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21 Jan 2020

COP25 Madrid - A Missed Opportunity

By Brendan Bateman

The principle items on the agenda for the COP25 negotiations were to encourage parties to increase their emissions reduction ambitions and to finalise the rules for the implementation of the Paris Agreement due to commence in 2020.  In respect of both issues, only limited progress was made, and as a consequence, COP25 represents a missed opportunity to get the world on the pathway to effectively mitigate the impacts of climate change.

Billed as the "time for action" conference, COP25 was remarkable in a number of respects.  It was the largest COP ever held with some 27,000 delegates, but also the longest running conference reflecting the difficulty in achieving international consensus in addressing climate change.

Most relevant for Australian business is that COP25 starkly revealed that positions being adopted by a number of countries in the negotiations, including that of the Australian government, are out of step not only with growing community expectations for action on climate change but the increasing strident calls being made by the business and investment communities for urgent action to ensure a smooth and just transition to the new "green" economy.

The emissions gap

The Paris Agreement has as its goals limiting the increase in average global temperature to well below 2 degrees, with the "stretch goal" of 1.5 degrees, and to achieve global net-zero emissions no later than 2050.

To achieve these goals, parties put forward commitments (called Nationally Determined Contributions or NDCs) and agree to achieve those commitments by the implementation of policies appropriate to domestic circumstances.  Australia's NDC includes a 2030 emissions reduction target of 26-28% below 2005 levels.  An assessment undertaken last year, however, showed that assuming that all NDC commitments were fully implemented, only one-third of the emissions reduction required would be achieved with the prospect that average global temperatures would increase by 3 degrees or more. 

At COP25 efforts were made, with only modest success, to encourage parties to commit to updating their NDCs to bridge the significant emissions gap. While a large number of countries did commit to resubmit revised NDCs, these represented only a small percentage of overall global emissions, reflecting the absence of a clear consensus among parties to reduce emissions beyond current NDCs. 

Australia has not committed to submitting a revised NDC but has categorically stated that it will not increase its current 26-28% target.  Further, Australia is the only country to have publicly reserved the right to utilise overachievement of its targets under the Kyoto Protocol (which it has characterised as "carry over credits") to meet its Paris target.  Analysis based on the recently released Australian Emissions Projection 2019 report indicates that Australia could potentially meet up to 100% of its current Paris target by relying on these "carry over credits".  Australia's stance in the negotiations attracted considerable international (and more recently increasing domestic) criticism as being entirely inconsistent with the essential goals of the Paris Agreement to achieve genuine emissions reductions.

Catalyzing private investment

The rules for the Paris Agreement had been substantially finalised at COP24 in 2018, but one significant issue had proved intractable - agreement on the rules to implement Article 6 of the Paris Agreement which recognises that countries may establish market-based mechanisms to enable emissions reductions to be achieved at lowest cost, while also supporting sustainable development.  More than 90 countries, including Australia, have indicated in their NDCs an intention to use these type of carbon market mechanisms to meet their emissions reduction commitments.

The market mechanisms in Article 6 have the potential, if designed well, to deliver cost effective abatement at the scale required to achieve emissions reductions consistent with the goals of the Paris Agreement by incentivising private investment into emission reduction projects and technological innovation.

In addition to Australia's stance on the use of "carry over credits" and issues associated with transitioning Kyoto activities and carbon units, negotiations over the Article 6 rules foundered on disagreements over a number of issues including accounting for bilateral trade of emissions reductions between countries to avoid double counting and ensuring overall mitigation in global emissions is achieved rather than simply displacing emissions from one country to another.

The sustainable economic imperative

The impasse in the formal negotiations stood in stark contrast to the very vocal position adopted by the large private sector presence at COP25, especially the business and investment community.

With climate change and its impacts increasingly seen as a significant business and financial risk (including by regulators both in Australia and abroad), more businesses and investors not only see a net-zero emissions world as inevitable, but the imperative to implement urgent and coherent policies to ensure a smooth and just transition to the new "green" economy.  This was evident from the increasing number of business and investment groups creating alliances to call for more action from governments, but also commitments by individual businesses to net-zero emission targets. 

Significantly we are also seeing words being backed up by actions in the business sector.  Business and investor action manifested itself in many ways at COP25:

  • the Climate Ambition Alliance was relaunched.The alliance involves countries, regions, cities, businesses and investors pledging actions to reduce emissions to achieve net zero by 2050.Included in the alliance are now 786 businesses and 16 investors who have made these pledges. 177 of the corporations have publicly committed to science based targets consistent with the 1.5 degree Paris goal, more than doubling the number of companies making these commitments. These companies collectively account for 5.8 million employees and have a combined market capitalization of $2.8 trillion;
  • the International Chamber of Commerce was prominent at COP25 in promoting the Chambers Climate Coalition initiative.The initiative aims to mobilise businesses around the world, including small businesses, to support strong action on climate change. It now has more than 2,100 chamber and affiliate signatories from around the world, who are committed to advocating for policies to limit temperature increase to less than 1.5 degrees and achieve net zero emissions by 2050;
  • 631 institutional investors issued the Joint Global Investor Statement on Climate Change urging governments to step up action to achieve the Paris Agreement goals.These investors manage more than US$37 trillion in assets;
  • 87 CEOs representing some of the world’s largest companies including Schneider Electric, AstraZeneca, Nestle and Nokia made pledges to be net-zero by 2050. Driven by Paul Polman, former CEO of Unilever, the initiative has been remarkably successful in obtaining public commitments from these corporations which will add further pressure on other corporations to make equivalent commitments; and
  • a group of investors managing close to US$4 trillion in assets, through the UN-convened Net Zero Asset Owners Alliance, committed to convert their investment portfolios to net-zero emissions by 2050.

A tipping point is close to being reached where leadership on climate change will shift from government to business because of the clear economic imperative to address climate change.

Looking ahead

2020 is likely to be a significant year both domestically and internationally in advance of the operationalisation of the Paris Agreement. 

Even before the unprecedented heat and bushfires experienced in Australia over 2019-2020, there has been increasing pressure on the Federal government to revisit its climate change policies.  Although this is still being resisted, there has recently been a softening in language including over the possible use of "carry over credits".  Whether this translates into substantive change in domestic policies or the government's approach to international negotiations remains to be seen.  With the government intending to shortly release a draft of Australia's long term 2050 emissions strategy for consultation, some indication is likely to be given.  Irrespective of what is occurring at the Federal level, most State governments have made commitments to net-zero emissions targets with policies being developed to achieve those targets.

Internationally, negotiations will continue during 2020, culminating at COP26 to be held in Glasgow in November.  With the UK Government having passed legislation committing itself to a 2050 net-zero emissions target, it has already signalled that it will be pushing hard to achieve a successful and ambitious outcome.  COP26 will also be held shortly after the result of the 2020 US Presidential election is known, with the Democratic candidates committed to reaffirming the USA's ratification of the Paris Agreement.  The outcome of that election could significantly impact the success of COP26.

The increasing role of business and finance is also not to be ignored, as evident by the frequent public announcements being made which involve commitments to emission reduction targets or divestment from fossil fuels and emission intensive assets.  Money talks and it is currently demanding urgent and effective action on climate change.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.