Event - COP26

 

COP26 Has Kept the Long-Term Goal of the Paris Agreement Alive

18th of November, 2021 - torck capital management AG

Three weeks ago, we were discussing what to expect ahead of the COP26 UN climate change conference. Last weekend, the two-week conference came to an end after intense, last-minute talks to secure the unanimous consent from all 197 signatories to the Paris Agreement for the Glasgow Climate Pact. We closely followed the outcomes of the conference, which leaders, including US President Biden and British Prime Minister Johnson, framed as the world’s last, best chance to save the planet. In fact, in a year in which the consequences of global warming were felt across the globe, many hoped for COP26 to be a decisive turning point in the collective action against climate change.

The science is very clear: on average, all nations need to reduce their emissions nearly in half this decade to limit global warming to 1.5°C. The expectation that every nation would align at the COP26 to get down to 1.5°C of warming was clearly disappointed. According to an analysis published during the talks, current nationally determined contributions (NDCs) would lead to devastating 2.4C° of warming. But the UN, the UK hosts, the US and other major figures already admitted before the conference that this aim would be missed.

While it is unrealistic that a single conference will solve the issue of global warming, particularly when 200 countries that each face a complex combination of political, social and economic pressures are involved, COP26 was successful in addressing the topics we discussed ahead of the event:

The finalisation of the rules for implementing the 2015 Paris climate accord

The basis of the Paris Agreement is formed by NDCs, which represent pledges on climate action that seek to limit global warming. Together, these climate actions determine whether the world achieves the long-term goals of the Paris Agreement. Alongside these voluntary commitments are mandatory requirements on reporting and transparency. Countries, therefore, need to share information about their emissions, what actions they have taken and, in the case of developed countries, what funding they were providing to poor countries. At COP26, the parties finally approved rules on making the Paris Agreement operate more transparently and effectively, which is key for achieving the agreement’s long-term goals.

Furthermore, a consensus was also reached on the fundamental norms related to Article 6 on carbon markets, which will make the Paris Agreement fully operational. The new framework is comprised of two parts: a centralised system open to the public and private sectors, and a separate bilateral system that will allow countries to trade credits that they can use to help meet their decarbonisation targets. Currently, the market is still very fragmented and unregulated and pricing is opaque. These problems experts hope the new UN framework will help solve.

The end of coal use and subsidies for fossil fuels

Accelerating the global phase-out of coal, the single biggest contributor to anthropogenic climate change, was said by UN secretary-general, António Guterres, to be “the single most important step to keep the 1.5°C goal of the Paris Agreement within reach”. At the last G20 meeting in July, ministers failed to reach an agreement to end coal use and subsidies for fossil fuels. The topics were, therefore, revisited by the UK presidency.

After objections from India and China halted a commitment to end coal use and subsidies for fossil fuels, global leaders were able to seal a last-minute deal that included a pledge to reduce the use of fossil fuels – a pledge that has not explicitly been included in a final COP decision before. The agreement asks countries to “accelerate efforts towards” phasing down “unabated coal power” – referring to power plants that do not use technology to capture their CO2 emissions. It also calls for an end to “inefficient” fossil fuel subsidies. A timeline was not further specified at this point.

Johnson acknowledged his “delight” at reaching a new deal but added that the result was “tinged with disappointment” after the language on coal was altered from a “phase out” to a “phase down” later on. The US defended the change on coal language as a necessary part of reaching a deal, arguing that coal use has to be phased down before it can be ended.

Nuclear energy as a means to fill the gap in the energy transition

COP26 is a chance for policymakers to choose emission-free energy, good jobs and sustainable prosperity. That means choosing nuclear power as part of a balanced energy system,” leaders at COP26 wrote. Even though, attitudes towards nuclear energy vary sharply across nations, which is demonstrated by the EU’s long-standing dilemma in the debate on whether or not to move away from it, COP26 constitutes a turning point. The recent IPCC report, which was a call to action for all parties that have committed to limiting global warming to well below 2°C, has certainly helped to refocus the attention on nuclear as a means to fill the gap in the energy transition. World Nuclear Association Director General Sama Bilbao y León said that more countries, including Russia, Czech Republic, Slovenia, Brazil, Ghana, Romania and the USA, have been recognising nuclear energy for its role in combatting climate change. The alternative, leaders at COP26 argued, would be the growing use of gas imports – from countries such as Russia – to fill the gap as existing coal-fired power plants were closed.

