COP26 – We’re toast, but let’s toast Glasgow!

By Michael Liebreich
Senior Contributor

Next week, the world’s climate elite roll into Glasgow for COP26, after an extra year’s delay caused by the Covid pandemic. John Kerry, President Biden’s special envoy on climate and former Secretary of State has called Glasgow the world’s “last best hope for the world to get its act together”. Greta Thunberg, the world’s most-quoted climate activist, has dismissed the entire UNFCCC process as “30 years of blah, blah, blah”.

Implied in both of their statements is the idea that Glasgow has to produce some kind of miracle outcome to be considered a success. This is incorrect on two levels. First, it misrepresents the time it takes to build new economic, financial and trading world orders – the long-term impact of Bretton Woods was by no means immediately apparent in 1944. Secondly, and more importantly, Glasgow’s success in underlining the long-term power of the Paris Agreement is all but assured.

Background – the global energy squeeze

Before diving in to whether Glasgow will be a success or a failure, a few words on the current global energy crunch. Hot takes abound, many blaming the dash for renewable energy. At heart, however, this is nothing more than the latest in a long series of fossil fuel price spikes, as explained in “Energy Market Volatility Is Here, Get Used to It” by BloombergNEF’s Albert Cheung, Ashish Sethia Ethan Zindler, available to clients here. 

The primary driver of the current energy price spike lies entirely outside the energy sector, in the global economy’s disorderly bounce-back from the deepest and sharpest recession in history. Surging demand is hitting a supply chain struggling to reboot itself and energy stocks lower than usual – along with a bit of geopolitical game-playing by President Vladimir Putin.

There is undeniably, however, an energy transition sub-plot. Since 2014, investment in the fossil fuel system – upstream, midstream and downstream – has plummeted from $1.3 trillion per year to around $700 billion. Over the same period, investment in clean energy value chains – renewables, nuclear power and the grid – have stalled at just under $700 billion. Add the two together, and you get investment in the global energy system falling from $1.9 trillion to $1.4 trillion. It would be surprising, frankly, if there were no price spike at this point, even in the absence of the pandemic bounce-back.

The collapse in energy investment is the inevitable consequence of society and the financial system demonizing the supply of fossil fuels, while failing to invest sufficiently in clean replacement technologies or in demand-side innovation in efficiency or substitution.

There will be much talk at COP26 about a Just Transition, but it risks being mainly defined in terms of inclusion and consultation. A truly just transition will also be one that ensures the world’s most vulnerable people do not bear the brunt of inadequate planning and an inadequate price placed on resilience. Ignoring this lesson will be catastrophic for people and planet.

The technocrats’ version of success

At the heart of each COP is a complex diplomatic negotiation. The policy team at BloombergNEF under Victoria Cuming has, as you would expect, published a deep dive into the issues that negotiators will be grappling with in Glasgow’s Blue Zone, and an assessment of the likelihood of success (available to clients here). One of the biggest questions is whether Article 6 – which governs emissions trading between countries and might unleash increased flows of climate finance – can  finally be concluded, completing one of the last major outstanding elements of the Paris Rulebook.

A related discussion will revolve around the developed world’s 2009 commitment to provide $100 billion per year in climate finance to the developing world by the year 2020. Progress over the past decade has been reasonably good: by 2019, according to the Organisation for Economic Co-operation and Development (OECD), the figure had reached $79.6 billion. With the pandemic, however, the figure has stalled – data is not yet available but 2020 almost certainly saw a gap of around $20 billion.

As I noted earlier this year in Climate Action – It’s the Trade, Stupid, the Sturm und Drang around the missing $20 billion is a distraction from the real scale of the investment flows needed by the developing world and from the power of global trade – which amounts to nearly $20 trillion per year – to help finance climate action.

Nevertheless, no one really disputes that the developed world needs to deliver as soon as possible on the $100 billion it promised, in order to maintain global trust in the UNFCCC process. In September U.K. Prime Minister Boris Johnson and UN Secretary General António Guterres called for developed countries to put their hands in their pockets, and on October 25, Germany and Canada release a blueprint for hitting the goal. The U.K. and U.S. several EU countries have already pledged additional funds and Glasgow will almost certainly include an announcement that the gap is to be closed, but not before 2023. It seems unlikely that much in the way of new funding commitments will be announced – though not impossible.

A third important negotiating front will be the treatment of “loss and damage” – effectively climate reparations which India and other developing countries want to extract from the developed world in perpetuity.

Glasgow’s success: the triumph of Paris

So much for the topics that climate negotiation aficionados will be watching. For the general public and the mainstream business community, Glasgow is set to be remembered for underlining the enduring power of the Paris framework and starting the world down the path to net zero.

The Paris Agreement, it should not be forgotten, was doubted by many when first signed in December 2015. Previous attempts to reach a binding agreement, culminating in the failed 2009 Copenhagen COP, had been abandoned, and the Paris Agreement was based on voluntary commitments – the so-called Nationally Determined Contributions (NDCs). The inaugural set, however were laughably weak, barely constraining global emissions from growing at their historic rate.

