COP26 — the 26th United Nations (UN) Climate Conference of the Parties — concluded last Saturday in Glasgow with a suite of new initiatives. The centrepiece is the Glasgow Climate Pact, whereby all participating countries agree to pursue efforts to keep global warming to 1.5°C and to accelerate climate action. In addition, smaller groups of countries, together with certain cities and states, and sometimes private stakeholders, have signed up to sector-specific initiatives. Private stakeholders also launched their own initiatives. The scope and pace of the initiatives is unprecedented, including sectoral action on agriculture, aviation, autos, finance, and energy (see our summary here). As with any international arrangements, a key question will be how and when the many commitments will be implemented.
Stakeholders should now expect a plethora of new national regulations, and shifting market dynamics, that spell major changes for business and industry. New regulations will develop in a complex patchwork across sectors and jurisdictions as each country puts its own climate plans in place to meet more ambitious commitments (so-called nationally determined contributions or NDCs).
1. Key developments from COP26
A. In the Glasgow Climate Pact, all participating countries have agreed
- to maintain efforts to limit global warming to 1.5°C, with an accelerated timetable for action. Emissions are to be reduced by 45% by 2030 (relative to 2010) and to net zero around mid-century. The parties also agreed to phase down coal power and phase out inefficient fossil fuel subsidies. Instead of waiting five years, the deal “requests” that countries “revisit and strengthen” their 2030 NDCs by the end of 2022, which is intended to increase pressure on countries to act.
- to adopt the so-called “Article 6 Rulebook” to facilitate international trading of emission reductions (see draft decisions on Articles 6.2, 6.4, and 6.8). This marks progress, because negotiators had failed to agree to these rules at previous COPs. Countries and companies will be able to invest in sustainable development projects that lead to certified emission reductions in another country that can be used to offset their own carbon emissions. Carbon offsetting will be an important way for countries and companies to meet net zero commitments. A new international body under the UN Framework Convention on Climate Change will administer the mechanism.
- to provide support to developing countries, through financial resources, technology transfer, and capacity-building, to assist with both mitigation and adaptation and to begin dialogue on support to address loss and damage resulting from climate change. For 2021-25, developed countries have been urged (again) to provide at least $100 billion annually.
B. Smaller groups of countries have made additional commitments, including through public-private partnerships, including the following:
- Automotive: 24 countries, plus city and state governments and a wide variety of private stakeholders, have signed on to the Declaration on Accelerating the Transition to 100% Zero Emission Cars and Vans. The declaration pledges to work toward phasing out new gasoline and diesel vehicles by 2035 (in leading markets) or 2040 (worldwide) and sets out differentiated commitments for each stakeholder (governments, auto manufacturers, business fleet owner/operators, investors, financial institutions, and all others). Some major automakers and auto-producing countries (U.S., China, Germany) have not signed on, although 12 U.S. cities and states have (including California, Atlanta, Dallas, New York state and city).
- Aviation: 23 participating countries (representing more than 40% of aviation emissions) have signed on to the International Aviation Climate Ambition Coalition. They commit to develop plans and targets to reduce aviation emissions, consistent with Paris Agreement goals. The agreement focuses on investments in green technology and emissions offsetting (through, e.g., the Carbon Offsetting and Reduction Scheme) rather than limiting industry emissions/size/growth.
- Clean technologies: 42 countries or entities, including the U.S., European Union (EU), UK, and China, supported by energy-related institutions, have signed the Breakthrough Agenda, committing to make clean technologies and sustainable solutions the most affordable, accessible, and attractive option by 2030. The agenda currently targets five high-emitting sectors: power, road transport, steel, hydrogen, and agriculture. The commitments include reporting and coordinating efforts on the state of transition, and cooperation between state and nonstate actors.
- Clean technologies (agriculture): In support of the Breakthrough Agenda on agriculture, 34 countries have endorsed the AIM for Climate, a new initiative led by the U.S. and United Arab Emirates, committed to accelerating innovation in sustainable agriculture.
- Coal/fossil fuel:
- International Support for the Clean Energy Transition: 34 countries and five regional development banks have signed on to a statement committing to prioritize public support for the clean energy transition and ending support for the fossil fuel sector by the end of 2022 and calling for an “accelerated alignment” of public/private sector financial flows to drive the energy transition. Participants include the EU, the UK, the U.S., and Canada but exclude Australia, China, South Korea, Japan, and Russia.
