Three Key Takeaways of the COP27 Climate Summit in Egypt

Last Sunday, November 20, marked the conclusion of COP27 — the 27th United Nations (UN) Climate Conference of the Parties (COP) that took place in Sharm el-Sheikh, Egypt. In their final decision package, the 197 participating countries reaffirmed the outcomes of the previous COP, the Glasgow Climate Pact, and addressed the implementation of the Paris Agreement goals, implications of the global energy crisis, and the financing of climate transition. At the last moment, a major decision was reached on funding to assist vulnerable developing countries facing loss and damage resulting from climate change. In addition, smaller groupings of countries, sometimes with nonstate actors, concluded agreements on specific issues.

1. Decisions of all participating countries

The main conference decision is the Sharm el-Sheikh Implementation Plan which, together with a number of more targeted decisions, addresses the following:

• Loss and Damage: The headline development was an unprecedented agreement on funding for “loss and damage” associated with the adverse effects of climate change. The decision on funding arrangements addresses economic and noneconomic loss and damage borne by developing countries that are “particularly vulnerable” to the adverse effects of climate change. No definition of “particularly vulnerable” has been agreed, so the pool of countries that may benefit is unclear. The decision envisages the mobilization of new resources that can be provided by developed and developing countries. The decision does not assign liability for loss and damage to developed countries, as argued by some developing countries. The decision will be operationalized by a newly established Transitional Committee, starting at COP28 in late 2023.
• Ambition: Countries have resolved to pursue their efforts to limit the global temperature increase to 1.5°C and to implement ambitious, just, equitable, and inclusive transitions to low-emission and climate-resilient development. Parties are strongly urged to align their nationally determined contributions (NDCs) with the 1.5°C goal but with no mandatory timeframe for doing so. Recalling pledges made in Glasgow, a new text was adopted on the Mitigation Working Programme (MWP). The MWP aims to scale up mitigation ambition and mobilize implementation in this critical decade leading up to 2030.
• Energy: Countries emphasized the urgent need for deep, immediate, and sustained greenhouse gas (GHG) emission reductions across all sectors; parties are called on to accelerate their efforts to phase down use of coal. In the context of the global energy crisis, countries stressed the need to “avoid backsliding” on climate action. There was no agreement on specific language committing countries to step up the pace of emission reductions, nor did countries accept India’s suggestion, supported by the EU, to cut the use of all fossil fuels — and not only coal — due to opposition by some other countries.
• Finance: The decision uses stronger language to address the (still unfulfilled) commitment by developed countries to provide US$100 billion per year in climate-related assistance for developing countries; parties expressed “grave concern” at this failure. The decision highlights that developing countries currently receive just one-third of the annual climate finance needed to meet the global temperature goal. The decision calls for multilateral development banks to reform their practices and priorities and significantly increase climate ambition.
• Nonstate action: Countries welcomed the recommendations made by the UN High-Level Expert Group on the Net Zero Emissions Commitments of Non-State Entities. This group has published a report on the transparency and accountability of nonstate (e.g., corporate) entities for net zero emission commitments, and put forward 10 recommendations to prevent greenwashing.
• Article 6 Rulebook and carbon credits: At the last COP, countries agreed on ground rules to facilitate the international trading of emissions reductions (i.e., carbon credits) under the Paris Agreement — the so-called “Article 6 Rulebook.” This time, the parties further fleshed out the two approaches for trading carbon credits foreseen under the Rulebook:
  • The parties adopted a more detailed decision on the Cooperative Approach under Article 6.2, which allows countries to trade carbon credits (based on a bilateral deal) or one country to allow other countries or companies to use credits. In anticipation, some countries have started to use the Cooperative Approach, adopting the first bilaterally authorized project (between Switzerland and Ghana) and unilaterally authorized project (by Vanuatu) to generate internationally traded carbon credits.
  • The Sustainable Development Mechanism (SDM) of Article 6.4 establishes a supranational scheme for the registration and approval of carbon-credit-generating projects but is not yet operational. A COP27 decision provides further guidance on rules and procedures for the SDM. This decision also instructs the international Supervisory Body to provide recommendations, to be considered at COP28, including on contentious issues deferred from COP27, such as how to treat emissions avoidance and removal activities.

