The Road to COP26: fighting climate change, a balancing act

The UN’s long-awaited climate summit, COP26, in Glasgow, from 1-12 November 2021, is a unique opportunity for governments and businesses to take drastic action and adopt meaningful measures to fight climate change.

However, the discussions are potentially fraught with disagreements and frictions. Here are some of the potential blockers – or avenues for change:

Nationally Determined Contributions (NDCs)

The summit will provide the first opportunity to check the progress made on the NDCs – pledges made by individual regions to split the burden of emissions reduction in a fair way, in the form of quantitative targets and climate actions. “It is important for both climate action and credibility that we get to see where countries are in terms of fulfilling their already pledged contributions,” noted Trevor Allen, Sustainability analyst at BNP Paribas Global Markets. It will also help the roadmap going forward, to understand what the NDCs to 2025 will be and how G7 nations will hit their 2030 targets of halving carbon emissions. “In our view, it’s important to think about energy and electricity going forward. It has become apparent that countries are very much likely to rely on fossil fuel generation in the interim. This might result in further investments in carbon storage. More investments in renewables are potentially also on the cards”, he added.

All eyes on Article 6

The COP26 may struggle to reach an agreement on a global price for carbon, as part of Article 6 of the Paris Agreement, an issue that has been contentious since 2015. The current energy crisis could push Emissions Trading Scheme (ETS) prices up in Europe Allen thinks, and this highlights further that a global rulebook could be needed. Disparities between the price of carbon in the EU, China, and the US are key issues in Allen’s opinion and should be addressed. Utilities in particular, have fewer free allowances allotted, so they face pressure from being the highest emitting industry, as well as having to buy the vast majority of their compliance credits at auction or in the market. As for purchasing power agreements (PPA), we believe they represent a novel way for renewable energy developers to securitise the potential future cash flows of a solar or wind farm, he said.

Emerging markets

Another eagerly anticipated update is on the delayed emerging markets fund. In 2009, rich countries promised to deliver $100bn annually in climate funding by 2020 to help developing nations transition to a low carbon economy and mitigate the impact of climate change. However, we are still waiting. “We believe that the main challenge right now for EM is financing and how to bridge that gap to not only achieve the energy transition but also to shift and get to those cleaner technologies,” Luiz Eduardo Peixoto, Economist, Emerging Markets at BNP Paribas Global Markets said, adding that some emerging economies may need greater awareness that a greener economy could help them improve their longer-term growth perspectives.

The good news? Markets are helping. This year should conclude with a $50bn increase in ESG-related funding across emerging markets, despite challenges and volatility, to help fund green projects and budget shortfalls. “Bond issuances of green, sustainable or ESG bonds are oversubscribed. Supply is increasing, but should remain below total demand,” Peixoto remarked. We expect issuance coming from emerging markets to grow further next year. “With green bonds, we had a forecast for this year of $430-460bn and we’re already well within this range today. For the moment, Europe dominates, especially in the government-related sector. We don’t have a forecast yet for next year, but we expect 2022 issuance to surpass that of 2021, with year-on-year growth highest for emerging markets as well as for corporates,” Sumati Jain-Semavoine – G10 rates strategist at BNP Paribas Global Markets added.

On a more positive note….

The COP26 potential disagreements should not distract from positive developments, like plans to reduce methane – a gas which represents 30% of the warming effect and is one of the greenhouse gases most addressable today. “A number of countries want to eliminate flaring and close up wells that are no longer functioning, they’re also looking at cattle emissions and providing alternatives,” Allen stressed.

As for electrification, with the growth of electric vehicles (EVs), watch for lateral or bilateral agreements with developed nations over batteries’ compounds at the COP26 as commodities – mainly lithium, cobalt, nickel, and rare-earth materials, represent a key constraint to mass production of batteries at utility scale.

Finally, coal and nuclear will also likely be hot, and heavily debated, topics. Many countries have already pledged, or ended, coal-fired power generation; what is now determinant is the timing. As for nuclear energy, we think it could find new support as power plants are in development in China, India, France, the UK, and the US, as they see it as a form of energy generation with lower-emissions.