Please see the below blog article taken from this weeks Tatton Weekly, a weekly update from Tatton Investment Management:
The 2021 United Nations Climate Change Conference, known as COP26, begins on Sunday. Current weather forecasts for Glasgow are perhaps a little too literal, with visitors to the city braced for torrential rain and flooding. Along with the precipitation there is also an air of – if not downright pessimism – ahead of the summit. Last month, Boris Johnson told world leaders at the UN that “it is easy being green” and referenced Kermit the Frog to reinforce his point. But on Monday, he was downplaying expectations by telling schoolchildren and reporters in Downing Street that it was “touch and go” whether COP26 would deliver any sort of climate change breakthrough.
The mood darkened further this during the week after it was announced that the $100 billion of climate finance promised by developed countries in 2005 – pledged to help developing countries adapt to climate change – had not been met by the original deadline of 2020, and would most likely not be reached until 2023.
Next came another stark warning from the UN, ratcheting up the pressure on COP26 attendees. It declared climate goals are off track and emissions rise could lead to 2.7°C warming. Some countries, notably China and India, have not updated their emissions reduction pledges ahead of the summit. Other nations, including Brazil, have submitted weaker pledges than were outlined in their original commitments. As one of the UN delegates succinctly put it: “Unless more progress is made in the next fortnight, we will all be in trouble.”
We don’t have a crystal ball of course, so it’s impossible to make any predictions of what progress will indeed be made over the next couple of weeks, if any. That said, news flow this week has presented a few ideas on what to look out for.
For example, COP26 could deliver what’s being labelled a “methane moment”, after another 25 countries joined the US and EU-led initiative to drastically cut global methane emissions by 30% from their 2020 levels by 2030. That takes the total number of countries backing the pledge to 34, although again, Brazil, India and China are conspicuous by their absence. This is a positive development. While carbon dioxide (CO2 ) is the biggest contributor towards human-made global warming, methane runs a significant second. According to the International Panel on Climate Change, methane contributed to about 0.5°C of warming between 2010 and 2019 relative to 1850- 1900 levels, whereas carbon dioxide produced about 0.7°C of warming over the same period/
Although carbon dioxide gas stays in the atmosphere for longer, methane is considered some 28 times more potent in global warming terms, as its properties trap more heat.
Another initiative to look out for over the next fortnight could be further developments made on carbon pricing. Carbon pricing programmes usually involve countries taxing polluters’ carbon emissions, or ‘cap and trade’ systems that effectively limit a company’s level of emissions before costs become prohibitive.
International business groups are pushing for an international carbon price strategy to be unveiled at COP26, to prevent the bewildering patchwork collection of local policies they are struggling to contend with now. The World Bank recently identified 64 different carbon pricing initiatives across 45 countries. Disappointingly, the World Bank says these initiatives cover less than 22% of global carbon emissions, and most schemes use carbon prices too low to incentivise heavy emitters to change their business models.
Carbon trading schemes rely on private market mechanisms to attach a price to a tonne of CO2. Usually, governments set an economy-wide allowance (or per sector) and issue permits. If a company needs more permits, it has to purchase them in the CO2 market. It is a highly effective set-up (first applied in the early 1990s to reduce US sulphur emissions in the most cost-effective way), provided it comes equipped with a functioning framework. Recurring issues are that too many permits are issued, and hence the trading price drops close to zero. Remedies to this include issuing fewer permits or, as California has decided, introducing a floor, which is then a carbon tax that the government levies. Besides poorly set-up trading mechanisms, control and enforcement mechanisms also tend to be too weak. What really seems to be lacking, on top of it, is international co-ordination on such schemes, which renders them currently to be somewhat akin (and globally ineffective) as domestic stock markets that operate under capital controls.
Getting a majority of countries to agree to some sort of carbon pricing framework looks like a tall order. A carbon price that is high enough to limit rising temperatures to no more than 2°C from pre-industrial times is considered unworkable by the likes of the US, China and India. The EU, however, has been more forward-thinking, adopting its own ‘carbon-border adjustment mechanism’. This would mean companies importing goods – such as steel, aluminium, fertiliser, cement or electricity – into the EU would have to buy carbon certificates that reflect the same carbon prices faced by European producers under the EU’s emissions trading system. However, even this scheme has been criticised, with detractors suggesting it could lead producers from developing nations to sell into other markets with lower standards, hindering climate action.
