COP26 Review

31 Oct-13 Nov: agreement at COP26 on accelerating initiatives

The 26th Session of the Conference of the Parties to the United Nations Framework Convention on Climate Change (COP26) took place between 31 October and 13 November. This was the first conference in two years, following its postponement in 2020 due to COVID-19. COP26 was the focus of considerable attention following nations' major progress over the past two years with policies to address climate change. We think the World Leaders Summit (not usually a feature of COP) in the first half of the conference schedule also stimulated financial markets' interest. We reviewed the results of the summit in our 8 November report ESG Research (policy): Outcome of COP26 World Leaders Summit; here, we review the conference as a whole following its conclusion.

The achievements of COP26 can be divided into the content of the official Glasgow Climate Pact document, and the side deals (COP participants' own initiatives) by national governments and industry groups.

Glasgow Climate Pact

We firstly look at the details of the Glasgow Climate Pact. The agreement is made up of eight chapters and 97 articles, but the following six points are key to monitoring climate change issues.

1. Developed countries are to at least double their collective provision of climate finance for adaptation to developing countries from 2019 levels by 2025, in the context of achieving a balance between mitigation and adaptation in the provision of scaled-up financial resources (Article 18)
2. The agreement reaffirms the Paris Agreement temperature goal of holding the increase in the global average temperature to well below 2°C and pursuing efforts to limit the temperature increase to 1.5°C (Article 20)
3. It requests that the parties to the agreement revisit and strengthen the 2030 targets in their nationally determined contributions (NDCs) as necessary to align with the Paris Agreement temperature goal by the end of 2022, considering different national circumstances (Article 29)
4. It requests that the secretariat annually update the synthesis report on NDCs (Article 30)
5. It aims to accelerate efforts towards the phase-down of unabated coal power and inefficient fossil fuel subsidies (Article 36)
6. It states that world leaders will convene in 2023 to consider ambitions toward 2030 (Article 86)

We focus particularly on point 5, the agreement on coal power and subsidies. This is the first time that a COP outcome document has directly referred to fossil fuels or coal, making it a renewed focus of global climate measures. International attitudes to coal power are becoming increasingly severe; the G20 Summit at end-October reached an agreement to end international public finance for unabated coal-fired power plants by end-2021, while the UK led progress with a number of side deals aimed at ending coal use at COP26 (as we discuss below). We expect the debate on scrapping coal-fired power plants, including in Japan, to become increasingly prominent in 2022.

The discussion about ending the use of coal will naturally not be straightforward given the likely caution among countries that rely heavily on coal power. India and China, which are highly reliant on coal (it represented respectively 71% and 64% of their 2019 power generation mix) also demanded last-minute changes to the COP26 outcome document. The initial draft used the expression "phase-out", but this was revised at their request to "phase-down".

The Paris Agreement goals in point 2 are also an important clue to future international negotiations. The agreement references two different yardsticks for temperature rise with its mention of "holding the increase in the global average temperature to well below 2°C and pursuing efforts to limit the temperature increase to 1.5°C". Given the ambitious nature of both targets, developing nations have been strongly focused on achieving the 2°C goal, but during the recent COP the European contingent led an emphasis on the 1.5°C target.

This reflects individual countries' stronger reduction targets. According to an analysis by the International Energy Agency (IEA), if the new targets announced by national governments at COP26 are fully achieved, the rise in global temperatures during this century will be limited to 1.8°C. In short, these targets are moving to align with the ambitions laid out in the Paris Agreement. In our view, this is evidence that COP26 represents a major breakthrough.

However, it may not be possible to fully achieve the targets countries announced at COP26. A smaller rise in temperatures would also reduce the forecast economic damage from climate change. From this standpoint, we expect Europe and other developed nations to focus more on the 1.5°C target. This is also connected with point 3, the request that countries revisit and strengthen their 2030 targets. National governments have substantially raised their reduction targets in the past two years, and we expect international calls for further increases in 2022.

Point 4 (annual updates to the synthesis report on NDCs) is also important in this regard. NDC synthesis reports are key documents that aggregate the NDCs submitted by each country and facilitate an understanding of global progress with reducing emissions. However, the edition of the synthesis report released in stages from Feb-Oct 2021 is the only update since the Paris Agreement came into effect (2016). This meant that an important basis for apples-to-apples comparisons of global initiatives was missing. While the specific timing is unclear, we expect the upcoming annual release of NDC synthesis reports to increase transparency on moves to strengthen global initiatives.

We would also note the following achievements from the official COP26 agenda, though these are somewhat technical considerations: (1) agreement on the "corresponding adjustments" referred to in Article 6 of the Paris Agreement (resolving double counting of carbon credits); (2) agreement that credits issued under the Kyoto Protocol since 2013 are valid; and (3) a recommendation that 2025 submissions should include 2035 targets.

