Monday 20/05/2019

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COP 23 and the “One Planet Summit”: two drivers to maintain the Paris spirit

Responsible Investment Strategist

Yesterday the “One Planet Summit”, spearheaded by Emmanuel Macron and co-organized by the United Nations and the World Bank, gathered world leaders to celebrate the second anniversary of the Paris Agreement.

The objective of the summit was to gather the international community, including some 2,000 leaders from the business world and social institutions, in order to make some progress in terms of financing. In particular, the focus was on the way various actors from public and private finance will innovate to accelerate the common battle against climate change. Hence, they discussed the required measures for the energy transition as well as potential solutions to a lower-carbon economy, the mobilization of public finances and green solutions for private investments.

The One Planet Summit was the last important event of this year after the rather technical COP 23 that took place from 6 until 17 November in Bonn in Germany.  While the One Planet Summit focused on the financing of the climate goals, the COP 23 had a rather technical nature and was aimed at defining the rules of the Paris Climate Agreement as well as the structure and agenda of the commitments to reduce greenhouse gas emissions. This was a decision that had been previously made by the ratifying states.

Thanks to the presidency of Fiji, an archipelago which is strongly exposed to the consequences of climate change, initial commitment was very strong. Indeed, for this archipelago, whose costs related to climate change are estimated at 4% of GDP annually, the challenge to uphold the Paris ambitions is quite high. The situation on Fiji was also relevant to the discussion of the more ambitious target to cap global warming at 1.5 degrees Centigrade, and to the solidarity agreement between emerging countries and developed countries. Indeed, the former will be the prime victims of climate change.

A second objective of this COP was the so-called facilitating dialogue, which consisted of taking stock of all climate related efforts and organizing the first negotiations regarding the conditions to raise the targets beyond 2020. As defined by the Paris Agreement, these target figures should be reviewed every five years.

A stark contrast between measures and needs

The latest report of the UNEP (United Nations Environment Programme) on global emissions[1] corroborates the scientific concerns: the objective to cap global warming to 2 degrees Centigrade will not be achieved. Rather, they aim for 3 degrees Centigrade based on current ambitions.

The same goes for financing. Although the exit by the United States is first and foremost a symbolic ‘no’ – especially as Nicaragua validated the agreement  in October and Syria on November 7 – it does remain one of the major actors dropping out of the agreement. An estimated amount of at least USD 100bn will be required by 2020 for infrastructure works. We are a long way from that figure at the present time. On the contrary, subsidies for fossil fuels are not decreasing and in the meantime carbon prices remain very depressed. Overall, the conclusion is rather negative. At current rock-bottom prices, some are even considering a sub-prime crisis for shale gas producers. This leads to the idea of taxing mining and external sources of emissions rather than the emissions themselves.

Carbon price and other alternatives

Currently 85% of emissions are not subject to any carbon tax. Moreover, three quarters of the emissions which are effectively being taxed, are taxed at a carbon price of less than USD 10 per tonne. In order to achieve the Paris climate change goals, the global carbon price would need to increase to USD 40 to 80 per tonne by 2020, and to USD 50 to 100 per tonne by 2030. The carbon price is a reflection of what society is prepared to pay to protect the environment.

In an environment where contributions to general interest are being postponed and everyone waits to take the first step to lower emissions,[2] an emission tax is not exactly an incentive. Due to the fact that there is no global market for the complex carbon price, it is being circumvented. The actors involved do not engage in any long-term investments (30 to 50 years) which are required for the transition to a low-carbon economy.

Another issue is the required financing coming from governments, which are often deprived of means and/or are deeply in debt. Consequently, some have become very dependent on other governments, which have a de facto veto right for any decision on a global level. Against the backdrop of this accident waiting to happen, an alternative in the form of a consumption tax on private or public mining companies was considered. This tax would then be doled out as subsidies to foster concrete measures and to have a measurable impact regarding the reduction of emissions. This would be applied to favourably evolving projects such as real estate, transportation and infrastructure, as there is no tax on imported CO2. This is quite gullible, you might think. It probably is, as it requires the creation of an international institution which is responsible for collecting and redistributing the consumption taxes in an impeccable manner. Moreover, it is quite typical for economic and political stakeholders of developed countries to oppose change. Meanwhile, greenhouse gas emissions continue to rise. Last year saw a sad record with the highest concentration of carbon dioxide, let alone the new records regarding greenhouse gas emissions.

Although the COP 23 was rather technical in nature, the urgency in terms of climate change remains very disappointing.

Maintaining the momentum of Paris

Paris and the COP 21 have clearly raised awareness about carbon risks. Hence, it is necessary for all parties to be involved, not just governments, but also companies and investors. Although Donald Trump’s seat remained empty during the Bonn conference, the initiative “We are still in”, which gathers almost 1,700 companies and investors, demonstrates that opposition to the White House is mounting. Still, we hope that there will be more ambitions than merely remaining in the Agreement.

This momentum, which emerged thanks to all countries willing to cooperate, is key. As the United States have pulled out and Europe is seeing the emergence of nationalism and movements calling for independence, there has been a lack of leadership with regards to climate urgency. China may be a stronghold, but in terms of the respect of rules, transparency and quantitative goals, it does not exactly serve as an example.

Besides a positive momentum that the meetings bring, it is even more important that the ambition remains intact, as Warsaw will probably be a less committed host during the COP 24. After all, Poland remains the most important blocking factor to overhaul the European carbon market (EU ETS).

While the COP 23 has thus been less in the news than the 21st edition, along with the One Planet Summit it is of great importance in the light of the ambitions which were promised two years ago.

[1] UNEP The emissions gap report

[2] “Waiting Game” – Gollier & Tirole – effective institutions against climate change, April 6 2015