COP29 got underway last week, representing another important event in the global fight against climate change. While it appears that some progress has been made in Baku, including early agreement over standards for a global carbon market, there have also been reports of general dissatisfaction with the pace of decision making – particularly in relation to the set piece negotiations surrounding the 'New Collective Quantified Goal on Climate Finance' ("NCQG"), which is due to be agreed at COP29 (but currently remains elusive).
At a time when the results of the US election suggest that the US will once again remove itself from the Paris Agreement and, as set out in our initial COP29 briefing, when wider political tensions between major international powers remain high, the increasing need for broader international cooperation and ambition in relation to climate change is becoming more necessary; with the COP29 president, Mukhtar Babayev, urging delegates to "be brave" at the start of the second week of negotiations.
1 The impact of the US election
Prior to COP29 getting going, the results of the US election immediately stoked fears that the world's largest economy would become absent again from the Paris Agreement and other international efforts to reduce the impact of climate change, threatening to overshadow the first few days of the conference in Azerbaijan entirely.
Under the previous administration of President-elect Donald Trump, the US announced that it would cease participation in the Paris Agreement – with the withdrawal finally taking place on 4 November 2020. While this withdrawal was ultimately reversed under President Joe Biden, the new President-elect has made it clear previously that he intends to take the US out of the Paris Agreement again and potentially also remove the US from the United Nations Framework Convention on Climate Change ("UNFCCC") – which could have more material consequences for international efforts to tackle climate change.
As one of the largest global emitters of greenhouse gases, the US plays an integral role in diplomatic efforts to tackle climate change and, while the US has sent representatives to COP29, these representatives are restricted by the knowledge that any commitments that they make now are likely to be undermined by the next administration. To some degree, the impact of the potential second withdrawal of the US has been felt already in diplomatic circles, with Argentina announcing during the first week of COP29 that its delegation would return home – amongst discussions that it may also remove itself from the Paris Agreement.
With that said, other participants to the Paris Agreement are recognising that the absence of the US from negotiations may provide an opportunity to show leadership on the issue. As set out in last week's Sustainability Insights, Europe and other regions have a chance to benefit from more investments in sustainability focused products and assets – with the UK's Prime Minister, Keir Starmer, taking the opportunity to attend COP29 to re-affirm Britain's commitment to the international climate agenda and announcing the UK's new Nationally Determined Contribution ("NDC").
2 New UK NDC
As was anticipated prior to COP29, the UK used COP29 as an opportunity to unveil its new NDC – pledging to reduce carbon emissions by 81% by 2035 compared to 1990 levels (up from 68% by 2030). The new Government is hoping that the UK's updated NDC will cement the UK's reputation as a global leader in relation to green technology – and also hoping that it will "attract further investment and jobs in low carbon technologies such as solar and wind, electric vehicles and batteries"
The UK's Energy Secretary, Ed Miliband, emphasised as part of the announcement that "Britain is back in the business of climate leadership, with an ambitious new target that will protect our environment, deliver energy security and restore our global climate reputation", highlighting that the new Government sees the energy transition as both a growth priority and a diplomatic tool.
Next year will see all of the major signatories to the Paris Agreement review their NDCs in advance of COP30. There is a hope that many will use new NDCs as an opportunity to map out long-term investment plans – and the UK has already set the tone of potentially more ambitious commitments.
3 Some signs of international agreement over the global carbon market
One positive announcement coming out of the first week of COP29 was the approval of international standards in relation to the global carbon market, and for generally improving the integrity of carbon credit programmes. This decision, which has been in the making for a number of years, provides a formal basis for the mechanism established by Article 6.4 of the Paris Agreement; known as the 'Paris Agreement Crediting Mechanism'.
Article 6 of the Paris Agreement details how participants can pursue voluntary cooperation to reach their climate targets – with the Paris Agreement Crediting Mechanism identifying "opportunities for verifiable emission reductions", attracting funding to implement them and also enabling "cooperation among countries and other groups to conduct and benefit from these activities".
The creation of a genuine global carbon market has been seen by many as one of the best ways to reduce international greenhouse gas emissions – although critics suggest that it will only incentivise further emissions and does not address the core of the problem. With that said, reaching an international consensus around Article 6.4 certainly appears to be a positive step in addressing some of these concerns – via a UN-backed carbon market.
As well as participating countries, companies would also be able to use the UN carbon market, and there is hope that the Article 6.4 carbon market can become operational – with some estimating that the market could lead to investment flows of $250bn a year.
Additionally, during COP29, the International Organization of Securities Commissions published its final report on 'Promoting Financial Integrity and Orderly Functioning of Voluntary Carbon Markets' – detailing 21 'good practices' to support voluntary carbon markets, showing progress is also being made in this area from a private markets perspective, which may end up having a greater impact on traditional financial markets and commodities trading.
However, unsurprisingly, given the speed at which the Article 6.4 framework was agreed, some COP29 attendees commented they were not given an equal say before the deal was reached in Baku – although there is hope that the 'Supervisory Body' of the Article 6.4 mechanism will continue to address stakeholder concerns as further discussions are held.
4 Climate finance
While agreement over carbon market mechanisms was certainly welcome, as we noted in our initial COP29 briefing – the set piece NCQG negotiations for the 'finance COP' have been centre stage (and are facing a significant uphill battle).
By way of re-cap, back in 2009 a $100 billion annual target for climate finance was first agreed at the Copenhagen Climate Summit. This target was met for the first time in 2022 (two years later than the original 2020 target year). The NCQG was introduced under the Paris Agreement and is intended to replace this existing finance commitment with a larger annual target (and needs to be finalised by 2025).
It has been estimated by the UN's Trade and Development body that developing countries may require up to $1.1 trillion USD annually for climate finance from 2025, rising to around $1.8 trillion by 2030, based on projections using the United Nations Global Policy Model. While experts may disagree on the exact number, it will certainly need to be much larger than the existing $100 billion target.
Key issues remain over how the funds should be structured, which countries should contribute (and receive benefits from) the money, in addition to its overall size – although the Independent High-Level Expert Group on Climate Finance suggests that $1 trillion USD will need to be the floor by 2030 (which represents around 1% of annual global economic output).
The UK Government has confirmed that the "last government's commitment to £11.6 billion of climate finance from 2021/2022 to 2025/2026 will continue to be honoured", however many countries are only just recovering from high-levels of inflation and a period of low growth, which makes it more difficult domestically to justify greater international expenditure. One potential source of further funds is private markets, with the same UK Government announcement stating that "public finance alone is not going to finance the global transition, and the mobilisation of private capital plays an important role to tackling the challenge".
While the current lack of consensus from stakeholders at the summit is causing concern, it is often the case that deals are struck at the last moment at COPs – and we will be watching to see if progress can be made in relation to this fraught negotiation.
5 What's next?
While COP29 did not necessarily begin with the strongest start, and while there have not been many major announcements so far, the first week of COP29 has potentially set the stage for further constructive talks. However, for real progress to be made, and for COP29 to be considered a success, agreement on an ambitious NCQG will be seen as the key outcome for gauging both the currently level of international commitment on tackling climate change and the possibility of still achieving the goals of the Paris Agreement.
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