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FORWARD THINKING | ARTICLE – 5 Min

COP28 – Moving away from fossil fuels and trebling renewables

By THIBAUD CLISSON 15.12.2023

In this article:

    COP28 saw a unique accord on the start of efforts to reduce global consumption of fossil fuels. The deal signalling the end of the fossil fuel age was striking given that the UN climate conference was being held in an oil-exporting country. It came after the conference president had suggested there was ‘no science’ that a phase-out of fossil fuels would help contain global warming to 1.5C.  

    Other headline-grabbing developments included an agreement to put the so-called loss and damage support fund into operation, as well as a greater focus on renewable energy sources, accelerated decarbonisation, carbon markets, and nature-related outcomes and climate action.

    Leaving oil, gas and coal behind

    COP28’s concluding statement avoided phase-out or phase-down language, instead calling on countries to transition “away from fossil fuels in energy systems in a just, orderly and equitable manner, accelerating action so as to achieve net zero by 2050”.

    The reference to all fossil fuels, and not just coal as had been the case at the previous COP, can be seen as a significant milestone. However, the non-binding agreement leaves room for improvement, with Samoa’s lead negotiator claiming the text featured a ‘litany of loopholes’.

    The meeting reaffirmed the 1.5C target for global warming and acknowledged the need for a 43% reduction in emissions by 2030 and 60% by 2035 compared to 2019 levels. It called for substantially stricter targets and policies when nations present new their emissions commitments in 2025, as agreed in the 2015 Paris Accord.

    To the surprise of many, there was progress on the loss and damage fund which aims to provide financial assistance to – mainly developing – nations most vulnerable to and impacted by the effects of climate change. It received USD 725 million in pledges from wealthy countries.

    Critics argue this does not go far enough, covering just 0.2% of annual losses and damages caused by climate disasters. One non-governmental organisation has put the amount required at more than USD 400 billion a year – and rising.

    Trebling renewables capacity

    Led by the EU, US and the UAE, 130 countries committed to tripling global renewable energy capacity by 2030, signing the Global Renewables and Energy Efficiency Pledge. Collectively, these nations contribute 40% of global CO2 emissions, represent 37% of the overall global energy demand, and constitute 56% of the global economy.

    The aim is to reach 11 terawatts (TW) of renewable capacity globally and double the annual rate of energy efficiency improvements to 4% by 2030. While on track to triple their renewable capacity, China and India did not endorse the pledge.

    To achieve this goal, renewable capacity needs to grow by 17% a year. This is the pace it has kept since 2016. Over the past year, renewable energy production has faced challenges including spiralling costs. To make things worse, higher interest rates have hampered investment. In the first nine months, investments in solar and wind infrastructure totalled USD 29 billion, a fraction of the USD 128 billion recorded in the same 2022 period.

    Logistical bottlenecks have caused issues – two offshore US wind projects were scrapped at a cost of USD 5.6 billion in impairments over a lack of vessels and other problems. Grid connectivity has become a major obstacle, with projects reportedly forced to wait five to 10 years. In answer, the UK Electricity Systems Operator (ESO) has been granted permission to terminate projects that are not making progress, freeing up the grid queue.

    The International Energy Agency (IEA) argues that renewable finance needs to reach USD 1.7 trillion per year by 2030 – that is more than double its current level. Plugging this gap will require stronger government incentives and packages.

    Carbon market credibility and development

    There was no agreement on Article 6 of the Paris Agreement. This acknowledges that achieving the so-called Nationally Determined Contributions (NDCs) cannot depend just on public funds, but that private sector involvement is crucial to finance ambitious emission reduction initiatives.

    Article 6 encourages voluntary cooperation among countries in implementing their climate action plans and fosters a thriving carbon market. Three tools intend to unlock climate finance: 

    • Allow countries to exchange mitigation outcomes bilaterally, report this trade and use them towards their plans
    • Establish a new mechanism to validate, verify and issue high-quality carbon credits
    • Provide opportunities for countries to cooperate on achieving their NDCs without relying on carbon markets. 

    Despite the lack of agreement on Article 6, the carbon market may emerge as a strong generator of funding for climate adaptation and mitigation measures. At the meeting, financial institutions, regulators and COP28 officials supported efforts to revive the voluntary carbon credits market which has faced scandals.

    Progress is being made on standards with independent certification bodies such as Verra aligning with the Integrity Council for Voluntary Carbon Markets to address investor concerns over verification and credibility. The proposed standards include ensuring that credits result in a durable reduction of emissions, preventing double-counting, and improving transparency. The initiative aims to bolster a market that, at its peak[NA1]  in 2021, was valued at USD 2 billion.

    To develop the carbon market further, the US launched the Environmental Transition Accelerator (ETA), bringing government and private sector stakeholders together to use high-integrity carbon credits to deliver faster and deeper greenhouse gas reductions by accelerating the transition from fossil fuels to clean power in developing and emerging economies.

    Nine leading companies have signed a letter of interest, with Chile, the Dominican Republic and Nigeria joining as pilot countries. The ETA could mobilise USD 72 billion to USD 207 billion in transition finance by 2035. The approach aims to encourage participating countries to intensify their near-term activities contributing to power sector decarbonisation, including retiring fossil fuel assets and enhancing storage capacity, transmission, and distribution.

    On the sidelines of COP28, Sweden and Switzerland agreed to begin developing an international market for carbon removal. Avenues towards negative emissions are likely to include innovative technologies such as capturing and storing carbon dioxide from burning biofuels (BECCS).

    Reducing methane emissions

    Six of the world’s largest dairy producers have formed the Dairy Methane Action Alliance to address methane emissions from livestock which contribute 30% of anthropogenic methane. The alliance commits signatories to disclose such emissions by mid-2024, followed by the release and implementation of a comprehensive action plan by the end of 2024.

    Methane is around 80 times more potent than CO2 in the first 20 years after entering the atmosphere. According to a 2021 assessment by the UN Environment Programme, cutting these emissions by 45% this decade would help keep global warming to below 2C.

    Various cutting-edge technologies are being developed to mitigate dairy methane emissions, including breeding techniques, vaccines and dietary changes. According to a study by the Swedish Environment Agency, the introduction of the chemical 3-nitrooxypropanol in dairy feed has reduced emissions by 30%. The report highlights that development in this field has been ‘rapid’ in recent years, presenting myriad investment opportunities.

    Addressing deforestation

    The European Commission intensified its collaboration with partner countries to promote deforestation-free supply chains. Key actions include launching the EU observatory on deforestation, a Team Europe Initiative with EUR 70 million in funding, and the Multi-Stakeholder Platform on Protecting and Restoring the World’s Forests.

    The EU law on deforestation, effective from 30 December 2024, marks a pivotal step in outlawing products associated with deforestation. The UK has announced similar legislation. Importers bringing in cattle products or products containing palm oil, soy or cocoa must prove they have not contributed to deforestation.

    Critics have argued that coffee, which ranks in the top-five UK deforestation risk commodities, should be included. 

    Disclaimer

    Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
    Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, (the Sub-Fund's) performance may at times be better or worse than the performance of relatable funds that do not apply such standards.

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