Implementing climate finance commitments in 2022 will make-or-break climate policy

Policy Pulse – 26 January 2022 – George Anjaparidze

Key messages:

• Implementing climate finance commitments in 2022 and scaling-up flows from developed to developing countries will make-or-break international climate policy

• For future mitigation plans to be more ambitious, current climate finance flows from developed to developing countries need to scale-up

• Making good on developed countries’ climate finance commitment of $100 billion has the potential to crowd-in an additional $600 billion in financing per year from other sources

Photo by Visual Stories || Micheile on Unsplash

The upbeat tone in our last year’s 2021 outlook on international climate policy proved to be justified. The UK COP 26 presidency delivered a successful outcome at last year’s annual UN Climate Conference as part of both formal negotiations and momentum building initiatives organized on the side-lines. Crucially, COP 26 also agreed on rules on how countries can cooperate across borders to achieve Paris Agreement goals (also known as Article 6 negotiations). Having Egypt as the COP 27 incoming presidency bodes well for the negotiations process in the year ahead. Egypt has the trust and confidence from a broad range of countries combined with very strong capacity and excellent knowledge of climate negotiations, especially on climate finance issues.

We expect the focus of international climate policy in 2022 to be on implementation. There will of course continue to be calls by some to focus on policy development, for example to scale-up mitigation pledges as the gap between individual actions and collective ambition persists. However, given that the exercise of updating Nationally Determined Commitments (NDCs) was just completed at COP 26, we think a focus on further scaling-up of individual mitigation plans in 2022 is not productive. Instead, the focus will need to shift to implementation of climate policies at the national level but also on implementation of existing international commitments. Particularly pressing is the need to achieve the existing target on climate finance flows from developed to developing countries.

Climate finance is essential for enabling greater climate action in developing countries. Developed countries did not meet their existing commitment to provide $100 billion in climate finance by 2020 to address the needs of developing countries in the context of meaningful mitigation actions and transparency. The climate finance gap is much larger than officially reported by OECD because of flawed accounting methods used for reporting climate finance. The shortfall in reaching the $100 billion target is about $67.4 billion, meaning that in 2019 only $32.6 billion of climate finance has supported developing countries.

The $32.6 billion figure includes climate finance provided for adaptation. If we remove adaptation specific finance but retain mitigation and cross-cutting support, we estimate that only $27.2 billion of climate finance was provided by developed countries in the context of meaningful mitigation actions and transparency. (Technical note: the $27.2 billion estimate is generated by subtracting the proportion of finance provided specifically for adaptation from total climate finance, the calculation is performed based on the ratio of adaptation specific finance in principal climate finance activities reported under the bilateral channel for 2019.)

As demonstrated in the chart below, the shortfall in the ambition of NDCs mirrors the shortfall in climate finance. The chart presents the status of communicated NDCs as reflected in the latest UNFCCC synthesis report from 17 September 2021. Some additional abatement measures were announced at COP 26 that are not reflected in the figures presented in the chart and it is important to note that the abatement target corresponds to both developed and developing countries. Nevertheless, the analysis presented in the chart captures well the correlation between globally planned emission reductions and delivered climate finance from developed to developing countries.

To have a realistic chance for the next round of updated NDCs to be significantly more ambitious, current climate finance flows need to scale-up. While new and more ambitious climate finance targets will also be necessary, there is an urgent need for developed countries to meet existing commitments and scale-up delivery of climate finance.

Climate finance is also critically important for meeting Sustainable Development Goal (SDG) 7 which aims to ensure access to affordable, reliable, sustainable, and modern energy for all. The overall additional financing required to meet SDG 7 is estimated at $1.3 trillion to $1.4 trillion per year, but current financing is approximately $514 billion. However, much of this gap could have been filled if developed countries had met their climate finance commitments. Making good on their climate finance commitment of $100 billion per year has the potential to crowd-in an additional $600 billion in financing per year from other sources, assuming leverage ratios of existing channels for climate finance. However, some mitigation actions will not fall within the scope of SDG 7, and hence, additional financing will be needed for SDG 7.