Side deals

We highlight the following six items from among the innumerable side deals at COP26 based on the importance of the actors (nations/bodies) or content.

1. Expansion of Global Methane Pledge
2. Adoption of Glasgow Leaders' Declaration on Forests and Land Use
3. US-China Joint Glasgow Declaration on Enhancing Climate Action
4. GFANZ calls for climate action announcements from participating financial institutions
5. Declaration on accelerating the transition to 100% zero emission vehicles
6. Moves to scale back coal use

Expansion of Global Methane Pledge

Signatories to the Global Methane Pledge launched by the US and EU increased to 109 countries at COP26. The agreement targets a 30% reduction in anthropogenic global methane emissions versus 2020 levels. If achieved, it should enable a more than 0.2°C reduction in average temperatures in 2050. China, India, and Russia have yet to sign up despite generating around 50% of global methane emissions.

Adoption of Glasgow Leaders' Declaration on Forests and Land Use

The Glasgow Leaders' Declaration on Forests and Land Use aims to reverse deforestation and land degradation trends by 2030. 141 countries and regions signed up, equivalent to around 90% of global forested land. While only 40 jurisdictions joined the 2014 New York Declaration on Forests, far more participated in the Glasgow Leaders' Declaration, including Brazil and China. The declaration also includes £14bn in public- and private-sector funding.

US-China Joint Glasgow Declaration on Enhancing Climate Action

The US-China joint declaration during the latter half of COP26 came as a surprise. The declaration lists up areas where the US and China will cooperate on addressing climate change in the 2020s. However, it lacked specifics and contained little that was novel. We think it is purely intended to demonstrate the two countries' cooperative relationship on tackling climate change.

The only items with any specific detail were: (1) the intention to develop additional measures to reduce methane emissions by COP27, and China's intention to develop an ambitious National Action Plan on methane; (2) the US and China's plans to convene a meeting on methane reduction in 2022 H1 (including standards for reducing methane from the fossil fuel and waste sectors and incentives and programs to reduce methane from the agricultural sector); and (3) the intention to communicate 2035 NDCs in 2025.

GFANZ calls for climate action announcements from participating financial institutions

GFANZ (the Glasgow Financial Alliance for Net Zero, launched in April) has announced its intention of providing the $100trn in capital needed to achieve net zero over the next 30 years. More than 450 financial institutions from 45 countries are participating in GFANZ and have committed to providing $130trn in private-sector capital. In order to achieve net zero emissions by 2050 at the latest, participants are required to: (1) reduce emissions by around 50% this decade; (2) review their targets every five years; and (3) report their progress and financed emissions annually. In addition, GFANZ has announced new plans to shift private-sector capital toward emerging markets, and has also announced that it will begin expanding capital supply to emerging markets by COP27 via the launch of five key initiatives. These activities by GFANZ will be reported to the Financial Stability Board (FSB).

Declaration on accelerating the transition to 100% zero-emission vehicles

The declaration on accelerating the transition to 100% zero-emission vehicles adopts the target that all new vehicles (passenger cars and vans) sold globally by 2040 will be zero emission (with government leased fleets to be converted to zero-emission vehicles by 2035). The declaration covers a broad range of entities, including central and local governments, automakers, and financial institutions. Central governments in a total of 34 countries (24 developed, 10 developing) have adopted the declaration. However, the US, China, and Japan, which have a high volume of auto sales, have not signed up.

In the transportation sector, COP26 also featured developments in air and marine transportation.

Moves to scale back coal use

Moves to reduce coal use picked up at COP26. The Global Coal to Clean Power Transition Statement aims to achieve a transition away from unabated coal power generation in the 2030s for major economies and in the 2040s globally. While 46 countries and regions signed up, China, the US, and India were among those that did not. Elsewhere, 28 countries and organizations announced their participation in the Powering Past Coal Alliance (PPCA) that was launched in 2017.

Summary

We think opinions about COP26's achievements will vary widely. The slow progress on ending reliance on coal will likely draw criticism, but the emergence for the first time of prospects (though only "ambitions" at this point) for achieving the 2°C target is positive. We think views of COP26 will vary substantially depending on whether the yardstick is minimizing damage from climate change or moves to accelerate existing initiatives.

In terms of surprises, we would highlight India's announcement of a net zero emissions target for 2070 and the US-China joint declaration.

We were surprised at India's announcement of a net zero emissions target despite the lack of additional funding from developed nations. However, India has requested that developed nations increase funding for developing nations from the current $100bn per year to $1trn, and we expect negotiations between the two blocs to continue.

The US-China joint declaration itself came as a surprise. The details of the declaration were also positive, but confirmation that the US and China maintain their cooperative relationship in climate change had greater significance. However, we think this may reflect China's desire to demonstrate its cooperative stance to the international community ahead of the Beijing Olympics (4-20 February 2022) and Paralympics (4-13 March), and we will be watching whether it maintains this stance once the Games are over.