Energy crisis is an opportunity for COP26

This article first appeared in the Financial News on 26 October 2021.

While world leaders gather to step up the transition towards net zero carbon emissions at COP26 in Glasgow, the nations they represent are locked in an unprecedented race to secure their supplies of fossil fuels for winter in the Northern Hemisphere.

Brent Crude is at a seven-year high, coal prices are setting new records and natural gas is at its highest price since 2008 – and winter hasn’t even started yet.[1][2][3]

This scramble for carbon-based fuels is a jarring reminder of what’s at stake at the Conference Of the Parties. Without a properly planned and well-executed transition away from fossil fuels, renewable energy targets could go up in smoke. It will be much harder for governments to make the case for phasing out coal in the face of blackouts and soaring electricity bills.

We believe COP26 delegates can rise to the challenge by doubling down on their ambitions to reduce emissions as well as their determination to deliver a smooth transition. The shift towards renewable energy must be rapid, but it must also be orderly and equitable.

Both dimensions are in everyone’s interests. The spike in energy prices highlights the world’s risky dependence on commodities that are increasingly scarce, as well as damaging for the environment. Replacing carbon-based energy with renewable alternatives will enhance energy security as well as limit global warming. But without the investment required to deliver a stable and consistent supply of renewable energy, consumers and businesses suffer, as today’s coal, oil and gas prices show.

Keeping 1.5ºC alive

The goal of limiting climate change to 1.5ºC above pre-industrial levels is still achievable, but the window is closing quickly. We have already warmed the planet by 1.2ºC, according to the Intergovernmental Panel on Climate Change’s latest assessment, and the impacts of climate change on extreme weather events are becoming all too clear. The US National Oceanic and Atmospheric Administration declared July 2021 Earth’s hottest month on record.

Keeping the 1.5ºC target alive will require far more ambitious commitments at COP26. Of the 191 parties to the Paris Agreement, only 70 have committed to net zero targets by around the middle of the century.[4] Based on existing pledges, we are on a pathway to a world that is 2.7-2.9ºC warmer. Countries must step up their Nationally-Defined Contributions (NDCs) – both in terms of the size of pledges and in making them legally binding.

And the tools exist to bring a 1.5ºC world within reach, with the right policy commitment: the International Energy Agency calculates that existing technologies can deliver more than 80% of the emissions reductions required by 2030.[5]

Access to finance

As well as setting ambitious targets, COP26 needs to ensure all parties can access the financing needed to reach them. Building the infrastructure and developing technologies that will get us to net zero requires massive investment – up to US$130 trillion between now and 2050 in clean energy and green hydrogen alone, according to Bloomberg NEF.

Less-developed countries need help. Many have made their NDC commitments contingent on accessing additional sources of finance. But the US$100 billion a year that developed countries promised under the Paris Agreement has not materialised.

The G20 must make good on these promises at COP26. Covid-19 has highlighted the depth of inequality between developed and developing markets. Some 66% of people in high-income countries have received at least one shot of a Covid-19 vaccine, for example, compared with 2% of people in low-income countries, according to the World Bank.[6]  The impacts of climate change are also disproportionately felt in developing countries, which are less well equipped to deal with changing weather patterns, drought or flooding.

Carbon pricing

The COP26 talks also need to resolve many other details of the ‘Paris Rulebook’ that will improve the flow of capital to lower-emission technologies.

The most critical of these is a global strategy on carbon pricing. The need for a ‘polluter pays’ mechanism to hold companies and governments accountable for their emissions is essential in steering investment towards net zero targets.

Over 40 countries now have some kind of carbon pricing scheme in place, including China, and the European Union is extending its emissions trading scheme to cover more industries. But the price of carbon must rise if these frameworks are to have a real impact. 

This is a contentious topic that will require agreement between economies at different stages of decarbonisation, and border taxes may be needed to avoid supply chain arbitrage. The IMF expects a global carbon price of US$100 a tonne by 2030[7]; that compares to current prices of around US$68 in Europe[8] and just US$6.81 in China’s new national carbon market.[9]

But it is vital that delegates do have the ambition to seek an agreement because – when it comes to energy – prices determine the future. If emitting carbon is cheap, economies will continue to be carbon-intensive. And while high fossil fuel prices should drive investment in renewables over the long-term, in the short-term they simply make the dirtiest fuels even more profitable and drive up costs across the supply chain – including for solar components.[10]

Increasing the financing available for the energy transition and reaching a consensus on carbon pricing will be hard. But this is the historic challenge for delegates at COP26 – and the prospects for a swift and orderly pathway to net zero depend on them stepping up to meet it.