Below is a list of events in 2022 that could potentially serve as opportunities for developed countries to announce how they intend to follow through on their existing climate finance commitments:

• 2-3 June 2022: Stockholm, Sweden Stockholm+50 https://www.stockholm50.global

• 26-28 June 2022: Elmau Castle, Germany G7 Heads of State https://www.g7germany

• 30-31 October 2022: Bali, Indonesia, G20 Summit https://g20.org

• 7-18 November 2022: Sharm El-Sheikh, Egypt UNFCCC COP 27 https://unfccc.int

Other key policy trends to watch in 2022:

• Carbon pricing initiatives are likely to continue to gain momentum in 2022. The best mechanisms will create fiscal space, support the post-pandemic recovery while simultaneously set long-term development incentives in a climate conscious way.

• Private sector financiers are increasingly mainstreaming climate change related considerations into business decision making. There is growing evidence that corporations that have adopted more environmentally conscious practices (particularly as it relates to corporate reporting) have been able to command a higher price for their stocks. Key developments to watch in 2022 relate to the regulatory interventions and voluntary actions that may be taken to make it attractive for capital providers to support climate friendly investments at sufficient scale.

• The EU proposed Carbon Border Adjustment Mechanism targets heavy industry importers and will continue to be a focus of attention in 2022. Sectoral approaches can play an important role in scaling-up climate action. However, appropriate representation of stakeholders from industry and government is critical for ensuring schemes have the needed buy-in and impact. In 2022, it will be important to see whether the World Trade Organization could potentially create the space for deliberation on sectoral initiatives, for example those launched through bilateral and plurilateral approaches, to feed back into the multilateral system.

• Due to travel restriction linked with the pandemic, the aviation industry had another difficult year in 2021. The year ahead is also filled with uncertainty. Despite the challenging business conditions, in 2021 the airline industry continued to show climate leadership by committing to net-zero CO2 emissions by 2050. For the target to be operationalized it will require development of a global scheme through building on the existing Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). Moving from an existing net-carbon neutral growth target to a net-zero carbon emissions target will require technical recalibration of the scheme design, some of these aspects are highlighted in the concluding section of the Policy Brief from the Harvard Project on Climate Agreement. If the sector starts to recover to its pre-pandemic levels in 2022, it will become a target for environment taxes and climate change related restrictions. Therefore, elaborating on how the sector will operationalize its new climate targets is likely to become increasingly urgent.

• Important elements will also advance in 2022 under the UNFCCC, both through the inter-governmental process and the work program of the secretariat. In the context of the inter-governmental process the ministerial dialogue on climate finance, workshop of on loss and damage and activities related to fully operationalizing Article 6 will be some of the key developments to monitor in the year ahead. The work coordinated by the secretariat also promises to support greater transparency on how the convention is implemented.

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About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure.

Implication of COP 26 for WTO negotiations and what can steel learn from aviation

Policy Pulse – 16 November 2021 – George Anjaparidze

Photo by UNclimatechange on Flicker

Key messages:

• Announcements at COP 26 side-lines could potentially be more impactful than outcomes from formal negotiations

• Sectoral initiatives targeting steel and aluminum need better representation

• The global sectoral approach developed for international aviation holds valuable lessons for the steel sector and other heavy industries

Announcements at COP 26 side-lines could potentially be more impactful than outcomes of formal negotiations

The UK successfully shepherded climate negotiations towards a meaningful outcome as host of this year’s main UN climate conference (COP 26). The outcome of formal negotiations resulted in incremental progress across almost the entire negotiating agenda. To achieve this progress at a time of significant shortfalls in promised climate finance is impressive. Perhaps most notably, several decisions were taken that were critically needed to unlock greater cross-border cooperation on climate change mitigation under the Paris Agreement, including cooperation through carbon markets. But this year, more so than any previous year, what happened on the side-lines of the COP was arguably just as consequential, if not more so, than the outcomes of formal negotiations.

