09 Dec 2024

Did COP29 make any meaningful progress on climate change?

By Dr Mark Hinnells, Director of Strategy, Climate Finance Asia

At the latest UN climate conference, representatives from each of the countries present sought to establish a new global climate finance regime. Developed economies had already committed to mobilise US$100 billion annually in climate finance by 2020 to help developing countries reduce emissions and adapt to climate change. This goal was belatedly reached in 2022, but the deal expires next year.

The Independent High-Level Expert Group on Climate Finance, chaired by the British climate economist Lord Stern, set out a need for US$1 trillion in annual external finance from all sources by 2030 to assist developing countries and help deliver the Paris Agreement.

In a report this month, the expert group warned: “Any shortfall in investment before 2030 will place added pressure on the years that follow, creating a steeper and potentially more costly path to climate stability. The less the world achieves now, the more we will need to invest later … Additionally, investment needs for adaptation and resilience, as well as loss and damage and restoration of nature, will rise sharply as climate and nature risks escalate.”

After two weeks of intense negotiations, delegates agreed on a new collective quantified goal to provide US$300 billion in annual funding. Meanwhile, climate financing is meant to reach at least US$1.3 trillion annually by 2035.

There is little clarity over who pays what, whether this is public or private financing, whether it is loans or grants to governments or a loan, grant or even equity investment in particular projects. The agreement encourages developing countries – which include China and many oil-producing economies – to make voluntary contributions.

Separately, the parties also agreed on the rules for a UN-backed market to facilitate the trading of carbon credits. Article 6 of the Paris Agreement allows one country to sell its savings to another country or to sell to an international scheme for aviation or shipping which, because they are international trades, are outside any nation-state target.

Trade under Article 6 could yield US$250 billion towards meeting climate targets. However, there is the risk that both developing countries could make smaller officially declared contributions to sell additional carbon credits while developed countries become too reliant on such trades to meet their targets.

What are we to make of this package deal of funding plus trading? Ottmar Edenhofer of the Potsdam Institute for Climate Impact Research was blunt in his assessment: “The climate summit in Baku was not a success, but at best the avoidance of a diplomatic disaster.”

His colleague Johan Rockstrom said raising US$300 billion annually from multiple sources by 2035 failed on several accounts. It was, he said, “Too little, too late, from too many sources. Global emissions must be reduced by 7.5 per cent per year to avoid unmanageable global outcomes as the world breaches the 1.5 degree Celsius limit.”

This must be seen in context, though. The developing world is responsible for an increasing portion of global emissions. About 80 per cent of energy-related greenhouse gas emissions have happened in my lifetime as a result of population growth and development, much of it in Asia.

The argument that the West needs to compensate for causing historical damage to the environment is sound but getting weaker. Asia is home to 60 per cent of the world’s population and has some of the most vulnerable groups to climate change. The climate is now very much an Asian problem.

The “cost of change” argument is losing strength as renewable energy becomes cheaper than coal and gas on a lifetime basis. This does depend on interest rates as renewables can be expensive to install. But they have no fuel costs later. The interest rate in developing countries can be significantly higher than in advanced economies for a variety of reasons, such as political instability or uncertainty over pricing.

It is not exactly surprising that the governments of developed countries which privatised, liberalised and regulated their energy markets decades ago are unwilling to freely hand over money to inefficient state-owned or private monopolies. The cheapest thing to do is open up electricity markets and help banks, pension funds and life insurance providers feel more comfortable investing.

There is also a need to stop subsidising fossil fuels as supporting renewable sources is pointless if coal and oil receive even more support. Recent UN climate conferences have had a pointed lack of reinforcement on commitments to “phase down” fossil fuels. The International Monetary Fund estimates that direct or implied fossil fuel subsidies amounted to US$7 trillion in 2022, making pledged support for renewables look paltry in comparison.

So in addition to the agreed-upon US$300 billion in annual support and rules about emissions trading, we need market reforms to help investors feel more comfortable, deliver more affordable capital and level the playing field between fossil fuels and renewables. Do that and capital will flow. The test will come as member states revise their nationally declared contributions towards the overall Paris target early next year.

Are we making meaningful progress in this effort? Yes, but only slowly. Every one of us has a stake in this fight. The state of the climate will affect the supply chains that deliver our food, our water supply, the value of our investments and pensions and our property values if they become even more difficult to insure.

A changing climate is an existential risk for many people and will displace millions in the next few decades. However expensive action is, doing nothing is even more costly.

 

This article first appeared in the South China Morning Post on 1 December, 2024