EBF SUSTAINABLE FINANCE ROUNDUP ARTICLE
‘COP 26 final assessment and what’s next’ by Antonio Ballabriga, Global Head of Responsible Business, BBVA & Chair of the EBF Sustainable Finance Working Group
BRUSSELS, 30 November 2021
Why was the COP26 so important? It’s a test for the level of ambition of countries to ﬁght against climate change against a background of mounting scientiﬁc knowledge that highlights the shrinking room of maneuver.
- Over the last few weeks, the climate change debate has captured much global attention. The UN Climate Change Conference, oﬃcially known as the “Conference of Parties” (COP), has happened every year since 1995. However, the COP26 has been perceived as the most important meeting and the ﬁrst real test of the level of global climate ambition since 2015.
- First, the Paris Agreement signed by almost all countries in the world in 2015 is based on a ‘bottom-up’ approach where countries voluntarily decide how much they will reduce their emissions by a certain year. Their commitments, so-called “nationally determined contributions” or “NDCs”, were collectively not ambitious enough to limit global warming to well below 2º, let alone 5º. The signatories of the Paris Agreement were, however, expected to submit new, and more ambitious, NDCs every ﬁve years. Last year the COP was cancelled due to the pandemic and 2021 was the ﬁrst real milestone.
- Second, since 2015, there has been a lot of science and research that illustrates the urgency of acting on climate change as quickly as possible. The 2021 Intergovernmental Panel on Climate Change report underscores that it is still possible to achieve the 5º but only if unprecedented action is taken now by all. The difference between 1.5º and 2º is substantial as every increment of a degree translates into exponentially increased risks for people, communities, and ecosystems.
- Third, the increase of atmospheric CO2 concentration, a slow but relentless process causing climate change, has not been halted by the transitory impact of COVID on CO2 Carbon dioxide emissions fell by 5.4% in 2020 as economies ground to a halt due to the COVID-19 pandemic, but a report by the Global Carbon Project published on 4 November forecast a 4.9% rebound in emissions for this year, close to pre-COVID fossil-based levels.
The COP26 outcome: on the positive side, important progress has been made, particularly by the private sector.
- The COP26 ended on 13 November 2021 with a mixed diagnosis, positive due to the broad commitments agreed by governments and the private sector which keep the 1.5º goal within reach, but negative because such commitments are still insuﬃcient and, mainly, uncertain to be fulﬁlled. In particular, there are no suﬃcient incentives or mechanisms of coercion beyond moral
- On the positive side, several agreements were announced with a potential impact against climate change. Four key agreements were reached: (1) a commitment led by the United States and the European Union and signed by more than 100 countries which aim at reducing methane emissions by 30% before 2030, a gas 80 times more powerful than CO2 in its contribution to global warming; (2) a commitment to stop and reverse deforestation in 2030, which will help absorb emissions in natural sinks such as forests; (3) an unprecedented bilateral agreement between US and China with no concrete action but with the commitment to work together; (4) and, also, a vow by larger polluters such as India, which promised to cut its emissions to net-zero by 2070, a positive political signal despite the tardive date targeted. The International Energy Agency estimates that all the climate pledges announced by November 2021, if met in full and on time, would be enough to hold the rise in global temperatures to 8 °C by 2100. This is the ﬁrst time we breach the 2º threshold in terms of the projected track.
- Negotiators closed a deal setting long-awaited rules for offsetting carbon markets after six years of debate. This was highly demanded by all as it is already included in article 6 of the Paris Accord and recently included in the G20’s policy toolkit against climate change. The ﬁnal deal adopted by nearly 200 countries will help countries to partially meet their climate targets by buying offset credits representing emission cuts by
- As regards the private sector, it cannot be blamed for a lack of climate ambition, especially when looking at the ﬁnancial system. More than 450 ﬁrms across 45 countries – including BBVA – under the umbrella of the Glasgow Financial Alliance for Net Zero have committed to net-zero by 2050 and to establishing, publishing and evaluating -according to strict scientiﬁc standards- their decarbonization More importantly, all ﬁrms will report their progress and ﬁnance emissions annually under a voluntary moral coercive effort.
