Outcomes for COP27 Sharm el-Sheikh: EGA Five Facts to Know

COP27 will be remembered as a missed opportunity to increase the world’s climate ambition, much to the chagrin of most OECD countries. It also provided a short-lived victory for developing countries on the issue of loss and damage, the concept that rich countries should compensate developing countries for the accumulated costs of climate-related damages. The can was kicked down the road to COP28 in Dubai for concrete measures. Forthcoming climate change regulations will need to be de-risked throughout the year. As COP27 concludes, here are five facts to know:

1. Focus on the Consequences of Climate Change

  • The final agreement marked progress on the principle of loss and damage. The Glasgow Dialogue on Loss and Damage was launched at COP26 and the subject remained the most contentious issue throughout COP27. The 190 parties eventually agreed to the creation of a fund to address this issue, the operationalization of which remains to be defined. The EU, Norway, Switzerland and the US, while not preventing the adoption of this new instrument, remained highly skeptical and insisted on future contributors to include “newly industrialized” countries such as Brazil, China, the Republic of Korea and Saudi Arabia. Lip service was paid to the objective of considering a broader funding base.
  • The Global Goal on Adaptation will conclude at COP28 and inform the first Global Stocktake (more below) to improve resilience among the most vulnerable countries. Pledges totaling more than US$230 million were made to the Adaptation Fund – hardly sufficient to make a real difference.
  • The UN Secretary-General further announced a $3.1 billion plan to ensure global early warning system coverage within the next five years.
  • Germany, under its G7 Presidency, promoted its €200 million Global Shield Financing Facility to directly provide funding to the V20 group of most vulnerable countries (increased to 58 countries), with Bangladesh, Ghana and Pakistan the first countries to benefit from this instrument (outside of the Paris Agreement implementation process).
  • French President Emmanuel Macron announced a Paris Summit in June 2023 to implement a “new financial pact” with the most vulnerable countries to address loss and damage fund design and adaptation prior to COP28.

Implications for business: Focus on loss and damage will constitute a distraction in the UNFCCC climate process for years to come. Watch for opportunities in adaptation investments and for breakthrough via the new financial pact.

 

2. ...Rather than increased ambition

  • The Glasgow Climate Pact reaffirmed the Paris Agreement goal of limiting the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit it to 1.5 °C. It recognized that the impacts of climate change would be much lower at a temperature increase of 1.5°C compared with 2°C.
  • While the 6th IPCC Assessment Report had highlighted the urgency to stabilize emissions by 2025 and halve them by 2030 to pursue the 1.5°C target, no increased ambition could be agreed upon at COP27.
  • More worrisome, the sum of nationally determined contributions (NDCs) – one of the main instruments for domestic action under the Paris Agreement – is on a trajectory of 10.6% emissions increase by 2030, with only 24 parties submitting updated NDCs since COP26. A recent UN Climate Change report further highlighted that current pledges by national governments put the world on track for a 2.5°C warmer world by the end of the century.
  • While India sought to introduce the concept of “phasing down coal and fossil fuels” at COP27, it was met with strong opposition from fossil fuel producing countries. (It was, however, supported by Egypt, which hopes to develop its own liquefied natural gas LNG exporting activities). Risk of backtracking on earlier ambitions became very real with some delegations – notably China and Saudi Arabia – arguing that “every fraction of a degree” counted and that 1.5°C was not cast in stone.
  • The Global Stocktake – a mechanism meant to lead towards increased ambition – concluded its second technical dialogue (GST TD1.2). It looked at how to scale up practices and experiences for accelerated implementation and how to make these effective in phasing down unabated coal and removing fossil fuel subsidies. The outcomes

Implications for business: While ambition was not increased under the “Sharm el-Sheikh Implementation Plan,” it is likely that most OECD countries will increase their ambitions in order for the 1.5°C target to remain a realistic prospect. Watch for more stringent regulations and carbon pricing signals to stabilize emissions by 2025. The EU will insist that the COP28 Global Stocktake include increased ambition – even at the risk of walking away.