- Global Coal to Clean Power Transition Statement: A public-private initiative, among 47 countries, five “subnational” entities (local/regional governments, acting independently of their countries in some instances), and various companies, nongovernmental organizations (NGOs), and industry associations. The statement commits to phase out coal power generation in the 2030s (major economies) and 2040s (globally). The statement includes some major coal-producing and -generating countries (Indonesia, Poland, South Korea, Ukraine, U.S., and Vietnam) but not others (Australia, China, Japan, and Russia).
- Deforestation: 141 countries have signed on to the Declaration on Forests and Land Use, committing to halt and reverse global deforestation (including Brazil, China, Indonesia, Malaysia, and Russia, which refused to participate in an earlier 2014 declaration). The declaration covers over 90% of the world’s forests.
- Methane: 105 countries have signed up to the Global Methane Pledge, committing to reduce methane emissions by 30% by 2030. The U.S. has published a detailed plan targeting methane-emitting industries, such as oil/gas and livestock farming, with measures including increased regulation of the oil and gas production/supply chain, better regulating landfills, and incentivizing farmers to adopt methane mitigation practices. However, some major methane emitting countries — Australia, China, India, and Russia — have not yet joined the pledge.
- US-China Cooperation Declaration: The two largest emitters agreed to cooperate on the transition to a “global net zero economy,” including on energy transition, regulatory standards, methane, circular economy, and carbon capture.
C. Private initiatives were launched, including the following:
- Private financing: In April 2021, the UN Special Envoy for Climate Action and Finance launched the Glasgow Financial Alliance for Net Zero (GFANZ). During COP26, GFANZ published a progress report outlining that its membership (which represents over $130 trillion in private capital, across 45 countries) has pledged to mobilize finance at scale to support decarbonization of the economy. Related initiatives include efforts to transform the financial architecture through climate-related reporting and risk management and calls for countries to require firms to publish net zero transition plans (as the UK recently announced).
- Standard-setting for financial markets: The International Financial Reporting Standards Foundation (a nonprofit accounting organization) has established the International Sustainability Standards Board to develop globally consistent climate-related disclosure standards for the financial markets.
- Aviation: In addition to the governmental pledge, the airline industry has announced its own Net Zero Carbon Emissions by 2050 pledge. The agreed “roadmap” focuses on sustainable aviation fuels, carbon offsetting, and new technologies.
2. Key takeaways for business and industry from COP26
Some regard COP26 as a constructive step in international cooperation; others call it insufficient. One thing is clear: The efforts to transition to climate neutrality will affect business and industry around the world. Key takeaways include these:
- The suite of initiatives from COP26 is expansive and happened at an unprecedented pace. The key objective of the Glasgow Climate Pact to accelerate efforts to reach the 1.5°C target is itself significant, but the breadth of ancillary initiatives is unprecedented and develops the broader framework to move toward the core climate goal. Bottom line: Stakeholders should expect significant new regulations, such as the EU’s Fit for 55 and the U.S. methane rules.
- New regulation will be a patchwork across all sectors and jurisdictions. Countries can already choose different regulations to meet their Paris Agreement commitments. The plethora of public and public-private commitments add to the patchwork, with diverse commitments in many different sectors, made by overlapping but different sets of signatories. This may facilitate incremental progress but could result in disparate regulatory developments that cause confusion, present compliance challenges for global trade, and will be difficult to monitor.
- More than ever, private stakeholders played a key part with voluntary commitments toward net zero. Whether independently or through public-private partnerships, business and industry across the economy played a key part in COP26, with many making voluntary commitments to address their carbon footprint. The new Article 6 Rulebook governing credits and trading may prove critical to significant progress on these private-sector commitments — which will, in turn, face increasing scrutiny from securities/financial regulators as well as investors, shareholders, and consumers.
- All eyes on implementation. Given how past agreements have fared, the essential question is how the new commitments will be implemented once the spotlight fades, as countries and business grapple with the challenges. At the same time, public and private pressure is expected to remain high, including from civil society and affected communities.
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