The UK presidency used COP 26 to announce new coalitions across government and non-government stakeholders to advance sectoral initiatives. This was done largely through the World Leaders Summit by launching the “Breakthrough Agenda”, with its own process, timelines and checkpoints. The overarching aim of this agenda is to work together to make clean technologies and sustainable solutions the most affordable, accessible, and attractive option in each of the targeted sectors. In addition, stand-alone initiatives were also kicked-off such as the International Aviation Climate Ambition Coalition as well as targeted initiatives for addressing sustainable forest and land use. Sectors covered by announcements from forged coalitions include agriculture, aviation, forestry, hydrogen, power, road transport, and steel.

Other countries also used COP 26 as a platform to announce bilateral initiatives. Perhaps the most widely covered announcement by international press was the US-China Joint Glasgow Declaration on enhancing climate action in the 2020s. However, other bilateral initiatives such as the US-EU announcement to negotiate a carbon-based sectoral arrangement on steel and aluminum trade could potentially have the largest practical implications in the near term. Bilaterally led initiatives can morph into broader coalitions, as can be observed in the case of the Global Methane Pledge, where this US-EU led initiative now includes over one hundred countries.

Sectoral initiatives have potential to build momentum for identifying technically feasible options for scaling-up climate action. But if representation of stakeholders excludes major industry or government actors, there is a risk that such initiatives only have marginal impact. The upcoming 12th Ministerial of the World Trade Organization could be an opportunity to create processes that give space for sectoral initiatives launched through bilateral or plurilateral approaches to feed into the multilateral system in the future. For example, in the context of future work of the WTO on the nexus of climate change and trade.

Sectoral initiatives targeting steel and aluminum need better representation

Issues related to greenhouse gas emissions in the aluminum and steel sectors were not specifically on the formal negotiating agenda at COP 26. However, aluminum and steel are getting increasing attention due to EU plans to introduce a carbon border adjustment mechanism targeting these sectors. Therefore, it is not surprising that announcements and declarations made on the side-lines of COP 26 targeted emissions from these sectors.

The steel sector is included in the "Breakthrough Agenda" launched at the World Leaders Summit. The initiative aims to have near-zero emission steel become the preferred choice in global markets, with efficient use and near-zero emission steel production established and growing in every region by 2030. The countries that have signed-up to the coalition include major steel producers in developed countries such as Japan, US and members of the EU as well as key producers among developing countries such as India, South Korea, and Turkey. However, the states included in the coalition only accounted for 31% of global crude steel production in 2019. Major steel producers such as China, Russia, and Brazil are not part of the coalition.

Furthermore, the US-EU announcement to develop a carbon-based sectoral arrangement that would include the steel sector would be representative of only about 13% of global crude steel production.

Lessons for the steel sector from international aviation

The first global sectoral approach that includes an absolute cap on CO2 emissions was developed for international aviation. The Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), adopted by the UN International Civil Aviation Organization (ICAO) in October 2016, addresses the growth in total CO2 emissions from international aviation. The International Air Transport Association (IATA), which at the time represented about 84% of global air traffic, played a critical role in developing workable solutions for the scheme. (ICAO is an international governmental organization, and IATA is a business association.)

The approach and design elements of the multilateral agreement addressing growth in CO2 emissions from international aviation hold valuable lessons for developing other sectoral schemes. Key lessons are highlighted below:

Include representative perspectives from industry and government in scheme design

The options developed by IATA tapped into industry specific knowledge. While the discussions at ICAO were particularly useful in highlighting the diverse set of perspectives, especially from developing and emerging economies. The scheme design features were often developed in small groups (usually championed by industry leaders), but for approaches to be palatable internationally, buy-in was essential from representative governance structures, including a balance between industry and government.