2. Decisions of smaller groupings

• Carbon markets:
  • The African Carbon Markets Initiative (ACMI) was launched by a number of African countries, and nonstate actors, to promote growth and job creation through a voluntary carbon credit market (VCM) in Africa. Participants released a Roadmap Report identifying 13 action plans to support growth of African VCMs.
  • Energy Transition Accelerator (ETA): The United States, in partnership with the Rockefeller Foundation and the Bezos Earth Fund, launched a proposal to mobilize private investment to accelerate clean energy transition in developing countries. The ETA will produce verified GHG emissions reductions through a shift by participating countries to renewable energy sources. Developing countries can then opt to issue such reductions as marketable carbon credits, which will benefit from fixed-price advance purchase commitments. Chile and Nigeria are among the first countries to express interest.
• Clean technologies: Under the Breakthrough Agenda, launched at COP26, a new package of 25 collaborative actions was launched to speed up decarbonization in the energy, road transport, steel, hydrogen, and agriculture sectors. To date, 47 states have signed on to the Breakthrough Agenda, and subsets of these countries have signed up for priority actions per sector, to be fulfilled by COP28. These include developing common definitions and phase-out targets, meeting essential infrastructure targets, and assisting the transition of developing countries.
• Deforestation: 26 countries and the EU — accounting for over 33% of the world’s forests and nearly 60% of the world’s gross domestic product — launched the Forest and Climate Leaders’ Partnership (FCLP). The FCLP aims to implement commitments made by over 140 countries at COP26 to halt forest loss and land degradation, including by publishing progress reports annually and mobilizing public and donor finance.
• Climate-related risk insurance: The Global Shield Against Climate Risk was officially launched by the G7 and the V20 group of 58 climate-vulnerable nations. This initiative seeks to provide climate risk insurance for developing countries to cover the risks of climate-related damages. It will be financed by voluntary contributions and the World Bank’s Global Shield Financing Facility. Germany, Canada, Denmark, the U.S., France, and Ireland have already committed to contribute a total of €210 million.
• Methane emissions: The EU and the U.S. convened a Methane Ministerial to discuss progress and implementation of the Global Methane Pledge (GMP). Since its launching at COP26, more countries have signed on to the GMP, with the objective of reducing methane emissions by 30% by 2030. Around 150 countries are now signatories, and more than 50 have developed or are developing national action plans; however, some major emitters such as India and China are still not among them. The EU and the U.S. also launched two new pathways focused on reducing methane emissions from food, agriculture, and waste.
• Wind energy: Belgium, Colombia, Germany, Ireland, Japan, the Netherlands, Norway, the UK, and the U.S. signed up to the Global Offshore Wind Alliance (GOWA), which seeks to ramp up wind power to tackle climate, energy, and security crises. The aim is to have total installed capacity of at least 380 gigawatts by 2030.

3. Takeaways for the private sector

As ever, there is a spectrum of views on the success of COP27: Some say it took important steps toward implementing last year’s commitments at COP26; others argue the decisions could have been more far-reaching and raise concerns over the viability of the Paris Agreement’s 1.5°C target. Whichever view is correct, the COP27 decisions continue the trends for business that emerged out of Glasgow last year:

• Initiatives are continuing to grow at an unprecedented pace. In our roundup of COP26 developments, we noted that the ancillary initiatives adopted to support the Glasgow Climate Pact were unprecedented in their speed and scale, and that stakeholders should expect significant new regulations at the domestic level. This holds true: The EU’s Fit for 55/Green Deal is moving at pace through the legislative process; the U.S. has adopted the Inflation Reduction Act, which contains a significant package of climate-related measures; India has launched a Green Hydrogen Mission and announced the launch of a national carbon credit trading scheme; and China has announced an action plan for carbon dioxide peaking and carbon neutrality. These developments show the different paths countries can take to meet their Paris Agreement commitments — and the potential for a challenging regulatory patchwork.
• The carbon credits scene is evolving, with voluntary markets gaining prominence and being subjected to scrutiny. As we saw at COP26, the private sector is making increasingly ambitious commitments to address their carbon footprint. As a result, businesses are undertaking and supporting initiatives to ensure there is availability of carbon credits in the VCMs. COP27 includes interesting new market developments, with ACMI and ETA initiatives. At the same time, VCMs are being subjected to increased scrutiny, with important initiatives underway to strengthen credibility and integrity. These initiatives address the public claims companies make using carbon credits (the Voluntary Carbon Markets Integrity Initiative, here and here) and the quality of carbon credits (the Integrity Council for the Voluntary Carbon Market, here).
• Green transition, not greenwashing. There is growing focus at the international level on avoiding greenwashing, with the UN setting out guidelines on assessing the integrity of corporate net zero plans. A major early casualty is the Glasgow Financial Alliance for Net Zero, which is facing criticism for allowing continued investment in fossil fuels. At the domestic level, EU and U.S. authorities are digging into greenwashing allegations surrounding environmental, social, and governance claims, and there has been a proliferation of civil suits in the last year targeting marketing campaigns.