Commentary

ICYMI, Now Europe is Fazed by the Phase-out

Implementing the Glasgow Climate Pact is already proving difficult.

Faced with the question of whether COP26 was a success or failure, many have taken refuge in the comment attributed to former Chinese PM Zhou Enlai on the impact of the French Revolution: “Too early to say”. This verdict, given to Henry Kissinger in 1972, is often cited as evidence of China’s long-term world view. Even though Zhou was probably referring to France’s 1968 student riots, it’s reasonable to hold judgement on Glasgow until we see how it influences policy decisions over the next 12 months.

Europe faced an early test this week, with initial agreement on its Eighth Environment Action Programme, which guides its priorities on climate and environment action for the next decade. In short, the deal – still to be confirmed by the European Parliament and Council – failed to set firm deadlines for the phasing out of fossil fuel subsidies, in line with the breakthrough text of the Glasgow Climate Pact.

MEPs had called for a fossil fuel subsidy phase-out by 2025, with all environmentally-harmful subsidies ended by 2027, but pushback from member states means the plan commits only to setting a phase-out deadline consistent with limiting climate change to 1.5 degrees Celsius.

The COP26 deal called for phase-out of “inefficient” subsidies alongside the phase-down of unabated coal power generation, the wording weakened due to last-minute opposition from India, among others. In response, the UK’s independent Climate Change Committee (CCC) today called for HM Treasury to “initiate a review of the role of tax policy in delivering net zero”, while also improving domestic climate adaption and resilience, detailing and deepening the UK’s nationally determined contribution (NDC), and using the rest of its COP presidency to “support strengthened global climate action”.

The CCC and others have insisted on the need for climate change to be a factor in every government decision for net zero 2050 pledges to be meaningful. UK plans to subsidise soil management are a step in this direction if a limited one, but further policy action is likely to be needed to make the COP26 methane pledge meaningful, given continued failings in the protein value chain.

Elsewhere, as governments may have hoped, the private sector appears to be taking the message from Glasgow to heart. Shell’s decision to back out of the planned Cambo oil field, just west of the Shetland Isles, may be the project’s death knell, and has been welcomed by investors and activists alike. The slow grind of business models accepting low-carbon realities was also heard amid the roar of British Airways engines, following the firm’s increased commitment to sustainable aviation fuel.

The NDCs presented at COP26 may have been underwhelming, but they did signal to investors the growing pace of the transition and the sectors most likely to benefit. Countries already set up for green technology innovation are expected to thrive, while emerging markets may need financial innovation, in the form of blended finance, to build the necessary infrastructure.

Asset managers stand ready to channel an estimated US$9 trillion of new net flows up to 2030, but asset owners will continue to read fund labels and stewardship reports with care.

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