The coalition announced at COP 26 to address emissions from the steel sector may need to enhance representation through either growing the coalition or finding ways to feed its proposals into multilateral bodies with appropriate representation such as the World Trade Organization.

Focus on largest producers

In 2018, about 90% of international air traffic was performed by airlines registered in 22 countries plus the European Free Trade Association area. The scheme was made mandatory only for operations to and from these countries, while other countries were exempted by a de minimis provision. Through this exemption it was possible to have more meaningful exchanges on scheme design. Subsequently, after scheme agreement, through various incentives all countries were encouraged to participate in the scheme.

In 2019, the top 20 steel producing countries made up about 90% of crude steel production. An approach that starts by focusing on the largest producers may also be appropriate for the steel sector.

Do not try to solve other grievances

During negotiations between airlines, there were several attempts to use the climate issue to correct for other grievances and imbalances. Such attempts were largely unproductive. Any perceived imbalances, for example due to subsidies or capacity manipulation, are best handled through separate interventions. Otherwise, there is a heightened risk of failure in addressing the core climate concerns and could lead to unnecessarily dragging out negotiations.

For media queries: contact@veritasglobal.ch

Briefing prepared by:

George Anjaparidze

About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure.

Heavy industry impacted by EU Carbon Border Adjustment Mechanism

Policy Pulse – 21 October 2021 – George Anjaparidze

Photo by Ant Rozetsky on Unsplash

Key messages:

• The proposed EU Carbon Border Adjustment Mechanism is largely targeted at heavy industry.

• In 2019, the imports in targeted sectors were equal to €53 billion, of which 90% was aluminum, iron and steel.

• 55% of targeted EU imports originated from Russia, China, Turkey, Ukraine, and India in 2019.

The European Union plans to introduce a Carbon Border Adjustment Mechanism (CBAM) on imports with high carbon intensity. The proposed regulation is targeted towards imports of products in the cement, electricity, fertilizer, iron and steel and aluminum sectors. Notably not all products in these sectors are targeted in the first phase, for example ferro-alloys and ferrous waste are excluded from the iron and steel sector, but the scope of sectors and gases covered by the proposed regulation may increase over time. In 2019, the imports in targeted sectors were equal to €53 billion, of which 90% was aluminum, iron and steel (see chart above).

The top 30 exporters (see chart above) are geographically diverse and at different stages of development. The majority (55%) of EU imports targeted by CBAM originated from Russia, China, Turkey, Ukraine and India in 2019.

The scheme is set to come into effect on 1 January 2023. However, in the initial “transition” period (up to 31 December 2025) there is only a requirement to report on greenhouse gas emissions. The requirement for importers to purchase CBAM certificates is envisioned to start in January 2026.

Importers are required to report the direct and where relevant also indirect greenhouse gas emissions of products they import. The methods used to estimate emissions and gases covered are outlined in the relevant annexes of the proposed regulation. The reporting is to be made based on actual emissions incurred but default values may also be applied when data gaps exist.

Producers can reduce the number of CBAM certificates required for purchase by importers in two ways (i) reduce the direct and where relevant indirect greenhouse gas emissions of their products (ii) help the importing entity demonstrate that a carbon price has been paid in the country of origin and deduct the commensurate amount from the CBAM certificate requirements. Furthermore, the EU may conclude agreements with third countries that take into account carbon pricing mechanisms through their domestic actions.

The CBAM aims to level the playing field between domestic producers and importers of greenhouse gas intensive products. Conceptually, the CBAM proposal is similar to EU’s past efforts to incorporate international aviation into its Emission Trading System (ETS). However, in the case of international aviation a multilateral agreement was designed to ensure a level playing field for all airlines and this stopped the clock on incorporating international aviation into the EU ETS.

For media queries: contact@veritasglobal.ch

Briefing prepared by:

George Anjaparidze

About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure.