Friday Climate Focus: What the COP? Death by Net-Zero, a $100 billion song and dance & more
Friday Climate Focus #4
In Today’s Edition
#1 - Representatives from nearly 200 countries descend into Glasgow this weekend. What’s different about the Climate Leadership Retreat this year?
#2 - Turn left, a Net-Zero Pledge. Turn right, another one. Look ahead, you know it. There’s something unusual about some of the countries causing this death-by-net-zero pledges in the run up to Glasgow.
#3 - Talking about cheap pledges, high-income nations published a climate finance delivery plan that said how it won’t deliver $100 billion commitment on time
#4 Bonus - Apparently, Climate News = Higher TV Ratings; Royal Dutch Shell is having a bad week, month, and year; A watered-down bill, intact climate funding, but less than ideal outcomes
#5 Banter - Frankie says don’t choose extinction; When $100 billion is a drop in the ocean
Welcome to the 4th edition of Friday Climate Focus - a weekly curation of the most recent climate developments of significance, with context and without the end-of-the-world overture.
Let’s dive in.
The Climate Party in Glasgow
COP 26 kicks off this Sunday.
For the uninitiated, the 26th edition of UN Conference of the Parties on Climate Change will convene in Glasgow with representatives from over 200 countries arriving to negotiate and advance global climate action.
You might be hearing about how it is a ‘make or break’ climate summit and wonder what will come off it.
However, the unfortunate reality of international negotiations, specifically around climate, is that it is incremental. Do not expect any sweeping changes.
Most importantly, I have to constantly remind myself that almost all of the coordinated climate action happens before and after the conference. Countries just shake on it during.
There have been unsuccessful climate summits in the past and a few successful ones. The Paris Climate Summit in 2015 was a rare occasion when countries agreed to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels
Despite meeting every year, the Paris Agreement mandates 5-year cycles for countries to up-the-ante on national climate action. That should explain the string of pledges we saw over the last fortnight or so. The Glasgow Summit is the platform for laggards to be nudged to do better.
Boris Johnson’s UK Government has laid out the agenda for the summit in classic Boris Johnson style - (Reduce) Coal, (Increase Electric) Cars, (Increase) Cash, and (Increase) Trees. Even for a seemingly simple agenda, it is difficult to get 200 countries to align on common ground.
Scorecard for Measuring Success
I’d consider the Glasgow Summit a reasonable success if we can get countries to collectively make a dent the following (and it’s a tall ask) -
Standardised framework for national carbon markets, and carbon pricing that isn’t laughably low within developed markets
Detailed milestones and pathways to achieve net-zero commitments
Signing more countries onto the 40+ list of signatories pledging to reduce Methane emissions by 30% by 2030
Regulatory framework for companies and financial institutions to disclose climate risk, and advancements in investor-led climate stewardship
Climate Finance beyond 2025 after the pledge by wealthy nations to fund $100 billion to developing countries ends
Give me some or most of this and I will be a happy man in a fortnight.
Here’s a brilliant COP 26 explainer that is informative and not at all boring -
Is Net-Zero Not All That?
If you ask me, there are only two types of climate pledges - ambitious pledges that are sparse on details, or inadequate pledges that are sparse on details. And it is hard to tell one from the other.
Recent developments have only confounded this problem further.
Here is a list of net-zero pledges from nations with unusual fossil fuel profiles.
The United Arab Emirates pledged to achieve net-zero by 2050
The Kingdom of Saudi Arabia pledged to achieve net-zero by 2060
Russia promised to reach net-zero no later than 2060
Australia said it will reach net-zero by 2050
What's unusual about their fossil fuel profile?
Oil and Gas makes up 30% of the economy in the UAE and 50% in Saudi Arabia. 35% of Russia’s revenues come from oil and gas exports. Australia is the 2nd largest exporter of coal, by volume.
Here are a few fun facts that was included along with the announcements.
Saudi Arabia indicated that it would continue to be the world's largest producer of oil.
Russia plans to use climate targets to negotiate current sanctions levied against state-owned utilities.
Australia will not introduce a legislation for emissions cut, and leave it to consumers and companies to drive the initiative voluntarily.
But, net-zero…
A Net-Zero Commitment is essentially a nation balancing its emissions books. You commit to remove as many units as you put in to the atmosphere.
Remember that “successful” climate summit in Paris I was talking about earlier? Countries agreed to a carbon accounting mechanism that left a lot to be desired when it comes to counting emissions.
Emissions within the national boundaries are only counted in the pledges, and excludes overseas emissions
Countries can come across as climate champions, while continuing to invest and extract fossil fuels and exporting emission outside its borders.
Okay, how can we differentiate a genuine climate policy from a 'greenwash'?
A quick rule of thumb to test for greenwashing -
— Does it cut emissions significantly? and,
— Does it make the climate emergency worse elsewhere?
If the answer is Yes and No for the two questions, it is an earnest climate commitment.
The $100 billion Song and Dance
The Copenhagen Climate Summit in 2009 had one tangible outcome - a pledge to fund $100 billion a year to poorer nations to fight climate change, starting 2020.
The Climate Finance Delivery Plan was published by developed nations earlier this week (yes, in the 10th month of 2021).
What’s more, they said that the threshold isn't likely to be met until 2023.
Here are 5 reasons why the current delivery plan, delays notwithstanding, creates uphill challenges in building trust ahead of the Glasgow Summit next week -
$100 billion the bare minimum and developed nations are struggling to meet that
Climate finance is required in the trillions. $100 billion is an arbitrary amount that was widely considered bare-minimum. The fact that even that hasn't been met signals that the developed nations are expecting a lot from the developing nations, when they aren’t pulling their weight
Amount of private financing (in a public commitment) is overstated
The delivery plan indicates that private financing has plateaued around $14 billion a year, a significant shortfall from the original $33 billion expectation annually. Moreover, private financing comes with an implicit requirement to generate returns which gears it only towards bankable climate projects. Such projects are a small fraction of overall climate financing required in poor countries.