Fast forward six years and Glasgow will demonstrate that the Paris framework works. It has successfully drawn the U.S. back into the fold after President Trump’s theatrical withdrawal. It has elicited a net-zero pledge from China and is now set to draw pledges from such recalcitrant nations as Saudi Arabia, Russia, Turkey, the UAE and even, by all accounts, Kyoto’s least cooperative developed country, Australia.

At the time of the Paris Agreement, in piece for BloombergNEF titled We’ll Always Have Paris, I wrote that “Paris is not posturing. Paris is not the world saying it wishes it weren’t trapped in an abusive relationship with the fossil fuel industry; Paris is the world’s economy serving divorce papers.” To continue the divorce analogy, Glasgow is the moment the world economy serves the decree nisi – the date on which its marriage to fossil fuels is most likely to end, some time shortly after the middle of the century.

By the time the first planeloads of delegates touch down, countries representing over 80% of global GDP and 70% of global emissions will have pledged net zero by 2050 or, in the case of China, Saudi Arabia and a few others, 2060.

There is, of course, a huge gap between pledges and action but given the pace of innovation in technology, the underlying rate of cost reductions in clean solutions, the awakening of the financial sector to climate finance and the sheer number of sub-national entities also making net zero pledges, it’s possible to be optimistic. In any case, the process of turning pledges into formal NDCs will represent a huge milestone in climate diplomacy, one that Boris Johnson will no doubt celebrate in his usual restrained way.

Hopes of 1.5°C – gone, like tears in the rain

Glasgow is therefore already pretty much certain to be a success. Unless, that is, you harbor a quixotic belief that world leaders can be lined up and forced to sign binding commitments consistent with keeping the world to 1.5°C of warming. Quixotic because no serious world leaders would ever sign such a thing – as Copenhagen showed – but also because the Paris Agreement does not require it. It requires countries to hold “the increase in the global average temperature to well below 2°C above pre-industrial levels”, but only to “pursue efforts” to limit the temperature increase to 1.5°C.

So there is nothing in the Paris framework indicating that Glasgow should be judged on whether it secures commitments consistent in aggregate with 1.5°C. There is also nothing in the Paris framework to say that COP26 is the end point of the ratchet mechanism. Its next major milestone will be the 2023 Global Stocktake, whereby global progress against the targets is assessed, followed by the third set of NDCs in 2026 which, given the pace of technological change, will almost certainly deliver further increases in ambition.

A valid yardstick for judging Glasgow might be whether it keeps the window to achieve 1.5°C open. Professor Jim Skea, co-chair of the Working Group of the Inter-Governmental Panel on Climate Change which maps emissions pathways, has observed that achieving 1.5°C still lies within the laws of physics and chemistry, but is it still achievable in the world in which we live?

The IEA’s recently-published World Energy Outlook 2021 makes it clear that we are at or near peak emissions (as I forecast in this 2019 piece: Peak Emissions are Closer Than You Think). It also includes an Announced Pledges Scenario (APS) which shows that, if delivered, all those COP26 net-zero pledges would cut energy-sector CO2 40% by 2050. This would be enough, according to an initial estimate by climate scientist Zeke Hausfather of Carbon Brief to limit temperature rises to a median figure of 2.3°C – just above the 2°C territory demanded by Paris and nowhere near the extreme IPCC scenarios that still dominate the climate debate (see my December 2019 piece “Climate Wars Episode IV”).

What this shows is that the arc of emissions has been bent steadily downwards by a combination of policy, climate diplomacy, investment, innovation and behavior change. That’s the good news. The bad news is that it has not been happening fast enough, and nor is it likely to do so in the near future. To achieve 1.5°C, emissions would have to drop globally by around half by 2030, or 7% per year. For context, according to the IEA, energy-sector emissions only fell by 5.8% in 2020, a year in which all major economies saw months of emergency lockdowns, before immediately bouncing back.

Sooner or later we will have to admit that the window to 1.5°C has shut. There is simply too much inertia in the global economy: too many existing fossil-fuelled assets, too many still being built in countries with too little resource to do anything else, too far to go to scale supply chains for the clean technologies we have, too few solutions ready at scale to solve hard-to-abate sectors, too much of the built environment that would need replacing and no willingness from the public to forgo their current lifestyles or their aspirations for development.

I’m not celebrating the fact that we’ll miss 1.5°C. Nor it does not mean that climate action is pointless – in fact the exact opposite: climate impacts are non-linear, so each incremental 0.1C of warming is more dangerous than the last. I’m just telling it like it is: the planet is already around 1.2°C warmer than in pre-industrial times, and on current trends it will pass 1.5°C above pre-industrial times by 2040, if not earlier, despite our best efforts.

It is one of the great ironies of the current moment that the financial world is awakening to the dangers of 1.5°C of climate change at almost the exact moment when it has become unavoidable. The extent to which investors pivot to funding adaptation to a 2°C world, investing trillions of dollars removing CO2 from the atmosphere, or neither of the above, will be the most important financial story of the coming decades.

To Glasgow and beyond!

Meanwhile, though, let’s meet in Glasgow to toast the success of COP26 and the triumph of the Paris Agreement – before getting straight back to work.


Michael Liebreich is the founder and senior contributor to BloombergNEF. He is also the CEO and chair of Liebreich Associates, founding managing partner of EcoPragma Capital and an advisor to the U.K. Board of Trade.

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