COP26 in November 2021 was hailed as ‘game changing’ by Boris Johnson and as a ‘fragile win’ by the Chair of the Conference. The final communique referred to the ‘phase down’ of coal but provided little that was concrete and measurable. This blog looks at the options going forward in the absence of a convincing fully multilaterally agreed action program.
There are three main avenues for policy:
‘Plurilateralism’, where groups of concerned countries continue together to pursue policies designed to mitigate climate change seems counter-intuitive. Climate change is a global problem. If the task of mitigation is pursued only by a few, the chances are that their policies will be ineffective and that other, non-participating, countries will ‘free ride’ on their efforts. However, there are still worthwhile objectives that smaller groups of like-minded countries can pursue.
One example of plurilateralism is illustrated by President Biden’s ‘Build Back Better’ (BBBW) initiative that aims to channel G7 official aid and to leverage up private finance towards environmental objectives. The ‘Road Map’ report produced by the International Energy Agency in May 2021 on the pathway to carbon neutrality estimated that investment in the energy sector will need to more than double from the average of $2trillion a year over the last five years to $4.5 trillion by 2050 with much coming from the private sector. BBBW provides a more targeted alternative to the general official resource transfer objective discussed in COP 26 where the money risks ending in the bottomless pockets of local power elites. The EU is proposing a parallel initiative.
Another example is the Global Methane Pledge made by the EU and US in September 2021 and endorsed more widely by over 100 countries in COP 26. It aims to reduce the venting and flaring in natural gas production. The pledge of about 40 countries to phase ‘out’ rather than to just phase ‘down’ coal production and of 130 countries to end deforestation by 2030 are other examples.
Segmentation means moving away from general aims such as achieving ‘net zero’ by a target date to concentrate on narrower and more specific targets. There are several worthwhile targets in addition to eliminating methane venting and phasing out coal. These include phasing out the use of hydrofluorocarbons. Another specific area for targeting is the introduction of clean cooking for the estimated 785m people still dependent on coal, wood and dung. These and other narrower objectives, such as the greening of maritime shipping, are worth pursuing, in their own right, even in the absence of overarching agreements.
Countries are tempted to resort to coercive measures in order to reach carbon neutrality because they seem to offer the most quick-yielding results. Coercive measures include the imposition of taxes, where people are forced to pay for adaptation or mitigation measures through for example, levies on household energy bills, or on airline tickets, or through other forms of carbon tax. They also include ‘command and control’ regulations where people and businesses are ordered what to do by their government, such as to install heat pumps.
What argues against coercion is the risk of public backlash and a general loss of public support for carbon reduction policies. The limited achievements coming out of COP26 are due at least in part to the nervousness of governments in front of public opinion. The IEA has estimated that around 55% of cumulative emissions reductions are linked to consumer choices such as opting for electric cars. In the long run, such behavioural change is better internalised rather than imposed on people from outside. This suggests much greater emphasis on non-coercive policies, such as investment in the infrastructure for electric vehicles, improved information, measures to develop market pricing of carbon through emissions trading and measures to encourage new technologies and their uptake.
Providing better information about the implication of our choices as consumers, savers and investors is not problem free. Problems range from questions over the science base for taxonomies, to ‘greenwashing’ in financial markets and to questions over the calculation of ‘net’ carbon footprints over the entire product life-cycle. However, the initiative in Nov. 2021 under the IFRS to set up a new International Sustainability Standards Board with the aim to ensure that international accounting standards reflect the materiality of environmental risks in corporate balance sheets is an example of improvements taking place, even if differences in accounting treatments remain.
The main market mechanism for incentivising carbon reduction involves the extension of emissions trading markets where carbon allowances for power generation, manufacturing, agriculture, and transportation are conferred on businesses and can be traded. The market price reflects demand from those who are producing more emissions than allowed and the supply comes from those who produce less. The key benefit in extending emissions trading is that trading sets a price for carbon.
Experience to date indicates problems in the granting of over-generous allowances so that the resulting price is too low to provide an incentive, and inadequate sector coverage. Proposals for a global carbon market at COP 26 did not advance. As a result, there is likely to be increasing friction over ‘border adjustment’ measures for traded goods between areas where carbon is priced and those where it is not, and between different pricing regimes.
The IEA Roadmap emphasised the importance of support for technologies currently at the demonstration or prototype phase. It estimated that by 2050 almost half of the reduction in carbon emissions would need to come from technology-driven sources. It identified batteries, hydrogen electrolyses, carbon capture and storage as the areas for development effort. Such efforts can be pursued by countries individually as well as cooperatively.
These different avenues are not mutually exclusive. In theory, a sufficient number of countries could divide up the broad agenda and put the emphasis on discrete measures that do not rely on command and control, including joint research programs. It would be possible for likeminded groups to avoid trading frictions between themselves even in the absence of a uniform carbon price. They could agree that their efforts to combat climate change were ‘equivalent’ even if their policies took different forms.
Large UN jamborees serve an important symbolic purpose. However, the lack of full backing for effective action means that other avenues may be more fruitful. In the wake of COP 26, smaller like-minded groups of countries will need to pursue more precisely and narrowly targeted measures.