 

3. De-risking in the best way forward to mobilise finance net zero

  • The Sharm el-Sheikh Implementation Plan points toward the need for $4-6 trillion a year to pursue the global transformation to a low-carbon economy. The Swiss Re Institute most recently concluded that as of 2022 the investment gap to reach net-zero by 2050 was $271 trillion, with required annual resources estimated at $9.4 trillion.
  • Disappointment was once again expressed at the failure of meeting the $100 billion per annum goal in climate finance, as agreed in 2009 at COP21 in Copenhagen. The scale of capital needed, as indicated above, is of an entirely different order of magnitude. It requires focusing on de-risking investment and on blended finance through a reformed multilateral development banks and Bretton Woods system. Reform would make these institutions capable of deploying their capital to mitigate actual and perceived investment risks in order to increase developing country access to finance and more generally to leverage donor money for green investment. This could unlock several hundred billion dollars of green lending capacity without needing additional shareholder capital in these institutions.
  • Progress was made through the Just Transition Energy Partnership (JTEP). JTEP offers a combination of concessional finance, grants and loans from the US, Japan, Canada, the EU, France, Germany, the UK and Norway to de-risk investments in emerging countries to transition away from coal-based energy. The first deal launched after COP26 targeted the South African coal-based energy sector with a $13 billion package. The second deal launched at COP27 and supports Indonesia with a $20 billion package. A third deal is being negotiated with Vietnam.

Implications for business: Investments in clean technology – particularly in developing markets – will become more attractive in the mid-term through the active deployment of risk-reducing instruments. Watch for short-term opportunities in the energy sector in countries covered by the Just Transition Energy Partnership.

 

4. G77+China (Temporary?) Power Shift

  • Despite the energy crisis, the EU showed tireless leadership. It stuck to its fit-for-55 plan, even increasing its ambition from 55% reduction of emissions by 2030 to 57%. And up until the last minute, it threatened, together with Norway and Switzerland, not to approve the final statement if commitment to the 1.5°C trajectory was not strengthened.
  • The US regained credibility through its Inflation Reduction Act, yet its Energy Transition Accelerator (ETA), launched in conjunction with the Bezos Earth Fund and the Rockefeller Foundation, was met with polite skepticism, as it seemed to shortcut provisions under the Paris Agreement's Article 6.2 on market-based approaches. The ETA is to create carbon credits linked to a reduction in power-sector emissions in developing countries to be bought by companies under advanced purchase agreements, which would create a “predictable finance stream to de-risk and leverage other forms of finance.”
  • While US-China climate dialogue resumed, the main “winner” of COP27 was the G77+China group (including Saudi Arabia) which showed cohesion to the end, successfully focusing on the establishment of a loss and damage fund. While iron discipline held the group together around this objective, the efforts of prominent members of the group to prevent increased climate ambition were ultimately made at the expense of those countries that will be most be affected by temperature increases, including small island states.

Implications for business: Opportunities may arise for US-based companies to benefit from the Energy Transition Accelerator (ETA) for clean energy investments in developing markets. Watch for: ETA provisions and resumed US-China climate dialogue, which could lead to increased ambition as well as trade and climate connections to come.

 

5. The heretical question: Is the COP process still the best format?

  • With 45,000 participants, more than 190 parties (each having a say on every column and dot), and a ballooning agenda that ranges from the essential to the trivial, the current COP process seems ill-equipped for the ambition and efficiency required to respond to the urgency of climate action.
  • G20 countries account for around 75% of global emissions. The COP would seem to be the setting where common ambition could be agreed upon and solutions pursued, at least in terms of mitigation and mobilizing the trillions of dollars required for a transition toward climate-compatible growth.
  • The G20 proved more ambitious than the COP27 meeting. G20 members at the recent Bali Summit reaffirmed the “urgent” need to keep to the goal of 1.5°C in global warming and to resist backsliding. The G20 communiqué also included commitments to phase down “unabated coal power” and phase out “inefficient fossil fuel subsidies,” in line with the Glasgow Pact.

Implications for business: Businesses should focus on G20 processes, where mitigation action will be increasingly defined. Watch for: Increased pressure from OECD countries to remove inefficient fossil fuel subsidies and phase down fossil fuels ahead of COP28 in UAE; More coalitions of the willing outside the UNFCCC process as a result of frustration from OECD countries with COP27 outcomes; Creation of climate clubs, linking ambitious countries to one another through carbon pricing, while excluding others.