COP26 Glasgow delivers Climate Pact and path forward for the decisive decade

COP26 culminated on 13 November 2021 with the formal adoption of the cover decisions for each of the three meetings; the COP, the CMP and the CMA, which constitute the Glasgow Climate Pact. The argy-bargy and last minute diplomatic shenanigans that preceded the adoption of the Glasgow Climate Pact have been extensively reported. Beyond the interesting difference between "phase out" and "phase down" in the text of the formal decision, there were important outcomes from COP26, and important challenges and opportunities for Australian businesses.

The ratchet mechanism under the Paris Agreement is working as intended

The regular global stocktakes and obligation on parties to periodically review their NDCs to increase ambition consistent with the science resulted in 151 countries submitting new or updated NDCs prior to COP26. This represented about 74% of the parties to the agreement and 57% of the world's emissions.

Equally, it exposed those countries who did not update their NDCs to criticism, including Australia. Those countries have been singled out in the Pact to strengthen their 2030 targets by the end of next year.

The science is in

The COP is now more fully embracing the scientific evidence. Whereas previously reservations had been expressed by some parties to the unqualified acceptance of the conclusions of the IPCC, COP26 not just welcomed the work of the IPCC 6th Assessment Report, it expressed alarm and utmost concern that human activities have caused around 1.1 degree of warming to date.

The challenge, however, remains an immense one – even accounting for all NDCs, GHG emissions are estimated to increase by almost 14% above 2010 levels by 2030. According to the UN's Emissions Gap Report 2021, even with enhanced targets the world is on track for an average temperature increase of 2.7 degrees, although more recent analysis by the IEA estimated warming could be limited to 1.8 degrees if all commitments to date were met in full and one time.

1.5 degrees is the new 2 degrees

The Paris Agreement's goal reflected the then scientific consensus: the average increase in temperature needed to be kept under 2 degrees to avoid dangerous climate change. COP26 formally resolved to pursue efforts to limit the increase to 1.5 degrees, seen as essential to the survival of many small island states. The corollary is that even more rapid and sustained reductions in global GHG emissions are required by 2030 if this more ambitious temperature goal is to be kept within reach.

Making America Back In Again

The We Are Still In coalition had been the flag bearer for the US at COP conferences since the former President withdrew that country from the Paris Agreement. COP26 unequivocally demonstrated that not only was the US back but more importantly assuming a significant leadership role in the negotiations. US announcements and commitments included:

• a long-term strategy to achieve net-zero no later than 2050;
• a quadrupling of US climate finance by 2024;
• the launch of the Global Methane Pledge;
• the EU and US deal to decarbonise the aluminium and steel industries;
• financial contribution to a US$8.5bn package to help South Africa shift from coal to renewables; and
• the launch of the First Movers Coalition with the World Economic Forum to accelerate demand for zero-carbon technology.

In addition to the central roles of both President Biden and Sen John Kerry at the conference, the announcement of the U.S.-China Joint Glasgow Declaration on Enhancing Climate Action in the 2020s in the second week rebuilt the momentum from the World Leaders Summit in the first week. While perhaps not as significant or influential as the 2014 U.S.-China Joint Announcement on Climate Change in securing the agreement at Paris in 2015, it underscored those countries' commitment to tackling climate change through their respective accelerated actions in the critical decade of the 2020s, as well as through co-operation in multilateral processes, including the UNFCCC process, to avoid catastrophic impacts.

Of course, a question remains as to how long the US will be a leader in driving the response to climate change.

Now we have a rulebook, we just need a game plan

COP26 achieved what could not be done at COP25 in 2019 – it finalised the key outstanding elements of the Paris Agreement Rulebook, in particular the rules for Article 6 and enhanced transparency framework. The Paris Agreement is now finally capable of being operationalised.

Article 6

The final decision texts provide rules for the functioning of two mechanisms to support international carbon markets (Art 6.2 and Art 6.4) and rules for non-market approaches (Art 6.8). In reaching agreement on the Rules, the parties made significant compromises on a number of contentious issues:

• Double counting – the parties agreed to corresponding adjustments to ensure no double counting of units in Art 6.2 and 6.4 mechanisms;
• Carryover of credits – the parties accepted limited carryover of credits under the Kyoto Protocol, being credits created post-2013 but only for the first NDC period;
• transition of CDM projects – activities from CDM may be transitioned into Art 6.4 and must do so by 2025, with the new Supervisory Body for the Art 6.4 mechanism being given responsibility for developing new methodologies for the mechanism including reviewing the suitability of adopting CDM methodologies and rules generally. There remains an open question about whether emissions avoidance projects should be included under Art 6.4;
• the parties agreed that share of proceeds, being a 5% levy on the value of transactions to finance climate adaptation, would be mandatory under Art 6.4 but merely voluntary under Art 6.2 mechanisms; and
• Overall Mitigation in Global Emissions (OMGE) – the parties agreed to the mandatory cancellation of a minimum of 2% of issued credits under Art 6.4 to deliver tangible emission reductions. While it does not apply to Art 6.2 credits, the parties are encouraged to cancel ITMOs that do not count towards NDC's to help deliver OMGE.

On Art 6.8, the parties agreed to establish the Glasgow Committee on Non-market Approaches to implement the framework and work program for non-market approaches.

While significant further technical work is still needed, the fundamental framework is now in place to provide certainty for investors in emission reduction projects and support for adaptation.  A plan by each party to leverage these new mechanisms to deliver on commitments in and outside of NDCs in the form of tangible policies is now critical to rapidly decarbonise within the next decade.