- The private sector also has a key role in sending a powerful demand signal by making purchasing commitments for a portion of their supply chains that can only be met if innovators bring emerging technologies to a commercial scale. This is the case of the First Movers Coalition launched on 4
- The automotive industry and road transport, including large manufacturing companies such as Ford, GM, Mercedes-Benz, have already committed to working towards all sales of new cars and vans being zero-emission globally by 2040, and by no later than 2035 in leading markets. However, this agreement lacks a quorum. Large automotive companies such as Toyota or Renault are not ready for zero-emission vehicles. They argue that many areas of the world such as Asia, Africa, Middle East do not have, and will likely not have, an environment suitable for promoting fully zero-emission
On the negative side, some reached pledges have been softened and remain accountable only through moral suasion. Critics argue that this is insuﬃcient.
- The glass could be seen as half empty. Signed agreements on methane or deforestation are hampered by the lack of relevant signatories and control mechanism Past experiences are not encouraging.
- Additionally, the necessary commitment to phasing out coal and fossil fuel subsidies was softened down in the ﬁnal COP26 deal after opposition from Saudi Arabia, Russia and India. The final text includes “accelerating efforts towards the phase-down of unabated coal power and phase-out of inefficient fossil fuel subsidies”. While this is not ambitious enough, it was the first time fossil fuels have been included in COP
- Beyond the aforementioned positive and negative points, it is worth noting that the global climate change commitments are on slippery ground. All agreements and pledges based on the Paris Accord are voluntary (unlike the Kyoto Agreement launched in 1997 which failed due to its mandatory nature, the absence of certain signatories). Mechanisms for public persuasion have been revealed to be ineffective compared to other incentives such as ﬁnancial help and/or expectations of carbon pricing. As an example, Turkey’s recent signing of the Paris Agreement was nudged by financial support and the carbon border tax 
- The ﬁnal agreement highlights the importance of mobilizing 100bn USD to support emerging countries, but the best way to make it real is to enhance transparency in the implementation of the
What can we hope for in the future? Reinforced moral suasion through more frequent updates of the NDCs, carbon pricing through global markets development and going beyond the voluntary nature of Paris.
- All countries agreed to revisit and strengthen their current emissions targets for 2030 (Nationally Determined Contributions) in 2022. This will be combined with a yearly political roundtable to consider a global progress report and a Leaders summit in
- Decarbonization is a formidable challenge that requires an incredible amount of capital Well-functioning global carbon markets, both mandatory and voluntary, and instruments for carbon pricing would be the most powerful incentives for dealing with the negative externality of emitting CO2 and changing consumer, producer and investor behaviors. The long-awaited carbon market agreement was good news. However, many critics worry that offsetting could go too far in allowing countries to continue emitting. In the coming months, we will see whether its development is a reality or not.
- Additionally, the steel and aluminium agreement between the EU and the US12 might be the origin of a climate club of countries that sets up third-country import tariffs for traded goods based on underlying emissions. It would amount to a global carbon pricing policy, an effective instrument to tackle climate
- Looking ahead, we also need to acknowledge some temporary clouds on the economic horizon. Consumer prices are surging in the US and Europe, primarily because of higher energy costs. This could fuel a potential populist backlash in the west against green reforms in the coming months. World leaders have a broad toolkit: offering better safety nets for vulnerable citizens for a “just transition”; setting the right incentives for attracting investments in non-carbon energy sources by using carbon pricing mechanisms and removing subsidies, and demonstrating a strong global stance in cutting Instead of choosing one option, better still, they should do all three.
- The next COP27 in Egypt in 2022 will likely not be in the global limelight, but it will be crucial to monitor whether the multiple pledges committed are translated into
 COP26 Glasgow – Final agreement
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