Projects currently financed is skewed against the needs of developing countries
Climate financing for developing countries is typically either adaptation financing (to better manage the adverse effects of extreme weather events) or mitigation financing (ones that cut emissions). Currently, mitigation financing outweighs adaptation 3:1, as natural disasters continue to increase in frequency with every passing year. There will be very little progress in negotiations unless the proportion is more balanced.
Unclear accounting mechanisms make it difficult to track climate financing
What constitutes climate financing is unclear and therefore, makes it hard to differentiate drawdowns from existing international aid budgets from fresh funding. The delivery plan currently outlines sources of climate financing as public finance, funding from multilateral development banks, as well as private financing, all of which are difficult to break down without criteria on designated spending.
Inconsistent choice of financing instruments affects project planning pipeline
Currently, 71% of the climate financing assistance comes in the form of loans. The new delivery plan does not clearly indicate what financing instruments will be preferred, and emphasises both grant-based resources, as well as loans, equity investments, and other de-risking instruments. Each comes with its own risk-return profiles, thereby making it difficult for poorer nations to plan expenditure and develop project pipelines that can meet immediate, as well as medium-term priorities
Canada and Germany were designated by the UK, host and the current holder of the rotating COP Presidency, to develop a plan for how developed countries can collectively come up with the money.
Jonathan Wilkinson and Jochen Flasbarth, representatives from the two countries responsible for the plan, outlined the difficulty in getting their counterparts to be forthcoming about their financing commitments.
Jonathan and I really pushed developed countries during the last weeks very hard, and not all of our conversations were really seen to be polite
He added that, “The developed world did not deliver on the commitment.” and it was “extremely unfortunate ... it's not right that the developed countries didn't do it in due time.”
At the COP26, a strong rhetoric that is not backed by strong commitments will make it difficult to break new ground to generate additional financing from other developed countries or to get developing countries to make more ambitious commitments.
Or may be, it wouldn’t matter.
Pledges are pretty cheap anyway.
Bonus
24x7 Climate News
Media companies are betting that programming about extreme weather events will increase viewership and ratings and Rupert Murdoch’s Fox News is making the first move.
Starting next week, Fox News Network is launching a new app next week that will stream weather programming live and has invested $10 million into the endeavour. It brings with it a 120-member strong team of meteorologists, a new studio in their Manhattan headquarters, and features on the app that allows users access to 3D radars and real-time footage of storms.
My $0.02
I am on the fence about what this means for overall climate discourse, but I can’t help but wonder … for a network that denied climate change vehemently up until last year … oh boy!
Cracks in (Royal Dutch) Shell
Things haven’t been going right for the Anglo-Dutch entity for some time, and this week was no different.
Third Point, an activist fund, wrote to its shareholders that the oil major be broken up into standalone businesses, including a separate one for its legacy oil business, to fasten the energy transition. This comes after the hedge fund built a large enough stake over the last 12 months.
The emphasis on Shell’s energy transition is noticeably higher after a court ruling in the Netherlands that mandated the company to cut its emissions by 45% from 2019 levels, by 2030, including Scope 3 emissions. (I wrote about different types of emissions using this infographic last week).
In what is surely a double-whammy, ABP, one of the largest pension funds in the world, confirmed earlier this week that it would exit all of its fossil fuel exposure by the 1st quarter of 2023. ABP holds positions in around 80 fossil-fuel companies, totalling nearly €15 billion, including Royal Dutch Shell.
The Chair of the Dutch pension fund included that they see insufficient opportunity as shareholders to work with oil and gas majors to push for significant acceleration required for the energy transition.
My $0.02
The Sustainable Investment industry is grappling with identifying an effective strategy that balances its fiduciary responsibility to its shareholders as well as future-proofing its portfolio amidst a climate crisis.
While divesting from fossil fuels might seem a prudent approach, it shouldn’t be the default. Investors must have an engage-before-divest strategy with fossil fuel companies, depending on their willingness to plan and execute a science-based climate strategy.
Interestingly, ABP’s exit from fossil fuels presents an opportunity for the fund to shift its attention to engagement with high emissions sectors such as utilities, automotive, and aviation. These sectors could be perceived to have a higher incentive and a lot lower inertia, to move away from fossil fuels, compared to businesses that extract and sell fossil fuels.
Oh and the less said about Third Point, the better. I believe it is short-term activism that discounts for bottomline pressures that could hamper performance of standalone clean-energy businesses. Shell’s integrated structure allows investors greater flexibility to utilise cash flows from fossil fuels in the short-term, and emerge in the medium-term with a higher share of clean-energy business. All parties willing, of course.
Public Opinion is a leading indicator for Political Action?
My $0.02
As news emerged yesterday that Biden’s ambitious $3.5 trillion infrastructure bill got trimmed to $1.85 trillion, climate spending appears to be relatively unscathed. However, Democratic Senator Manchin, the pantomime villain or the hero depending on how you view the subject, managed to successfully block portions of the bill that would have significant impact on fossil-fuel powered electricity. The Clean Electricity Protection Program (CEPP) promised to incentivise utilities that generated more power from cleaner sources and punitive measures against the ones that did not. It did not make the final cut.
While overall spending volumes did not decrease and that is reason enough to celebrate, the mechanism included in CEPP could have accelerated emissions reductions significantly. But a win is a win, and we will take it.