Transparency

Common monitoring, accounting and reporting standards are all critical to the integrity of the Paris Agreement – to determine if its goals will be achieved, and to enable the parties held accountable for performance against their NDCs.

The final decision texts for the Enhanced Transparency Framework provides for, among other things, agreed reporting tables for national inventory reports, common tabular formats for tracking NDC progress, and the outlines for the biennial transparency report, for reporting on and accounting for targets and emissions. Developing countries will have a degree of flexibility in meeting reporting requirements, which reflects their capacity and need for resources and technical support. The finalisation of the framework will enable parties to submit their first biennial transparency reports under the Paris Agreement in 2024.

A related issue concerned common time frames – the period by which all countries are required to submit and communicate their NDCs. Without a definitive agreement by parties, the decision text merely "encourages" all parties to submit five year pledges, starting in 2025 to cover the period to 2035, in 2030 an NDC with an end date of 2040, and so on every five years thereafter.

At the coal phase

The G20 summit in Rome failed to agree on the inclusion in its communique of a statement calling for a phase out of the extraction and burning of coal. What 20 major economies could not agree was, quite remarkably, agreed by 196 at COP26, albeit in slightly different terms. Nevertheless it represents the first explicit statement in the history of the UNFCCC process by countries of the need to increase efforts to "phase down unabated coal power" and the "phase out of inefficient fossil fuel subsidies" [emphasis added].

Minds certainly differ on whether this means the end of coal but now the word "transition" is often being mentioned in the same sentence.

Money, money, money: finance for slowing climate change and mitigating impacts

Perhaps the most significant failing of COP26 was its inability to progress in any substantive way on the outcomes of previous COPs when it comes to finance and financial mechanisms.

Developing countries continued to push for the developed countries to meet their pledge at Copenhagen in 2009 to deliver US$100bn in finance by 2020, with developed countries admitting the goal was not likely to be reached by 2023. What finance was actually being offered was critiqued for being in the form of high interest loans or simply rebadged existing aid programs.

In addition to keeping the existing US$100bn goal on the agenda, the finance outcomes from COP26 included a proposal to double adaption finance, and set up an ad hoc work program to deliberate on a new financial goal.  The relevant decision notes "with deep regret" the failure to achieve the US$100bn goal, urges developed countries to fully deliver on that goal, and requires that discussions on long-term climate finance be concluded by 2027.

A similar outcome was experienced in relation to loss and damage, intended to provide financial assistance to countries impacted by climate change.  Although a mechanism for loss and damage had been agreed in Warsaw in 2013, and a network established in Madrid in 2019, it was still unclear how loss and damage finance would be operationalised.  This was a significant concern for those countries already experiencing permanent climate change, but ultimately, little progress was made other than to agree to establish a dialogue on loss and damage finance.

Complementing COP with decentralised action brings opportunities

There has been no shortage of critics of COP26 for failing to get the world on the path to meet the goals of the Paris Agreement.  While climate change must be dealt with by all countries, and the UNFCCC was set up for this very reason, the magnitude of challenge exposes the frailties of the COP process – it can move neither fast nor extract the required level of ambition from unwilling parties to meet a goal that has become even more critical with the passage of time. Bluntly, herding 196 cats is challenging at the best of times, let alone when responding to a crisis like climate change in which those cats have their own vested interests. It is a mistake to think that the UNFCCC can fix the climate problem in the first place, when it was caused by us and our governments.

That is why we have been seeing an increase in efforts outside the formal COP process – especially by business and bilateral initiatives between countries. This doesn't remove the need for future COPs; rather, it recognises that a massive, multi-faceted crisis can be tackled imaginatively from many different points.

Some of these responses are well known: the increasing expectation on business to set a low/zero emissions target and develop a business strategy for achieving this comes from the community and investors demanding to know the climate risk strategy of each business. Carbon Border Adjustment Mechanisms are becoming real, which will affect import/export, not least Australia's export markets.

But those responses also open up opportunities for business, and those will continue to emerge. New technologies (such as hydrogen) are becoming increasingly attractive as a commercial proposition, including P2X. Augmenting this is the progress at COP26 on operationalising Article 6 of the Paris Agreement: there are more trading opportunities with the creation of pathways for offset credits between countries. We're already seeing other countries seizing those opportunities: for example, the UAE and US are funding renewable energy program in India, and the EU and US are contributing to a fund to transition South Africa from coal to renewables.

Bringing it all home: challenges and opportunities for Australian business

The transition is happening and it will only speed up, given the pressure for increased 2030 targets.

Although offering no new policies in its Long Term Emissions Reduction Plan, the Commonwealth Government is not the only player here; States and Territories are all developing and implementing policies to achieve their ambitious emissions reduction targets. We also know what most of the policy levers will be – the PRI identified them at a global level and the Business Council of Australia's Achieving a Net Zero Economy 2021 report identified the obvious ones for Australia, including the ratcheting down of baselines under the Safeguard Mechanism and its conversion to a baseline and credit emissions trading scheme.

The financial and insurance markets have also spoken: operating an emissions-intensive business is becoming more expensive, including funding and insuring it, and that shift won't be reversed. More capital is becoming available for low emissions projects and sustainable businesses opening up new industries and new jobs.

These policy and market shifts make it essential to plan for the transition, which requires capacity and adequate resources to understand what the transition is likely to involve and how it will affect a particular business.  More critically however is the expectation from investors that business not only understands climate risks but are able to report how they are being managed as part of an overarching business strategy.