Gauging the weather: COP at a generation old

Charlie Thomas, CIO at EdenTree, reflects on the UN’s COP process, the policies that have dominated so far and the role of technology and innovation in shaping ambition.

The UN’s Conference of Parties (COP) process is a generation old. My first direct experience of the process was when I attended COP 5 in Bonn in 1999 and after each summit I’m usually asked to comment on what that year’s COP means for investors.

To me, this question is too narrow. History will judge the COP process over decades, not individual years. Granted, there are turning points and each conference seeks to raise important issues to build on work done so far. “Loss and damage” is an example of that. This topic was first highlighted at COP 18 in Doha and led to the Warsaw International Mechanism for Loss and Damage at COP 19, and is back on the agenda at COP 27.

But the decisions made today may not be fully understood for years. And no one is under any illusion. History isn’t judging to process well so far.

Losing valuable time

It is easy to forget that there have only been two UN climate policy regimes: the Kyoto Protocol and Paris Agreement.

Kyoto Protocol came into being at COP 3 in 1997 – amazingly early in the process but given what has happened since. With its focus on 37 large, industrialised polluters, the collective aim was to cut emissions by about 5% between 2008-2012, from 1990 levels.

While it met this goal, Kyoto was a policy failure. The US and Australia decided not to ratify the treaty. And when COP 15 in Copenhagen in 2009 failed to come up with a successor, the global community kicked the can firmly down the road. COP 18 in Durban delayed the plan to strike a new deal to Paris in 2015 with whatever might be agreed not due to start in 2020. The Durban Platform for Enhanced Action really didn’t live up to its name.

At Copenhagen, which was the first time a COP committed to a science-based goal of limiting warming to 2oC, the science was already warning policymakers that the world was moving too slowly to reduce greenhouse gases, and that 2020 needed to be the peak year for emissions.

Despite this, Kyoto was given a second implementation period, which required deeper cuts of about 18% from 1990 levels but excluded the US, among a larger group of major industrialised nations, as well the major developing economies, China, India, South Africa and Brazil.

While it is likely the second 2020 goal was met by those countries that remained committed, emissions globally continued to rise.

Of the many reasons Kyoto failed, the need for each signing party to adopt “legally binding” targets was perhaps the most significant. Copenhagen set in train a new approach, one based on individual contributions at the country level that reflected individual political and socioeconomic circumstances. This bottom-up “pledge and review” system is the backbone of the Paris Agreement, which included the requirement to ratchet up every five years.

It has been rightly criticised for lacking a firm link to science – despite its 1.5oC aspiration – and having no mechanism for keeping countries on track. The US pulled out under Trump and is back in under Biden. These are paper-thin voluntary agreements. Policy risk is extreme.

Nevertheless, the Paris Agreement was ratified ahead of schedule and remains the current regime for tackling climate change. And Glasgow effectively marked the start of the Paris Agreement – hence the flurry of Net Zero pledges and generally increased ambition in the months leading up to the conference. That was exactly what was meant to happen under the Paris Agreement.

The policy-technology nexus

Putting the onus back on individual countries, while retaining several of the mechanisms for supporting developing nations, was a model the world could get behind. It is a model based on what happens at home in terms of politics and economics of each country that is likely to drive the success or failure of the COP process, rather than the science. The influence of hydrocarbon states at COP27 is a stark reminder of that fact.

However, notwithstanding the gaps that remain between ambition, policy and what is needed to keep emissions below 1.5oC, there are reasons to be optimistic about the domestic policy support we are seeing from the world’s largest emitters – China and the US.

China’s 14th five-year plan for renewable energy is likely to see the country exceed its targets in a similar fashion to the previous three plans. Meanwhile, Biden’s Inflation Reduction Act has potential to massively spur potential investment in clean energy, and thus helping the US to achieve more ambitious emissions cuts in the region of 40% rather than 30% by 2030, based on a 2005 baseline.

Indeed, China accounted for 45% of all global investment in renewables in 2021, with the country spending some $142 billion. The US, Japan and India follow behind, while 92% of developing countries now have long term clean energy goals, up from 67% in 2019. Globally, investment in the energy transition has doubled since the Paris Agreement was struck in 2015 from just over $300bn to roughly $620bn in 2021¹.

The message here is there has been a marked acceleration of investment since Paris and a massive pick up in installed capacity of renewable energy. Some 78% of countries installed more renewable energy capacity than solar in 2021².

Tying this back to the COP process, policy and innovation have typically had a cyclical relationship, with policy driving innovation and innovation driving policy. We bemoan the lack of ambition at COP, but I would argue ambition can quickly be overtaken by innovation and the take-up of alternative technology.

The UK’s renewable energy auctions demonstrated this during the summer. The government securing 11 gigawatts of renewable energy at a price that was four times cheaper that the prevailing gas price. Some seven gigawatts will come from offshore wind at a price lower than onshore wind for the first time.

The UK government increased its target for offshore wind power from 40 to 50 gigawatts by 2030³ at around the same time. Floating wind turbines are a new technology which will help to make this happen and the revised target is expected to support around 90,000 jobs (up from 60k) in the UK offshore wind sector by 2028.

This doesn’t deny the need for ambition or the urgency by which the world economy needs to decarbonise in a fair and just fashion – which includes fiscal support to at-risk nations. 2022 has been a tough year, with rising input pricing slowing the transition. Coal investment, which has spiked during the last year due to the war-induced gas crisis, must also come down. But when these immediate pressures ease, the further acceleration in renewables should path the way for more ambitious targets.

At COP27, UN Secretary-General António Guterres summed up the urgency with a grim warning: “We are on a highway to climate hell with our foot still on the accelerator.”⁴ We hear that warning loud and clear. COP 27 again showed the influence of hydrocarbon countries and companies on the negotiations, and again highlighted the need to support countries most vulnerable to a changing climate.

But Paris does appear to be having an impact, spurring a positive cycle of domestic ambition, improved alternative energy economics and innovation.

As a house, EdenTree fully recognises this urgency and are tilted towards a just transition. We have a clear fossil-fuel exclusion policy and offer a suite of funds that allocate capital towards green projects, companies and infrastructure, through equities and fixed income, with high thresholds in terms of alignment, impact and what qualifies as a green investment.

The views contained herein are not to be taken as advice or recommendation to buy or sell any investment or interest. The value of an investment and the income from it can fall as well as rise, you may not get back the amount originally invested. Past performance should not be seen as a guide to future performance. EdenTree is authorised and regulated by the Financial Conduct Authority and is a member of the Investment Association. Firm Reference Number 527473.

For more information, please go to www.edentreeim.com

Sources

1. All statistics sourced from BloombergNEF’s Climatescope 2022 report
2. All statistics sourced from BloombergNEF’s Climatescope 2022 report
3. https://www.offshorewind.biz/2022/04/07/uk-to-raise-2030-offshore-wind-target-to-50-gw-slash-project-approval-times
4. https://www.ft.com/content/b1f8cc36-e2b5-4506-9899-87379e79827d