Global heads of state met in Sharm El-Sheikh in Egypt from 6 to 18 November 2022 at COP27, the United Nations climate summit, to discuss more ambitious action to tackle climate change. Not surprisingly, energy security, climate finance for developing nations and a "just transition" were at the top of the agenda for world leaders this year. The Matheson team followed the negotiations closely and, in this insight, we explore the key takeaways and what this means in practice.
The Sharm el-Sheikh Implementation Plan: "not a moment of unqualified celebration"
UN Secretary-General António Guterres observed that COP26 had been driven by two overriding themes: justice and ambition. In a historic first, delegates to the 27th UN Climate Conference agreed, in the early hours of Sunday, 20 November 2022, to create a "loss and damage" fund to assist countries suffering from the impact of the climate crisis. Three Irish government departments, led by Minister Eamon Ryan, were at the centre of drafting, crafting and negotiating the historic agreement. The result represents a significant step towards climate justice.
Despite this historic achievement, COP26's President, Alok Sharma, remarked at the closing plenary of COP27 that "this is not a moment of unqualified celebration." COP27 failed to demonstrate greater ambition across a number of different areas and, crucially, in relation to ending the use of fossil fuels. This insight describes the key debates at COP27 and where future developments might lie.
Loss and Damage Finance
The EU agreed to support a "loss and damage" fund, subject to certain conditions:
- that the donor base be broadened to include sectors such as aviation, shipping and the fossil fuel industry;
- that the most vulnerable developing countries are targeted for support; and
- that a robust agreement to reduce emissions be put in place.
These conditions were partly met and developing nations accepted the offer.
The passing of the Inflation Reduction Act in the US, as we have previously discussed here, in conjunction with support from other wealthy countries, generated further the momentum for an agreement in Egypt "to establish a fund for responding to loss and damage". A transitional committee will assess what funding is needed, where the money should come from and whether to expand the donor base to countries like China or Qatar. There will be a further reporting obligation at COP28.
Some of the funding is to come through "existing funding arrangements" like development banks or debt relief while more will come from "innovative sources", which could mean taxes on fossil fuels, aviation or shipping. The EU specified that support should only go to "vulnerable" countries which the transitional committee will define. Countries agreed on the establishment of an organisation called the Santiago Network which will provide technical assistance in averting, minimising and addressing loss and damage resulting from climate change.
At last year's COP26, the presidency made a push to "keep 1.5°C alive", referring to the most ambitious temperature limit in the Paris Agreement. At least 23 countries made new commitments in Glasgow to phase out coal power, including five of the world's top 20 coal power-using countries. The text of the COP27 agreement does promote renewables but also "low-emission" energy. It is possible to interpret this as including gas, a fossil fuel which is less polluting when burned than coal, or fossil fuels with carbon capture and storage. It holds the Glasgow Pact line on 1.5°C and the treatment of coal, but does not go any further. While the agreement recognises that the 1.5°C target "requires rapid, deep and sustained reductions in global greenhouse gas emissions reducing global net greenhouse gas emissions by 43% by 2030 relative to the 2019 level", President Alok Sharma highlighted a number of omissions from the text of the agreement. In particular, the fact that emissions must peak before 2025 in order to keep this target, that there was no mention of a clear follow-through on the phasedown of coal or a clear commitment to phase out all fossil fuels and that the text in relation to energy was weakened. On balance, he concluded that "...in Glasgow... the pulse of 1.5 degrees was weak". Now, "[u]nfortunately, it remains on life support".
Proposed Reforms to the International Financial System
Prompted by Barbados' Prime Minister, Mia Mottley, during COP26, a conversation about moving trillions of dollars into green and climate-resilient investments has been gaining momentum. These proposed reforms to the international financial system are happening outside UN Climate Change. The International Energy Agency estimates that $4 trillion needs to be invested in renewable energy every year by 2030 to reach net zero emissions by 2050. Countries called on multilateral development banks (MDBs) and international financial institutions to scale up and simplify access to climate finance and ensure their activities contribute to increased climate ambition. However, Prime Minister Mottley's flagship proposal to use IMF relief, known as special drawing rights (SDRs), to fund carbon-cutting projects does not feature in the text of the agreement.
In recognition of the fact that financial systems must be reformed, in September 2022, Matheson hosted a very informative event on Financing Through the Lens of ESG which is available on our Knowledge Hub. We previously considered the corresponding legal instruments: the SFDR and the Taxonomy Regulations in November of 2021 and we provided an overview of the various issues arising relating to the completion and filing of the SFDR Level 2 pre-contractual disclosure templates in "SFDR Level 2: Are You Ready to File?" in October 2022. If you would like to see a recording of these discussions, please contact our Knowledge Insights team.
Wealthy countries have not yet provided the $100 billion they promised to deliver by 2020 over a number of COP meetings to help developing countries cut emissions and cope with climate impacts. As Lord Nicholas Stern, Chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science, stated these "...investments will [also] generate a new and attractive form of economic growth and development that is sustainable, resilient and inclusive. The plan is that investment will be made mainly by the private sector, but will not occur without strong policy and greatly increased flows of capital at affordable cost. That in turn will require a major expansion of external finance from a range of sources, including the World Bank and other multilateral development banks..." Talks on a new collective climate finance goal for 2025 were slow.
The text agreed in Egypt says the new goal will "take into account the needs and priorities of developing countries".
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