The global COP28 climate negotiations have ended, with a deal, as usual, reached at the very last moment. Overall, this COP will be remembered for being the first to agree on transitioning away from fossil fuels, and indeed for being the first time language around the role of ‘fossil fuels’ has been included in a UN climate change agreement.
Increasingly the COPs are splitting into dual conferences, one for the country negotiators and a side-conference with corporate and finance delegates promoting voluntary initiatives. This COP was unprecedented in its attendance, with a record number of observers and guests, including business executives from the energy industry, such as the CEO of ExxonMobil Darren Woods, Occidental CEO Vicki Hollub and the heads of European giants Eni and RWE.
‘Coalitions of the willing’ have also become increasingly important, where national and subnational governments make commitments going beyond the lowest common denominator of a global deal. Most significant this year was an expansion of the alliance of countries committed to setting a deadline for the phase-out of unabated coal use, which now counts the US as a signatory.
COP28 saw the conclusion of the first global stocktake, designed to itemize what countries are doing (or failing to do) to realise the Paris Agreement commitments. At the heart of the negotiation was the outcome of this stocktake, and what it would say about fossil fuels.
After several re-iterations of the text, it was clear that the negotiations were centred on wording around oil, gas, and coal. We saw first drafts suggesting language around ‘phasing out’ fossil fuels, before finally settling on ‘transitioning away from fossil fuels’. Though the final wording is less ‘ambitious’ than calling for a full phaseout it is nonetheless indicative of the growing international consensus for fossil-free energy systems – the UN Climate Change Executive Secretary dubbed it “the beginning of the end” of the fossil fuel era. However, the text still includes a sentence recognising that “transitional fuels can play a role”, which is easily interpreted as a way to provide space to negotiate for the role of natural gas.
The text also calls for the phasing out of “inefficient” fossil fuel subsidies. This statement,, which we do not think received enough attention, could provide a material blow to the fossil fuels sector, as fossil fuel subsidies are significant ($7trn in 2022). A statement signed by 12 countries – including the Netherlands, Denmark, Canada and France – committed to providing ‘transparency’ into is fossil fuel subsidies by publishing national inventories ahead of COP29.
The text also calls for a ‘tripling of renewable energy capacity’ and a ‘doubling […] of energy efficiency improvements’ by 2030. If these goals are implemented, they will minimise climate change impacts. Clearly this will need financing, with quick estimates suggesting the costs sit somewhere between $2.2 and $2.7 trillion annually. We note other constraints that need to be ironed out to make this reality, particularly in regards to permitting and grid resilience – according to the IEA the world must spend $600 billion annually by 2040 to prepare our grids.
As always with climate deals, what is critical is how global, high-level pledges translate into actions by governments. As we stated ahead of the conference, investors need greater clarity on national commitments to judge the credibility of country transition strategies. To this end, having these international commitments reflected in individual NDCs, which should be published from late 2024 onwards, will be a crucial next pillar of transparency for investors.
Outcome: COP28 is rich in new global initiatives, but these commitments (like tripling renewable energy capacity and phasing out fossil fuel subsidies) will only meaningfully shift the dial on 1.5C alignment when translated to actionable pathways to implementation.
Ahead of the conference we predicted that there may be some minor progress on loss and damage but did not foresee the full operationalisation being agreed. We were surprised, like many, when it was announced on the very first day of COP28 that an agreement to provide funding had been reached. By conference end $700 million had been committed to the fund, from nations including the UK, Japan, UAE, Germany and the US. It was also re-iterated that the fund would be hosted by the World Bank, for now, and that it will be governed by a board of 26 member nations, mostly from developing nations.
However, though initially celebrated, a lot is left unanswered regarding the new fund, as most of its operationalisation remains unclear. The current decision does not include a final statement on the scale and magnitude of the fund. There is also no firm obligation for developed countries to pay into the fund, leaving it open to individual countries generosity.
