Event - COP26

 

What to Expect Ahead of the COP26 UN Climate Change Conference?

28th of October, 2021 - torck capital management AG

For almost three decades, the 197 nations that agreed to the United Nations Framework Convention on Climate Change at a meeting in 1992 have met nearly every year to forge a global response to anthropogenic global warming. COP stands for “conference of the parties” under the UNFCCC. This year’s COP is the 26th time the parties meet in person and is to be hosted by the UK in Glasgow between 31 October and 12 November 2021. In a year plagued by catastrophic floods, wildfires and heatwaves, the conference is considered a crucial moment to address the threat of climate change and set out a pathway to ensuring the world cuts emissions sufficiently.

COP26 aims to finalise the implementation of the 2015 Paris Agreement, which set the goal of holding global heating well below 2°C, with an aspiration to limit temperature rises to 1.5°C. Every additional degree of warming, according to the latest analysis of the science of global warming from the UN’s Intergovernmental Panel on Climate Change (IPCC), brings far greater climate risks, such as ever more vicious floods and heat waves, worsening droughts and accelerating sea-level rise.

Pressure has been building on the world’s biggest emitters, the G20 countries, to set an example with their own climate targets and financial pledges ahead of the event. That pressure grew only more intense after the release of the aforementioned IPCC report, which we discussed in Part 1 of our blog article series on the topic of Energy Revolution. In essence, the report found that humans can only unleash the equivalent of about 10 years of current global emissions until 2050 to have a chance at limiting warming to 1.5°C above preindustrial levels (see Figures 1 and 2). The pledges on greenhouse gas (GHG) emissions cuts – known as nationally determined contributions (NDCs) – at the time the Paris Agreement was signed in 2015 were not enough to fulfil the goal, which is why the agreement included a “ratchet mechanism”. Therefore, to meet those goals, all countries are urged to revise their NDCs in line with a 1.5°C target every five years and COP26 is their first official deadline. Current NDCs, according to the IPCC, would result in a 16% increase in emissions. This is set to push the world towards 2.7°C of global heating by the end of this century (see Figure 2).

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The UN, the UK hosts, the US and other major figures have admitted that the original aim of COP26 will be missed, as the pledges will again fall short of the halving of global emissions this decade needed to limit global heating to 1.5°C. However, they insisted that the broader goal of the conference – keeping 1.5°C alive – was still in sight, and that the parties could still come up with mechanisms and ways forward on how to further close the gap between current and required measures. The current energy supply crisis, which, according to the head of the IEA, is the result of a confluence of factors, including an “unsustainable recovery” from the pandemic, weather conditions and significant gas supply outages, shows that being in a transition phase – a half in half out approach – leaves countries vulnerable to volatile energy markets. The situation underscores the imperative for countries to switch to renewable energy or nuclear power, because it will both cut emissions and boost security and independence of supply.

Although the G20 countries all promised in their July communiqué to submit new climate targets to the UN before COP26, UK’s COP president Alok Sharma had to challenge China, India and Saudi Arabia to deliver on their G20 promises. The actions taken by China – the world’s biggest emitter – will be especially critical. It has yet to produce a new NDC, and it is expected that China’s president, Xi Jinping, will not come to Glasgow. However, John Kerry, special envoy for climate to Joe Biden, said COP26 could still be a success if Xi did not attend. Pointing to a recent phone call between Xi and Biden in which climate was discussed, he said “there was a very clear commitment to work with the US to achieve our goals. We are very hopeful.”

In a draft of the next Five-Year Plan (2021-2025) released in March 2021, China set the goal to reach net zero emissions by 2060, a major step forward, and peak emissions by 2030. Thereby, China pledged to cut coal consumption from 2026. The UN secretary-general, António Guterres, said that “accelerating the global phase-out of coal is the single most important step to keep the 1.5-degree goal of the Paris Agreement within reach”. But China is not the only country in the frame which needs to strengthen its commitment to emissions reduction. Global fossil fuel subsidies were estimated by the IEA to have reached $400B in 2018, which Kerry said “is subsidising the very problem you are trying to solve.” Coal consumption reduction and fossil fuel subsidies, which ministers at the last G20 meeting in July failed to reach an agreement on, are certainly two topics the UK presidency will want to revisit at COP26.

While the NDCs are a central part of the negotiations at COP26, and getting more countries to sign up to a long-term net zero goal is also important, the UK presidency also hopes to help achieve these goals with a focus on two more areas: climate finance and nature-based solutions.

The UK is calling on developed countries to step forward with more money to help meet a 2009 pledge for $100bn in climate finance for developing countries that are both least equipped to tackle climate change and most vulnerable to its effects. This key promise was one of the cornerstones of the 2015 Paris agreement but developed countries have consistently failed to provide the agreed level. The OECD found in a report in September that only about $80bn was provided last year. Climate finance will, therefore, be an important element of COP26 climate talks.

Out of the G7 nations, only France and Italy have not made new financial pledges for climate assistance to developing countries. Joe Biden, on the other hand, told the UN general assembly in September that the US will become the world’s leading provider of climate finance to “help developing nations tackle the climate crisis”. Biden vowed to give poor countries $11bn by 2024, subject to congressional approval, and is confident wealthy countries will meet the collective pledge. There is a clear awareness that the parties have to work together to enable and encourage countries affected by climate change to implement nature-based solutions to avoid loss of homes, livelihoods and lives as a result of the climate crisis. But to have all countries on board for setting out a pathway to ensuring the world cuts emissions sufficiently requires trust. Trust is only possible if the developed countries fulfil their promises to the developing world.

At the moment, however, Biden’s credibility as a global leader in the fight against climate change is at play. The New York Times reported that a critical piece of his climate agenda, which would replace coal- and gas-fired power plants with wind, solar and nuclear energy, will likely be dropped from the proposed $3.5 budget bill pending in Congress, which we discussed in Part 2 of our Energy Revolution blog article series. The setback means that Biden will be unable to provide evidence about changing course and leading a global effort to fight climate change in Glasgow and makes it harder for him to convince other major emitters, primarily China, to do more. It is possible that the Democrats may try to push through the $150bn clean electricity programme as a stand-alone bill but only after the climate conference. Nevertheless, there will be an opportunity for the world leaders to see their common interest and find a way to work together on how to deliver on their pledges at the next G20 summit in the days before COP26.

Finally, there has been a change in the discussion on the use of nuclear energy to help fill the gap in the energy transition. Nuclear technology has been shifting and a new generation of SMRs that are smaller, cheaper and more flexible can be used as a temporary source of clean energy. Currently the UK government is poised to approve £210m in funding for a fleet of Rolls-Royce mini nuclear reactors that Prime Minister Johnson believes may help the UK reach its zero-carbon electricity target by 2035. Macron even announced an investment of €1bn in the creation of SMRs. Although the focus is on generating power from renewable energy sources, such as solar, wind and hydroelectric power, to cut global emissions, renewables only account for a small part of current energy sources compared to nuclear. It is unlikely to change in the short-term without significant investments in the innovation of battery storage and transmission systems. Therefore, governments need to decide on whether they want to tolerate the risks of nuclear in exchange for reducing the reliance on fossil fuels.


COP26 may be a decisive turning point in the collective action against climate change. We will closely follow the new developments over the next two weeks. Although it is expected that the new pledges for COP26 fall short of the emission reduction target, it is critical for the parties to come up with mechanisms and ways forward on how to close that gap further between now and 2025. While total mineral demand is already set to double by 2040 under consideration of today’s climate policies, demand from clean energy technologies will have to quadruple in that time for the climate goals of the Paris Agreement to be attainable (see Figure 3).

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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.