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Take Five: Peak Carbon

A selection of this week’s major stories impacting ESG investors, in five easy pieces. 

New data suggests a need for tough decisions at COP28’s Global Stocktake to keep 2030 emissions reduction targets in sight.

Past the peak – Reports setting the agenda for COP28 are coming thick and fast now that we’re just a few weeks away from the conference. But few could be more relevant than UN Climate Change’s synthesis of parties’ nationally determined contributions, given that these plans – or future iterations – which will carry us to 2030, are a significant stepping stone on the journey to net zero. Current NDCs collectively will yield 53.5 gigatonnes of CO2 equivalent by 2025 and 51.6 GT/CO2e by 2030, meaning we will have passed peak carbon, if the conditional elements of NDCs are implemented (that’s a big ‘if’). At best, emissions levels could be 8.2% below 2019. This is going in the right direction, of course, but far too slowly given the IPCC has said we need to reduce to 43% of 2019 levels. Further, we would have used up 87% of the carbon budget by 2030, assuming a 1.5°C objective.

Shared objectives – How much of this week’s summit did the presidents of China and the US spend talking about shared net zero ambitions ahead of COP28? If climate was low down the agenda, this was largely because it had already been outsourced to climate envoys John Kerry and Xie Zhenhua. A statement released this week confirmed that US-China climate diplomacy was back on track, just in time for a joint push at COP28. Shared objectives for Dubai included a “consensus Global Stocktake decision” which should reflect the need for “substantially more ambition and implementation on action”. And while China committed for the first time to including methane in its 2035 climate goals as part of an economy-wide NDC, no one will be surprised that the wording on coal phase-out (“send signals with respect to the energy transition”) remained vague.

Hard yards ahead – In conducting negotiations, Kerry may have been aware of hard yards ahead for US climate policy, as highlighted in the Fifth National Climate Assessment, published this week. The report warned that rapid decarbonisation of energy, transport, buildings and agriculture are necessary, but insufficient to reach net zero, asking Americans to prepare for “transformative adaptation” which would deliver a “more resilient and just transition”. Though more substantial, the US assessment may have generated fewer headlines than JP Morgan’s latest annual Climate Report. The bank received four stars out of five from NGOs, with investor network Ceres noting a broadening of the sectors covered by emissions reduction targets and a strengthening of existing targets. Sierra Club welcomed JP Morgan’s alignment with the IEA’s Net Zero by 2050 scenario, but flagged concerns that its new energy mix target could theoretically allow it to report progress without decreasing finance for oil and gas expansion.

Blowing’ in the wind – The US Climate Assessment suggests wind energy’s contribution to its energy mix will more than double from 10% today to more than 22% in 2050. But the Financial Times reported disquiet in the industry this week over the US’ chances of reaching its 2030 target to install 30GW of offshore wind power by the end of the decade, a crucial element of Biden’s plans to halve emissions over the period. Even with the Inflation Reduction Act supplying financial incentives, higher interest rates are adding to costs and causing delays. The European wind industry has experienced similar problems, with the UK government responding this week by hiking the strike price at its next auction for offshore wind projects to £73 (US$90) per MW/h, versus the £44 rate that drew no bids earlier this year, putting the UK’s own target – 50GW by 2050 – in jeopardy. With so many sources of uncertainty, who would bet on the price differentials between energy sources in 12 months’ time?

Support for CBAM – Europe’s Carbon Border Adjustment Mechanism faced a lot of scrutiny and scepticism before it was launched officially at the beginning of October, but there are signs it could soon be joined by similar levies in the UK and US. Essentially a means of levelling the playing field for trading carbon-intensive goods between countries with different carbon price regimes or climate policies, the UK’s CBAM equivalent could be floated as soon as next week in Chancellor Jeremy Hunt’s autumn fiscal statement. To be effective, Hunt will also need to level up UK carbon prices, currently languishing way below Europe’s, after the UK oversupplied carbon allowances in an apparent act of post-Brexit generosity. Meanwhile, the US has seen the launch of the Foreign Pollution Fee Act by a Republican Senator with the aim of preventing China from undercutting US manufacturers via exports of high-carbon products. Louisiana Senator Bill Cassidy published evidence of industry support for his proposal earlier this week, but has attracted fierce criticism from the right, suggesting it might struggle to gain bipartisan traction.

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