Outcome: The current seed funding is tiny compared to the predicted economic costs of damages from climate change in developing nations. Some estimates put the loss and damage needs for developing economies somewhere between $100-580bn per year. Clearly it is impossible to accurately calculate this, but as the fund stands (in scale and in operation) it is unlikely to provide significant capital to countries struggling with climate impacts.
We predicted prior to the conference that there would be continued progress on designing an international carbon market. However, COP28 flattered to disappoint on carbon markets, with negotiators failing to secure an agreement. The main stumbling block was the process for overseeing carbon removal credits, with some nations concerned about inadequate safeguards and loopholes, while others pushed for a lighter touch governance system.
This leaves the UN-led carbon market in a continued state of uncertainty, although avoids a worst-case scenario where a lax international rulebook on carbon credits enables the return of the carbon fraud and greenwashing that was endemic under the previous UN carbon credit system, the Clean Development Mechanism. The lack of agreement will have a knock-on impact on the voluntary carbon market. However, we view this more as removing a potential near term upside rather than promising further downside for this beleaguered market.
Outcome: All major decisions are pushed to COP29, the only cold comfort is that the worst-case scenario of a poorly functioning global carbon market was avoided.
At COP28 the topic of food finally made its way onto the COP table, with several references in both the Global Stocktake and the Global Goal on Adaptation. On the side-lines, 134 countries covering more than three-quarters of the world’s total food systems emissions signed a commitment to work on building more resilient food systems. These efforts were supported by the UN Food and Agriculture Organization (FAO) releasing a roadmap for achieving food security within a 1.5C threshold, however, our view is that the roadmap had insufficient focus on the links between fossil fuels and agriculture. There was also a welcome focus on agricultural methane. This was epitomised by six major food companies, including Nestlé and Kraft Heinz, launching the Dairy Methane Action Alliance, under which they pledged to put in place a methane action plans for their dairy supply chains by the end of 2024.
COP28 was the first round of climate talks since the Global Biodiversity Framework (GBF) was agreed in Montreal last year. This stimulated many new initiatives focused on integrating actions to meet the goals of the GBF and the Paris Agreement. The most notable was Brazil launching a new “tropical forests forever” fund that aims to provide 80 tropical countries with finance to help maintain forest by raising $250bn from sovereign wealth funds. In the closing days of COP28, Colombia announced that it will host the next biodiversity summit, COP16, in 2024.
Outcome: The food system was a welcome addition to the COP menu, but future conferences need to address the links between food production and fossil fuels. We are seeing a positive trend towards tackling the nature-climate nexus, and approaches to tackle both issues in the national biodiversity strategies and action plans which are due before biodiversity COP16.
Governments approved a ‘framework’ on adaptation at the conference, which marked a clear step forward on the Global Goal on Adaptation (GGA). We have been watching this agenda item particularly carefully, because adaptation is becoming increasingly relevant to investors – as adaptation tilted strategies can serve the dual purpose of liming future losses while delivering positive returns that can also benefit people and the planet.
Negotiators agreed on key themes to be incorporated in the adaptation framework, which included water, food, health ecosystems, infrastructure, poverty eradication and cultural heritage. The text also re-stressed the highly context-specific nature of adaptation. Overall, we were disappointed with the lack of clarity in the adaptation goals in the final text, as they fail to set clear numerical targets attached to goals on adaptation.
G77 countries wanted adaptation finance to feature heavily in the text, but there were no new funding agreements approved. We saw this live throughout negotiations, with the first drafts suggesting $400bn annual funding to adaption, but this being removed by the time the gavel went down. The adaptation text talks in general terms about the need for finance to adaptation, including noting that the adaptation finance gap is widening. However, it does not make any conclusive commitments on financing.
Outcome: The agreement provides some clarity on the simultaneously broad and context-specific nature of adaptation action. However, the lack of clear targets and quantifiable metrics means this agreement lacks teeth in its current iteration.
