Introduction
Global leaders concluded their annual negotiations on climate change over the past weekend, where carbon markets and more ambitious national emission reduction plans were key agenda issues. The Global Risk Institute in Financial Services has put together a quick overview on this process and what we can expect going forward.
COP25 - What was it?
Under the landmark 2015 Paris Agreement, all 197 Parties to the United Nations Framework Convention on Climate Change (UNFCCC) committed to pursue efforts to stabilize global mean surface temperature at 1.5°C warming relative to pre-industrial levels by the end of this century. Each party, nearly every country on earth, put together their own Nationally Determined Contribution (NDC) toward this goal, and every year the UN Climate Change Conference of the Parties (COP) is held to advance progress. Two top priorities of the 25th Conference of the Parties (COP25), 2-13 December 2019 in Spain, were to promote adoption of more ambitious targets and to reach agreement on an international carbon market mechanism.
Greater Ambition
Recognizing that the cumulative impact of NDCs as set today would only limit warming to about 2.8°C by the end of the century,[1] one key focus of COP25 was on fostering more ambitious NDCs to close the gap between existing emission pledges and Paris Agreement goals – and this was generally achieved. All parties agreed to submit updated NDCs ahead of COP26 which will be held in Glasgow in November 2020.
The requirement for more ambitious climate actions under the Paris Agreement will necessitate significant adjustments in current national and sub-national climate policies for all Parties, including Canada. At COP25, Canada’s Minister of the Environment and Climate Change, Jonathan Wilkinson, stated that “we need to not only meet our Paris target, but to exceed it” and pledged that “we will come forward with legislation that commits us to a net-zero-by-2050 goal, with milestones every five years, paired with a just transition act to make sure we keep people at the centre of our policies.”[2] In addition, Minister Wilkinson announced a contribution of $5 million to support developing countries in designing, piloting, and implementing carbon-pricing tolls that work for them.[3]
Carbon Markets
Another top priority in Madrid was to complete the work on a global carbon market mechanism under Article 6 of the Paris Agreement – an outstanding item that has proven difficult to find consensus on at previous COPs. This mechanism will create a global market for carbon emissions trading with the aim of driving emissions down. Sticking points for negotiators this year were on carbon accounting to avoid double counting, recognizing legacy credits from former systems (e.g., the Clean Development Mechanism formed under the Kyoto Protocol), and how to link proceeds to loss and recovery in hard hit poor nations.
The Canadian Government has a fairly consistent position on carbon pricing both domestically and internationally. The current federal carbon tax is set to reach $50 per ton of CO2 by 2022 and is an important part of Canada’s plan to reduce overall emissions. To meet its 2015 NDC target, Canada will need to reduce emissions by 13% over the next decade, and Minister Wilkinson has stated that even more ambitious targets will be set toward COP26 in 2020 – specifically a net-zero-by-2050 goal which is aligned with the European Union’s new Green Deal.[4]
For those hoping for early and orderly transition policy signals, COP25 did not deliver. There is some concern that the longer the world waits to reign in carbon emissions, the more abrupt and stringent the policy response will have to be in order to avoid increased severe weather impacts. Financial institutions can already prepare for different future scenarios, for example, by testing how issuers or clients in their portfolio would fare in a world with a $100 per ton price on carbon.[5] This exercise can help reveal the potential for stranded assets, share price change, impact on the balance sheet, and sources of financial system destabilization.
Looking Ahead
The United Kingdom took over as COP President and will host the next gathering in Glasgow in November 2020. It will be a complex year for the UK with Brexit looming, but the government has reconfirmed its commitment to a successful meeting. Mark Carney has been appointed as United Nations Special Envoy on Climate Action and Climate Finance and will take up this role in January. It anticipated that he will activate financial market players ahead of COP26 where climate finance may have a more prominent spot on the agenda. The main question will be whether or not governments can come closer to the expectations of the public movement for a stronger climate response by delivering more ambitious NDCs next year.