Six years ago, the Paris Agreement was signed by countries representing 98% of global emissions. This landmark agreement is, to date, the most important agreement in addressing climate change.
It recognized progress in reducing emissions requires global cooperation, and while that agreement didn’t include any specific policies to reduce emissions, it did provide a framework for countries to reduce emissions (nationally determined contributions, or NDCs) and be held accountable for tracking progress in those plans. In the years since its passage, countries have increased funding for emission-reduction programs and enacted stricter regulations around emissions. Lux has also noticed significant changes in some companies: Whereas corporate sustainability was more of a buzzword and marketing tool without real action before the Paris Agreement, today, many — but of course not all — companies have made firmer commitments to reaching net-zero carbon emissions backed by investments and partnerships to meet those goals.
An important part of the Paris Agreement was a commitment for countries to meet every five years to highlight revised NDCs. This year’s COP26, delayed one year due to the COVID-19 pandemic, was the first opportunity for countries to once again meet to share these plans. It also provided an opportunity for countries to operationalize key provisions outlined in the Paris Agreement. Following two weeks of presentations and discussions, and one extra day of negotiations, the Glasgow Climate Pact was signed. Lux has identified several key parts of that agreement that will shape global climate policy in the coming years:
Carbon Trading: Article 6 of the Paris Agreement established a need to create mechanisms that allow for the trading of carbon emissions between countries. This would allow countries unable to meet aggressive decarbonization goals set in their NDCs to purchase offsets from countries that have exceeded emission-reduction targets. While a contentious part of the agreement — some claim it will enable greenwashing, where countries continue to emit while purchasing offsets, whereas others claim it enables a more efficient deployment of capital and allows countries to set more aggressive targets — it was one of the last parts of the Paris Agreement that had yet to have clear rules ratified. This changed at COP26, where a sustainable development mechanism was agreed upon and will replace the two existing mechanisms (the Clean Development Mechanism and Joint Implementation) formed under the Kyoto Protocol. Key provisions include the elimination of double counting (which would have allowed countries to both sell credits and use them), prevention of carrying over credits from the existing Clean Development Mechanism generated before 2013 and setting restrictions about credits generated before 2020, and a global tax — the first global tax of any kind to Lux's knowledge — of 5% on traded credits, which will fund climate adaptation in developing countries.
Climate Financing: A key part of any international climate agreement focuses on addressing the flow of capital from richer countries historically responsible for the bulk of global emissions to less-developed countries most at risk from the impacts of climate change. At the 2009 Copenhagen conference, wealthy countries pledged to deploy $100 billion per year by 2020 — a goal wealthy countries have fallen $20 billion short of to date — with much of that funneled into emission-reduction projects rather than adaptation efforts. Two important outcomes in climate financing occurred at COP26. First, many countries increased pledges for financing less-developed countries, but that goal only totaled $96 billion by 2023, and leaders of the least developed countries have called for increases in funding. Second, the ratio of funding to be spent on adaptation measures (efforts to protect communities from climate change) will increase compared to mitigation (efforts to limit the severity of climate change); paragraph 18 of the agreement “Urges developed country Parties to at least double their collective provision of climate finance for adaptation to developing country Parties from 2019 levels by 2025.” However, it is worth noting this language is nonbinding — only “urging” and “welcoming” action rather than requiring specific commitments, while a loss-and-damage fund was ultimately not established, as wealthier nations pushed back. For innovation leaders, it presents a clear opportunity to develop solutions, specifically noting opportunities related to climate adaptation rather than mitigation, which have been the focus of most efforts related to managing climate change in the past.
1.5 °C is the new 2 °C: A key part of the Paris Agreement included “Holding the increase in the global average temperature to well below 2 °C above preindustrial levels and pursuing efforts to limit the temperature increase to 1.5 °C.” The Glasgow Climate Pact took stronger language around limiting global temperature increases to 1.5 °C, recognizing the impacts of climate change are much lower at 1.5 °C. It resolves to pursue efforts to reach that target (paragraph 21) and recognizes that the target requires reducing global CO2 emissions 45% by 2030 compared to 2010 levels. “Keep 1.5 alive” became a rallying cry for many at the conference, but the Climate Action Tracker noted emission-reduction commitments in existing NDCs will result in a global temperature increase of 2.4 °C. Despite this, discussions at the event, paired with stronger language in the pact, indicate 1.5 °C is the new primary target.
While the energy industry is typically the focal point of climate-related discussions, and was so at COP26, a much broader number of industries were focal points of COP26, even if not specifically referenced in the Glasgow Climate Pact. Discussions around industrial decarbonization and addressing emissions in the agricultural sector increased dramatically compared to previous events. Notably, five countries signed agreements to support the adoption of green steel and cement, which are meaningful commitments given their governments' large portion of cement markets specifically, which will add further momentum to building a global hydrogen economy. Pacts to manage methane emissions will put pressure on the agricultural sector to manage livestock methane emissions while accelerating a shift away from natural gas and toward hydrogen and electricity in energy systems.
Ultimately, the Glasgow Climate Pact is not a piece of policy but rather an agreement that ensures sufficient action is taken across all countries to avoid the worst impacts of climate change. In that sense, the most important takeaway from the event is in paragraph 29: “requests Parties to revisit and strengthen the 2030 targets in their nationally determined contributions as necessary to align with the Paris Agreement temperature goal by the end of 2022.” The Glasgow Climate Pact will ultimately accelerate the already-rapid pace of the energy transition, and no sectors of the global economy will be immune to its impacts. If we look back at the Paris Agreement and consider corporations taking decarbonization seriously as an inflection point, the Glasgow Climate Pact will likely be a tipping point in the relationship between governments and corporations during the energy transition. Companies should watch closely for updated NDCs at COP27 next year, which will likely include accelerations of plans to reduce emissions.