Alongside COP26 were significant announcements on nuclear from China and the UK. China announced plans to build at least 150 new reactors in the next 15 years as part of its emissions reduction plans, which according to Bloomberg estimates could comprise $440bn in new investments in nuclear energy. The UK also announced to commit £210m in new government funding for Rolls-Royce SMR to develop the design of one of the world’s first new small modular reactors.

Climate finance for developing countries

The 2009 pledge by developed countries to provide $100bn per year in climate finance for poor countries constitutes one of the cornerstones of the 2015 Paris agreement. However, developed countries have consistently failed to provide the agreed level. At the same time, only a small fraction of that aid to date has gone toward measures to help poorer countries, which struggle to obtain funding to adapt to the growing hazards of a hotter planet. The Glasgow Climate Pact asks developed countries to “at least double” their support for adaptation measures, which will help developing countries prepare for climate change, by 2025, compared to 2019 levels. This would imply that adaptation funding could be around $40bn annually.

What’s more, a major focus of this year’s talks was how to push countries to do more. While countries under the 2015 Paris agreement are only required to return every five years to set new NDCs, the Glasgow Climate Pact aimed to intensify global efforts to fight climate change by calling on countries to return to next year’s COP, to be held in Egypt, with stronger 2030 emissions reduction targets.

Alok Sharma, UK President of COP26 said: “We can now say with credibility that we have kept 1.5°C alive. But, its pulse is weak and it will only survive if we keep our promises and translate commitments into rapid action”. The question of whether the world will make significant progress to slow global warming comes down to the actions of a handful of nations. The US and China were able to send a strong political signal to other nations through a mutual declaration. “We both see that the challenge of climate change is an existential and severe one,” said Chinese climate envoy Xie Zhenhua. Despite military tensions between the world’s biggest economies remaining high, the US and China have reached a climate detente in the final days of COP26. The declaration mainly reiterated previous climate pledges, but both countries promised to take “accelerated actions in the critical decade of the 2020s”. The success of the conference now hinges on whether all world leaders follow through with new policies to cut greenhouse gas emissions. Only one major emitter – India – produced a new NDC at the talks, saying it would reach net zero by 2070.

Evidence of how “just transition” from fossil fuel dependency might be achieved was delivered by an announcement of the US, EU, UK, France and Germany, which closed a $8.5bn partnership with South Africa to help transform the country – which relies to 90% on coal for electricity generation – into a “clean energy economy” over the next five years. President of the EU Commission, von der Leyen, hailed the agreement as a model for how rich countries can support polluting nations accelerate their shift from fossil fuels.

For businesses, the biggest effect from the Glasgow climate meeting is said to likely come from a coalition of the world’s biggest investors, banks and insurers that collectively control $130 trillion in assets which formed on the sidelines of COP26 and pledged to use that capital to hit “net zero” emissions targets in their investments by 2050.

Overall, it remains conceivable that the world could limit global warming to 1.8°C, according to an estimate by Climate Action Tracker. Whether the new rules and promises made in Glasgow will be enough to get companies, investors and politicians to collectively align for the transformation to a post-fossil fuel age will be seen over the next few years. As long as ambitions are kept high to achieve the long-term goals of the 2015 Paris Agreement, total mineral demand, which the IEA says is set to double by 2040 under consideration of today’s climate policies, continues its path to quadrupling as countries increasingly deploy clean energy technologies (see Figure 1).

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About torck capital management

 

torck capital management is an asset management boutique based in Zurich. Well-established in the Swiss financial industry, our goal is for torck to become the leading boutique of choice for exponential opportunity investments. We aspire to both drive meaningful change with our investments and seize exponential return opportunities in times of market disruption. Our new “Energy Revolution Fund” – launched at the end of September 2021 – builds on the thesis that a worldwide clean energy transition will kick-start another “super cycle” of rising commodity prices, which was last seen in the early 2000s when China’s economic growth took off. With investments in hand-picked junior mining companies that ensure an adequate supply of minerals for the clean energy transition, we see the potential for our next exponential opportunity.

Follow our upcoming blog articles to learn more about how the clean energy transition will impact the demand for critical minerals and create a strong investment case for junior mining companies.