COP28 outcomes: strengthened commitments but practical hurdles | Insight Investment

• The first-ever ‘global stocktake’ is applying pressure to countries in order to achieve previous commitments

• Final agreement includes significant steps forward – but with important caveats

  - Strengthened requirements for nationally determined contributions (NDCs) updates
  - Significant renewable-energy pledge, but with practical hurdles
  - Agreement to transition away from fossil fuels sits alongside ambiguity on coal and gas
  - Reference to methane will sharpen focus on agriculture and land use
  - Momentum on net zero maintained by new announcements

• Nature and land-use targets take centre stage

• Climate change adaptation an increasing focus, but the funding gap for vulnerable countries remains

Pressure is rising for countries to act in order to achieve previous commitments

The final agreement represented the outcome of the first ever ‘global stocktake’, the periodical review cycle of international progress against the Paris Agreement.

For countries lagging behind their previous pledges or NDCs to tackle climate change, the ‘ratchet’ mechanism of the Paris Agreement already requires them to increase the ambition of their emissions-reduction activities, and all countries are required to submit revised emissions-reduction plans by 2025 (see Figure 1).

This mechanism, coupled with the persistent failure of countries to deliver planned emissions reductions to date, increases the risk of governments apply rapid and disruptive policy changes in the second half of the 2020s.

Figure 1 : Paris Agreement ratchet, stocktake mechanism and timescales

Final agreement includes significant steps forward – but with important caveats

Against the backdrop of increasing pressure on countries to take action if they are to fulfil previous commitments, the global stocktake set out steps forward, but with some important caveats.

• Strengthened requirements for NDC updates

The final text of the COP28 agreement explicitly references, for the first time, the need for countries to detail measures to align with the 1.5ºC warming target within their updated NDCs, confounding expectations that the 1.5ºC target might be weakened given the lack of progress to date and the narrowing window for achieving this goal. This should strengthen the robustness and comparability of country NDCs in the next round of submissions.

• Significant renewable-energy pledge, but with practical hurdles

The final text includes a call to triple renewable energy capacity globally by 2030, and over 100 countries committed to a specific, separate pledge to do so, as well as to significantly improve energy-efficiency performance¹. The target, of renewable capacity growing to 11,000 gigawatts, is around a fifth higher than current projections from Bloomberg New Energy Finance (BloombergNEF).

However, China and India did not sign up to the pledge, despite their domestic capacity additions being expected to triple by 2030²; both nations see domestic coal capacity as an important source of baseload power generation to address intermittency challenges. Also, achieving the goal faces practical barriers, including grid integration and approval timescales; for example, solar and wind projects typically take four to 12 years from project inception to generation in Europe³. Complex and poorly designed auction mechanisms are a further barrier. Ultimately, while renewable energy sources are significantly competitive with fossil-fuel energy sources on the basis of cost in all countries, further government de-risking of projects, alongside permitting and planning reform, will be needed to incentivise private investment to deliver these higher targets.

• Agreement to transition away from fossil fuels sits alongside ambiguity on coal

The final agreement made the first specific reference to “transitioning away from fossil fuels” as a whole – rather than purely focusing on thermal coal generation in isolation – as well as a commitment to peaking energy-related emissions by 2025, although substantial revisions to the final text include loopholes that could gas to be used for many years as “transitional fuels”.

The commitment to “accelerating efforts towards the phase-down of unabated coal power” can be read as a weakening of previous agreements because of the implicit role for carbon capture and storage (CCS) in meeting this target, despite the high technology risks associated with CCS. The commitment is also at odds with the scientific consensus on the need to end coal-power generation entirely in order to meet the 1.5ºC target. There were also limited new financial incentives for coal-dependent emerging markets to retire coal assets early along the lines of the Just Energy Transition Partnerships announced at previous COP meetings.

• Reference to methane will sharpen focus on agriculture

A new commitment to “accelerating and substantially reducing non-carbon-dioxide emissions globally, including in particular methane emissions by 2030”, builds on the previous methane commitment by selected countries at COP26 and received strong endorsement from the US. Major emitters such as Angola Kazakhstan and Turkmenistan also signed on.

Methane’s very high global-warming potential means reduction is a relatively powerful mechanism to rapidly reduce overall greenhouse gas emissions, and although methane reduction in the energy sector is becoming increasingly economically viable, agriculture remains the dominant source of emissions and these are more technically challenging to reduce. However, research by the UN Environment Programme (UNEP) has highlighted that changes to livestock management and sample crop cultivation practices could halve emissions by 2030⁴.

Accordingly, we expect to see significantly increased references to reducing agricultural sources of emissions within the next round of NDCs, though governments will be highly sensitive to any potential impacts on food production costs and prices.

• Momentum on net zero maintained by new announcements

A consistent theme throughout the conference and within the final text was improving the integrity of net-zero policy implementation and accountability – including a report, 2030 Climate Solutions, published by the UN Framework Convention on Climate Change that details potential policy levers, and specific sectoral and technological climate solutions that need to be scaled, to address net zero. A Task Force on Net Zero Policy was also announced that will focus on improving the credibility and accountability of 1.5ºC commitments⁵.

Notably, a consensus on the common rulebook for carbon markets under the Paris Agreement proved elusive at COP28, despite rising concerns around the integrity of carbon credits and rising regulatory scrutiny of the use of credits within corporate and national net-zero pathways.

Nature and land-use targets take centre stage

One of the most significant developments at COP28 compared to previous conferences was the strong focus on land use and nature restoration throughout the text of the final agreement.

In particular, the COP28 Joint Statement on Climate, Nature and People⁶ reaffirmed the importance of integrating nature restoration plans under the Global Biodiversity Framework within climate plans and NDCs. A commitment to ending and reversing global deforestation by 2030 represents the first time that this target has been formally endorsed within a COP agreement text.

Climate change adaptation an increasing focus, but the funding gap for vulnerable countries remains

As with COP27 in Egypt, adapting to climate change was a major focus for the conference, with a commitment to doubling global adaptation finance and a new 2030 date for adaptation targets across water security and agricultural production, ecosystem condition and public health. Quantitative targets will be developed across each of these measures by COP30 in 2025.

Despite this, there was no specific detail on how the adaptation public finance gap (estimated at $366bn a year by the UN) will be closed in practice⁷. From an investor perspective, barriers to financing adaptation projects in comparison to mitigation activities relate to how many of these projects are public goods with a lack of measurable financial returns, particularly where these investments pertain to avoided losses or damages.

Elsewhere, more practical details emerged on ‘loss and damage’ assistance from developed nations to vulnerable nations facing the most acute impacts of climate change. The fund will be initially administered by the World Bank and initial pledges were made from developed nations. However, commitments were generally small , with only $700m of pledges from 15 countries in total (under $20m in the case of the US), although this is expected to grow in subsequent years. The mitigation-focused Green Climate Fund, for example, has gathered over $10bn of public finance from developed countries since its introduction in 2014⁸.

The agreement of a post-2025 framework for international climate finance flows from developed to emerging economies was left unresolved – the existing target of $100bn per year has been consistently missed since its introduction in 2009. This is expected to become a major point of debate at next year’s conference, in particular the contribution of China and the Gulf states to a future finance target.

The outline of a global goal on adaptation at COP28 sets the stage for more substantive outcomes on adaptation at COP29 in Azerbaijan next year.