The UK is not a member of the EU’s mechanism, which is perhaps another example of the somewhat muddled response from the UK government. At COP26, Boris Johnson will plead with the international community to make significant pledges to cut carbon emissions. Yet on Thursday, Rishi Sunak’s Autumn Budget drew criticism for measures that would make it cheaper to take domestic flights. Sunak also continued the time-honoured practice of freezing fuel duty (a freeze that has remained firmly in place since 2010), which has the net result of making car travel less expensive than more environmentally sustainable alternatives. According to the Office for Budget Responsibility, this year’s fuel duty freeze alone will mean an additional 450 million litres of fossil fuels purchased over the next five years. Such mixed messages certainly make alignment difficult.
When it comes to tackling climate change, every action has a reaction, and risks creating losers as well as winners. Which leads us to another key theme that has emerged this week: divestment. On Tuesday, Europe’s biggest pension fund, ABP of the Netherlands, announced plans to divest €15 billion worth of fossil fuel assets by early 2023. The fund said it doesn’t expect the decision to hurt long-term returns and added that the move will allow it to unveil a more ambitious CO2 reduction goal next year. Also on Tuesday, several UK faith institutions, announced an en masse $4.2 billion divestment from coal, oil and gas companies. Six cities, including host city Glasgow, have also said they will sign formal commitments to dispose of their fossil fuel assets in the future. According to the DivestInvest lobby group, that helps to bring the totals committed to be divested by asset managers on behalf of their investors to a stunning £39 trillion in the next few years.
Unsurprisingly, fossil fuel producers have spoken out against the hidden dangers of divestment. Coal producer Glencore argued that the movement was counterproductive, as it would force them to dispose of their assets and place them in the hands of less responsible owners (‘brownwashing’). Other producers have pointed out that it is better to allow these assets to run down, and that companies that demonstrate engagement on addressing the climate agenda should still be deemed worthy of investment. They do have a point. After all, divestment arguably just means gains are being pushed elsewhere and perhaps towards investors without CO2 reduction aims at all, and that will most likely have unforeseen and unintended consequences. Unceremoniously dumping fossil fuels might well be a ‘quick win’ for funds that are keen to decarbonise their portfolios – although whether this has a net positive effect on the environment – as discussed above – is another matter entirely. It changes the dynamics of capital markets, certainly, but without addressing the underlying problem. After all, selling the stocks themselves doesn’t reduce the demand – or use – of fossil fuels. Instead, it’s likely to just make stocks more volatile, and therefore tradeable. Without government action, and policy on a global scale, that discourages the use of fossil fuels, there will always be a demand for ‘dirty fuels’ to be met by someone.
The markets will always look towards global leaders to provide them with the framework in which they can successfully operate. If we think green investment is still the missing piece of the puzzle, and we want the market to help solve this problem, we need a framework that is clear, transparent and can be relied on to be here to stay to provide the planning certainty that is so crucial for successful longer-term investments. At the same time, from an investment point of view, it’s important to recognise that climate change is not a sector-by-sector issue. The whole of the economy has to ‘green up’, while accepting the risk of stranded assets and that there will be losers as well as winners.
Climate change is a global problem that requires a truly global approach. The key point regarding COP26 is that big events like these can – and must – be used to create common frameworks. So far, governments have been walking a political tightrope in terms of making the right noises about dealing with climate change, but without making the hard choices that a genuine commitment demands, or without being honest about what a fully transitioned global economy would look like – for better or worse. We can’t keep having it both ways.
What is COP26 and why is it happening?
COP 26 is the 2021 United Nations Climate Change Conference which is currently being held in Glasgow from 31st October – 12th November.
The world is warming because of fossil fuel emissions caused by humans.
Extreme weather events linked to climate change – including heatwaves, floods and forest fires – are intensifying. The past decade was the warmest on record, and governments agree urgent collective action is needed.
For this conference, 200 countries are being asked for their plans to cut emissions by 2030.
They all agreed in 2015 to make changes to keep global warming “well below” 2°C above pre-industrial levels – and to try aim for 1.5°C – so that we avoid a climate catastrophe.
This is what’s known as the Paris Agreement, and it means countries have to keep making bigger emissions cuts until reaching net zero in 2050.
Keep checking back, we will be posted regular updates and articles as the conference takes place and announcements are made.
Andrew Lloyd DipPFS
01/11/2021
Information Source: Tatton Weekly and BBC News
