COP26’s important news was the climbdown on coal. COP26 may not have ended with a big bang, but the sequences of announcements made at the forum certainly do not represent a whine. While last-minute changes grabbed the headlines, Glasgow was about far more than ‘phasing down’ coal.
In the light of that outcome (which certainly wasn’t guaranteed, Wood Mackenzie considers COP26 a success, albeit a qualified one. And with nearly 200 countries signing the Glasgow Climate Pact, the way has been paved for future progress. There are three core elements of the Pact.
a. NET ZERO PLEDGES AND THE FUTURE PATHWAY
We estimate nearly 90% of global emissions are now covered by a net zero target, with most aimed around 2060. India’s 2070 net zero target was met with indifference from many quarters, but we think it’s a big deal; not all nations can decarbonise at the same pace and the country’s participation is vital to achieve a 2°C world.
The sticking point, though, is that while the EU-27, the UK, Japan and South Korea aim to nearly halve emissions by 2030, growing economies including China and India have no such targets. These may come through the next nationally determined contributions (NDCs) though, which crucially now ratchet up in 2022 rather than waiting a further five years.
Significantly, it is estimated that if all pledges made at COP26 are actioned, the world could reach a 2 °C pathway, although we would still fall short of 1.5 °C.
b. FINANCING AND THE JUST TRANSITION
The Pact’s call to phase out inefficient fossil fuel subsidies will only make raising finance in capital markets more difficult for unabated fossil fuels. Despite the last-minute change of wording to talk about ‘phasing down’ rather than ‘phasing out’ coal-fired power, more than 40 countries pledged to scale up clean power and move away from unabated coal generation. This transition is due to happen by 2030 for major economies (or as soon as possible thereafter) and by the 2040s for the rest of the world.
A key attraction of coal is that it’s the cheapest source of baseload power generation, so current super-high coal prices could start to divert capital towards renewables. However, to push coal out of the mix will need alternatives that are scalable, affordable and not intermittent in nature. Inevitably, some countries will prioritise supply security over environmental goals — at least until clean baseload alternatives are commercially available at sufficient scale to replace coal in power generation.
c. UNDERPINNING CARBON MARKET DEVELOPMENT
Agreement of Article 6 means the Paris rulebook is finally complete, paving the way for the development of a global carbon market. Disagreements over double counting were resolved by requiring the application of corresponding adjustments on all new emissions under Article 6.4 (although post-2013 Certified Emission Reductions are exempt). Meanwhile, the major roadblock around funding adaptation for developing countries was removed by directing 5% of proceeds from credits into a special fund.
Tougher accounting rules will improve the transparency, reliability and liquidity of voluntary carbon markets, long the subject of criticism. Initiatives such as the Intercontinental Exchange (ICE) carbon credits future and plans for public listings for carbon funds will also help. At the same time, countries and supranational organisations can choose how, by when and how much to allow carbon offsets to meet compliance obligations.
MORE TO BE DONE
Even though the pact is a move in the right direction, it’s important to remember the world is currently on a 2.5 °C to 2.7 °C warming pathway. The window of opportunity to keep 1.5 °C is narrowing by the day, so the world must action the pledges made in Glasgow as swiftly as possible.
Given that today’s energy market is 80% fuelled by hydrocarbons, it’s going to take a long time to decarbonise the energy mix and the associated infrastructure; zero-carbon supply must be built out while existing emissions-intensive plants need to be decarbonised or closed.
To make that happen while keeping the lights on, it is estimated the world needs US$70 trillion in cumulative capex. So, while COP26 should be considered a success, we are still near the start of what will be a long, difficult and quite possibly bumpy road.