COP26 and the Path Forward
By Jack Lloyd
Impact Analyst, Essex Investment Management
With COP26, the 26th Conference of the Parties, wrapping up from Glasgow recently, it is important to take stock of the progress made to date and understand what needs to happen now. Advocates and critics have been quick to label COP26 as a success or an utter failure, but the reality falls somewhere in the middle. Based on new commitments and pledges stemming from the Glasgow conference, the International Energy Agency (IEA) projects global temperature warming could be limited to 1.8 degrees Celsius (2.1 degrees C pre-COP26) above pre-industrial levels by 2100 if all net-zero pledges are met in full and on time. However, it is important to realize that the 1.8-degree pathway comes with significant caveats, most notably the credibility of net-zero pledges. Although 90% of emissions are now covered by net-zero pledges, the reality is few are on track to be achieved due to insufficient near-term action, making projections contingent on achieving net-zero pledges unreliable. To provide further context, the IEA projects a 70% gap in emissions reductions needed by 2030 versus what is targeted as part of net-zero pledges to limit warming to 1.5 degrees C, which is the goal of the Paris Agreement.
In the final hours of COP26, the parties agreed to the Glasgow Climate Pact, which includes the first explicit reference to fossil fuels in a UN climate agreement. The pact targets coal use, fossil fuel subsidies, and proposes strengthening 2030 emissions targets sooner than previously expected. While the focus on 2030 targets represents a step forward, the wording related to coal was significantly weaker than initially drafted due to objections from the biggest consumers of coal: China and India. COP26 also achieved an agreement on the framework for an international carbon trading system which allows countries with higher costs of emissions abatement to purchase credits from countries that have decreased emissions more than required. One of the most significant developments at COP26 was the methane agreement spearheaded by the US and EU to reduce methane emissions 30% by 2030. Methane is one of the most impactful short term decarbonization solutions since methane’s warming potential is 80x higher than CO2 in the first 20 years in the atmosphere. Another target addressed in Glasgow negotiations was deforestation, as 100 countries that represent 85% of the world’s forest cover committed to halt and reverse deforestation and degradation by 2030. Finally, COP26 welcomed a surprise 2070 net-zero pledge from India, the world’s fourth largest emitter, as well as Brazil strengthening their 2030 emissions reduction target while pulling their net-zero commitment forward from 2060 to 2050.
Despite the positive agreements stemming from COP26 and momentum on climate action, there is considerable work to be done in the next few years. There is a widespread disconnect between long term net-zero targets and tangible near-term emissions reductions, demonstrated by the 2030 emissions reduction gap of 70% between what is pledged by countries and what is needed to limit warming to 1.5 degrees C. Climate Action Tracker projects that based solely on forecasted 2030 emissions and the subsequent emissions pathway, the world is heading for 2.4 degrees C warming by 2100. This is a far cry from the 1.8 degrees C if all net-zero pledges were achieved on time, and substantially higher than the 1.5 degrees C target of the Paris Agreement. Countries and corporates are far too complacent setting long term net-zero targets and touting their climate credentials without establishing decarbonization plans to meaningfully reduce emissions in the short term. Many net-zero pledges, whether from individual companies or overall countries, are violating the Time Value of Carbon which states that greenhouse gas emissions reductions now are more valuable than emissions cuts in the future. Scientists agree that given the dire state of the climate and the remaining carbon budget to achieve net-zero by midcentury, significant emissions reductions are needed now. Any credible net-zero pledge must be accompanied by checkpoints over the next five to ten years to ensure the pace of emissions reductions keeps future net-zero pledges within reach.
While there are future climate technologies that are needed to achieve total decarbonization, such as low-cost, scalable carbon capture technology, many of the solutions needed to reduce emissions are present now. Renewable energy is the cheapest form of energy in many areas of the world, leading to calls to “electrify everything”. Electric vehicles are less expensive than ICE vehicles on a total cost of ownership basis and are expected to reach sticker price parity soon. Other technologies such as insulation systems and HVAC are addressing the emissions footprint of buildings while green hydrogen is rapidly progressing to target hard to abate areas such as heavy industry and long-haul transport. We must leverage the impactful technologies we have available today and stop relying on grand promises for future emissions reductions. GEOS was created to intentionally invest in companies that provide solutions to reduce greenhouse gas emissions and solve environmental challenges. The GEOS team recognizes the greatest climate impact is achieved by eliminating emissions now and we actively identify companies providing climate solutions today.
This commentary is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. The opinions and analyses expressed in this commentary are based on Essex Investment Management LLC’s (“Essex”) research and professional experience and are expressed as of the date of its release. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is intended to speak to any future periods. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties.
This does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product, nor does it constitute a recommendation to invest in any particular security. An investment in securities is speculative and involves a high degree of risk and could result in the loss of all or a substantial portion of the amount invested. There can be no assurance that the strategy described herein will meet its objectives generally, or avoid losses. Essex makes no warranty or representation, expressed or implied; nor does Essex accept any liability, with respect to the information and data set forth herein, and Essex specifically disclaims any duty to update any of the information and data contained in the commentary. This information and data does not constitute legal, tax, account, investment or other professional advice. Essex being registered by the SEC does not imply a certain level of skill or training.
 Fatih Birol, COP26 climate pledges could help limit global warming to 1.8 degrees C but implementing them will be key. International Energy Agency, 2021.
 Climate Action Tracker, Glasgow’s 2030 credibility gap: net zero’s lip service to climate action. Wave of net zero emission goals not matched by action on the ground. 2021.
 Felix Preston and Puja Jain, The Time Value of Carbon. Generation Investment Management, 2021.
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