.
An Emissions Trading System (ETS), which is also referred to as a cap-and-trade system. Governments hand out or auction a fixed amount of CO2 permits (or allowances). CO2 can only be produced by companies that own sufficient permits. Lower-emitting companies may choose to sell permits to higher-emitting companies and these transactions will determine the price of carbon permits. Governments reduce the amount of permits in circulation over time, which in turn reduces CO2 emissions. This approach allows polluters to reduce emissions flexibly at the lowest possible cost. It provides certainty about the level of reduction in emissions, but not the price. The World Bank estimates that only 13% of annual GHG emissions are covered by carbon pricing schemes so there is clearly significant scope for this to be increased.
Irrespective of COP26’s perceived success (or not), there will be no silver bullet that fully addresses climate change. A firm commitment, however, to a plan that is more actionable and less aspirational will help set us on the path to net zero.
Colin Dryburgh is an investment manager of multi-asset & solutions at Aegon Asset Management. The views expressed above are his own and should not be taken as investment advice.